This presentation summarises recent macroeconomic developments in Latvia and outlines a medium-term outlook for real GDP and inflation. Presentation reviews ongoing economic recovery, labour market issues and includes analyses on core factors behind the path of inflation. The main focus of the presentation is on the issue of competitiveness of the Latvian economy pointing to the costs adjustment process and productivity gains, as well as presenting export performance, market shares and current account developments. Presentation also features slides on monetary and financial market developments.

1. Recent Economic Developments
in Latvia and Medium-term
Outlook
December, 2011

2. Macroeconomic Overview
2

3. Economy is back to growth; uncertainty in the
global environment spells risks to the outlook for
2012
Real GDP growth (%)
6 5.7%
4.8%
4
2.5%
2
0
-2
-4
-6
2010 I II III IV 2011 I II III* 2011 F 2012 F
* Flash estimate of Central Statistical Bureau of Latvia
Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast

4. Export has lead the economic recovery
Real GDP growth (y-o-y, %) and contribution to the growth (pp)
10
0
-10
-20
Q2
Q3
Q4
Q2
2010 Q1
2011 Q1
Private consumption Public consumption GFCF Changes in inventories
Exports Imports GDP, % yoy
Source: Central Statistical Bureau of Latvia

5. Rebound in manufacturing has been underpinned
by strong export expansion
Manufacturing output volume index and real export (2005 = 100)
150
140
130
120
110
100
90
80
70
IV
IV
IV
IV
IV
2006'I
III
2007'I
III
2008'I
III
2009'I
III
2010'I
III
III
2011'I
II
II
II
II
II
II
Manufacturing (seasonally adjusted data)
Manufacturing (non-adjusted data)
Real exports (nsa)
Real exports (sa)
Source: Central Statistical Bureau

6. Global prices as well as indirect taxes
contributed most to the increase in inflation;
risks to the forecast for 2012 are on the downside
Y-o-y inflation excluding food, energy prices and tax changes (%), contributions
(percentage points)
12
Energy Annual average inflation
10 Food forecast:
12 month inflation (%) 2011 – 4.4%
8 Inflation excluding food and energy (%) 2012 – 2.4%
Inflation excluding food, energy at constant tax rate
6
4 4.4
2
0.6
0
-0.5
-2
-4
-6
-8
I III V VII IX XI I III V VII IX XI I III V VII IX
2009 2010 2011
Source: Central Statistical Bureau of Latvia; Bank of Latvia’s calculations and forecast

7. Unemployment rate continued to decline
Unemployment rate (% of economically active population)
19.7 20.5 19.4
18.7
20 18.4 17.9
15.9
16.7 17.3 16.9 16.6
15.1
16.2
15 13.9
11.5
9.9
10
6.5 7.2
6.3
5
0
2010
IV
IX
IV
IX
IV
IX
IV
IX
III
V
X
III
V
X
III
V
X
III
V
X
VIII
VIII
VIII
VIII
II
II
II
II
VII
XII
VII
XII
VII
XII
VII
VI
XI
VI
XI
VI
XI
VI
XI
2011 F
2012 F
2011 I
2008 I
2009 I
2010 I
Registered unemployment rate Unemployment rate (Labour Force survey)
Source: Central Statistical Bureau of Latvia; State Employment Agency

8. Hours worked grew again particularly
in the private sector and manufacturing
Hours worked by institutional sectors, Hours worked by sectoral breakdown,
y-o-y, % 2011 H1, y-o-y, %
5 -5 0 5 10
3.8
1.7
0 -1.6 Total 1.7
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
2011 Q1
2008 Q1
2009 Q1
2010 Q1 Agriculture 6.8
-5
Manufacturing 8.5
-10 Construction 6.6
-15 Trade 0.3
Transport 4.2
-20
Hotels & restaurants 5.2
-25
Finance -1.6
-30 Public administration -3.3
Education -3.0
-35
Total Private sector Public sector Healthcare 3.3
Source: Central Statistical Bureau of Latvia data

9. Competitiveness
9

10. Wage-productivity gap has narrowed
rapidly
Labour productivity and real wages
(2005 Q1 = 100; seasonally adjusted)
150
140
130
120
110
100
90
Q3
Q3
Q3
Q3
Q3
Q3
2011 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
Labour productivity Real wage
10
Source: Central Statistical Bureau of Latvia; Bank of Latvia’ s calculations

11. Recent wage growth in manufacturing is
productivity-based; productivity is driven by an
improvement in competitiveness
Nominal wages in manufacturing (y-o-y Labour productivity and real wages in
changes;%) manufacturing
(2005 Q1 = 100; seasonally adjusted)
8 170
6 5.2 160
4 150
2 140
0
130
120
-2
110
-4
100
Q3
Q3
Q3
Q3
Q3
Q3
2011 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
-6
-8
Q2
Q3
Q4
Q2
Q3
Q4
Q2
2009 Q1
2010 Q1
2011 Q1
Real wage Labour productivity
Source: Central Statistical Bureau of Latvia; Eurostat; Bank of Latvia staff calculations
11

12. The price and cost competitiveness has improved
markedly as compared to the pre-crisis levels
The REER of the lats (Jan 2000 / Q1 2000) = 100)
130
125
120
115
110
105
100
95
90
IV
X
IV
X
IV
X
IV
X
IV
X
VII
VII
VII
VII
VII
2007 I
2008 I
2009 I
2010 I
2011 I
REEER_CPI REEER_PPI REEER_ULC_manuf
Source: Bank of Latvia

13. Latvia’s export market shares are growing in
most of our key markets reflecting gains in
competitiveness
Share of Latvian exports in particular country’s imports, % (4q-moving average),
2009 Q4–2011 Jul-Aug
12
0.45
9
0.30
6
0.15 3
0
0.00 Estonia Lithuania
EU27 Germany UK Sweden Denmark Finland Poland Russia
Source: Eurostat, Central Statistical Bureau of Latvia; Bank of Latvia calculations

14. External imbalances have seen a significant
improvement resulting in a sustainable level of
the current account and its components
Current account main positions (% of GDP)
10
8.6
5 3.0
1.1 0.9 0.6 -0.2 -0.2
0
-3.8
-5
-10
-15 -13.1
-20 -22.6 -22.4
-25
2006 2007 2008 2009 2010 2011 Q1 2011 Q2 2011 Q3* 2011 F 2012 F 2013 F
Current Transfers Income Goods and Services Current Account
Source: Bank of Latvia ;F- forecast

15. Annual growth rate of exports – strong, broad-
based across product groups
Merchandise exports by commodity groups (in nominal terms, y-o-y growth)
160 60
Other goods
140 Transport vehicles
50
120 Machinery and electrical
Y-o-y, millions of lats
40 equipment
100 Base metals
80 30 Textiles
60 20 Wood
40 Plastics
10
20 Chemical
0 Mineral products
0
Agricultural and food
-20 -10 products
2011 I
VIII
IV
V
IX
X
III
II
XII
VII
IX
XI
VI
Total exports y-o-y (%,
RHS)
Source: Central Statistical Bureau of Latvia

16. The pickup in foreign direct investment
inflows reflects growing investor interest
Net FDI inflows(% of GDP)
10
8.4
8.1
5.7
5
3.8
1.6
0.4
0
2006
2007
2008
2009
2010
H1 2011
Source: Bank of Latvia
16

17. Monetary and Financial Market
Developments
17

18. Both tight lending standards and low demand for
loans determined credit decline; however, the annual
rate of decline remains nearly constant
Credit to private secor (y-o-y, %)
100
80
60
40
20
0
-20
IV
IV
IV
IV
IV
IV
IV
I 2011
IV
I 2004
X
I 2005
X
I 2006
X
I 2007
X
I 2008
X
I 2009
X
I 2010
X
X
VII
VII
VII
VII
VII
VII
VII
VII
Annual growth of household credit stock
Annual growth of nonfinancial corporation credit stock
Annual growth of resident credit stock (without government)
18
Source: Bank of Latvia

19. The backing of the monetary base with
foreign reserves exceeds 200%
Net foreign assets and Monetary base (mln lats)
4500
4000
3500
3000
2500
2000
1500
1000
500
0
IV
V
IX
X
IV
V
IX
X
IV
V
IX
X
IV
V
IX
X
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
I 2008
II
III
I 2009
II
III
I 2010
II
III
II
III
XI
XII
XI
XII
XI
XII
I 2011
Net foreign assets Monetary base
19
Source: Bank of Latvia

20. Foreign exchange resources are adequate
to meet 6.6 months of import
Ratio of the net foreign assets of the Bank of Latvia in the months of imports of goods
12
10
8
6.6
6
4
2
0
IV
X
IV
X
IV
X
IV
X
IV
X
IV
X
IV
X
IV
I 2011
I 2004
I 2005
I 2006
I 2007
I 2008
I 2009
I 2010
VII
VII
VII
VII
VII
VII
VII
VII
20
Source: Bank of Latvia

21. Deposits at pre-crisis level point to an
enhanced depositors’ confidence
Domestic deposits (mln lats)
5800
5600
5400
5200
5000
4800
IV
V
IX
X
IV
V
IX
X
IV
V
IX
IV
V
IX
X
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
X*
II
III
II
III
II
III
II
III
XI
XII
XI
XII
XI
XII
I 2011
I 2008
I 2009
I 2010
* In October 2010, decline of deposits reflects large one-off effect from restructuring of funding within financial group 21
Source: Bank of Latvia

22. Capital adequacy ratios remain significantly
higher than the required minimum of 8%
Capital adequacy ratios (%)
18
16
14
12
10
8
6
4
2
0
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
1Q 2011
2Q
3Q
1Q 2006
1Q 2007
1Q 2008
1Q 2009
1Q 2010
CAR Tier 1 ratio
Source: Financial and Capital Markets Commission

23. Liquidity level remains very high
Liquidity ratio (defined by FCMC, %)
70
60
50
40
30
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
1Q 2011
1Q 2005
1Q 2006
1Q 2007
1Q 2008
1Q 2009
1Q 2010
Source: Financial and Capital Market Commission 23

24. Non-performing loans have peaked in Q3 2010;
signs of improvement are evident
Amount of loans over 90 days past due, provisions and their share in outstanding
loans
% Mln. of lats
20 3000
18
2500
16
14
2000
12
10 1500
8
1000
6
4
500
2
0 0
1Q 2008 3Q 1Q 2009 3Q 1Q 2010 3Q 1Q 2010 3Q
Share of provisions in outstanding loans
Share of loans over 90 days past due in outstanding loans
Provisions (right-hand scale)
Loans over 90 days past due (right-hand scale)
Source: Bank of Latvia, Financial and Capital Market Commission

25. RIGIBOR rates remain at low levels
Money market rates (%)
30%
25%
20%
15%
10%
5%
0%
RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M 25
Source: Bank of Latvia

26. 26