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Recent Economic Developments in Latvia and Medium-term Outlook

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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.

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Recent Economic Developments in Latvia and Medium-term Outlook

  1. 1. Recent Economic Developments in Latvia and Outlook March, March 2012
  2. 2. So far economy has recovered swiftly y y Real GDP growth (%) 11.2 10.1 9.6 10 8.9 89 5.5 5 0 -0.3 -5 -3.3 33 -10 -15 -20 -17.7 17 7 2004 2005 2006 2007 2008 2009 2010 2011Source: Central Statistical Bureau of Latvia
  3. 3. GDP growth, initially was led by exports; broadened to investment Real GDP growth (y-o-y %) and contribution to the growth (percentage points) (y-o-y,25201510 5 0 -5-10-15-20 Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Private consumption Public consumption GFCF Changes in inventories Exports Imports GDP, % yoySource: Central Statistical Bureau of Latvia
  4. 4. Wage-productivity gap has been closed g p yg p Real wage and productivity index (whole economy, seasonally adjusted, per hour worked, 2005 Q1 = 100) 150 130 110 90 70 2005 Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 Q4 2007 Q1 Q2 Q3 Q4 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2 Q3 Q4 Q2 Q3 Q4 2011 Q1 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Labour productivity per hour Real hourly wage 4Source: Central Statistical Bureau of Latvia data; Bank of Latvia staff calculations
  5. 5. Latvia’s export market shares are up in most of our key markets reflecting gains in y gg competitivenessShare of Latvian exports in particular country’s imports, % (4q-moving average), country s (4q- 2009 2009 Q4–2011 Q4 2011 12 0.45 9 0.30 6 0.15 3 0.00 0 share of EU27 Germany UK Sweden Denmark Finland Poland Russia Estonia E i Lithuania Li h i exports 72.4% 8.4% 3.1% 6.1% 3.4% 3.1% 5.9% 10.6% 13.6% 18.0%Source: Eurostat, CSP, BoL calculations
  6. 6. Merchandise export growth remains robust both in nominal and real terms Merchandise export (Q1 2007 = 100)180 Real export170 Nominal export160150140130120110100 90 80 II III II III II III II III II III IV IV IV IV IV 200 I 200 I 200 I 201 I 201 I 07 08 09 10 11Source: Central Statistical Bureau of Latvia; Bank of Latvias calculations
  7. 7. Latvia’s export profile: a significant diversification di ifi ti Structure of merchandise exports (%) 100% Others 90% Textiles 80% 70% Transport vehicles 60% Mineral products 50% Chemical 40% 30% Machinery and electrical equipment 20% Metals 10% 0% Food products 000 005 010 011 20 20 20 20 Wood, Source: Central Statistical Bureau of Latvia, Bank of Latvia
  8. 8. Intermediate goods dominate in the import structure and drive import growth t t dd i i t th Import by BEC product group (million EUR) 1100 1000 900 800 Other items 700 600 Motor spirit and passenger motor cars 500 400 Consumption g p goods 300 Intermediate goods 200 100 Capital goods 0 V IX V IX V IX V IX 2008 I III VII XI 2009 I III VII XI 2010 I III VII XI 2011 I III VII XISource: Eurostat
  9. 9. Investment in productive sectors like industry and transport accounted for a half of non- p financial investmentNon-financial investment growth (y-o-y; %) and sector contribution to the growth g (y y; ) g (percentage points) 45 40 36.5 35 30.4 30 27.2 25.3 25 20 15 10 5 0 -5 -10 10 Q1 2011 Q2 Q3 Q4 Agriculture (A) Industry (BCDE) Construction (F) Trade (G) Transportation and storage (H) Private services (IJKLMNRS) Public services (OPQ) Non-financial investments, y/y, %Source: Central Statistical Bureau of Latvia
  10. 10. Unemployment rate continue to decline p y Unemployment rate (% of economically active population) 20.5 20 15.4 15 14.3 14.4 13.7 10 5 0 II III II III II III II III 2011 IV IV IV IV 2012 F 2013 F 2008 I 2009 I 2010 I 2011 I 2 2 2 2Source: Central Statistical Bureau of Latvia
  11. 11. Employment increased in the private sector (manufacturing) Hours worked by institutional sectors (y o y %) (y-o-y, 10 6.7 5 3.5 0 -1.4 -5 10 -10 -15 -20 -25 -30 -35 Q2 2 Q3 3 Q4 4 Q2 2 Q3 3 Q4 4 Q2 2 Q3 3 Q4 4 Q2 2 Q3 3 Q4 4 2008 Q1 1 2009 Q1 1 2010 Q1 1 2011 Q1 1 Total Private sector Public sectorSource: Central Statistical Bureau of Latvia (firms’ survey data)
  12. 12. Number of job vacancies low; no evidence of country wide labour shortage country-wide Beveridge curve: unemployed and job vacancies registered in the SEA 25 2007 VIII 20 Job vacancies, ths. 15 10 b 2012 II 5 2004 I 2010 III 2009 I 0 50 80 110 140 170 200 Unemployed, ths.Source: Central Statistical Bureau of Latvia (firms’ survey data); State Employment Agency
  13. 13. While wage growth resumed in all sectors, it remains stable and no major risks for wage j g acceleration so far Average gross nominal wage ( g g g (for full-time work) by institutional breakdown ) y (y-o-y changes, %) 30 20 10 5.4 4.5 0 4.0 40 -10 -20 -30 Q3 Q3 Q3 201 Q1 Q3 200 Q1 200 Q1 201 Q1 11 08 09 10 Total Private sector Public sectorSource: Central Statistical Bureau of Latvia
  14. 14. In 2012, slowdown in economic activity is expected d e e pected due to weakening in external demand eakening e ternal Real GDP growth (%) 8 6 5.7% 5.5% 4 2.7% 2 1.3% 0 -2 -4 -6 2010 I II III IV 2011 I II III IV 2011 2012 F 2013 FSource: Central Statistical Bureau of Latvia data; F – Bank of Latvia forecast
  15. 15. Despite unfavorable external conditions, manufacturing g g growth doesnt show signs of g weakening Manufacturing volume index g (2005 = 100) 120 110 100 90 80 70 60 IX IX IX IX IX III XI III XI III XI III XI III XI V V V V V 2007 I VII 2008 I VII 2009 I VII 2010 I VII 2011 I VII 2012 I Seasonally adjusted data 15Source: Central Statistical Bureau of Latvia,
  16. 16. The global commodity prices tend to contribute less to the y-o-y inflation than in 2011 on y y averageInmact of food and energ prices on total inflation (pp) and the y-o-y inflation rate (%) energy o 7.0 Bank of Latvia forecast: 2012: 2.4% 2 4% 5.0 2013: 2.0% 3.0 1.0 -1.0 -3.0 3.0 -5.0 I 2010 III V VII IX XI I 2011 III V VII IX XI I 2012 Food Energy Y-o-y inflation Y-o-y inflation excluding food and energy prices 16Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations
  17. 17. Indirect tax changes contributed notably to inflation in the recent years; no indirect tax y ; increases this year The impact of changes in tax rates on HICP (I 2008=100) 115 Constant-tax-rate HICP 113 HICP 111 109 107 105 103 101 99 I IV VII X I IV VII X I IV VII X I IV VII X 2012 2008 2009 2010 2011 I 17Source: Central Statistical Bureau of Latvia
  18. 18. External imbalances have seen a significant improvement resulting in a sustainable level of p g CA and its components Current account main positions (% of GDP) 10 5 8.6 3.0 -1.2 -0.6 -1.3 0 -5 5 -10 -13.1 -15 15 -20 -22.4 25 -25 2007 2008 2009 2010 2011 2012 F 2013 F Current Transfers Income Goods and Services Current AccountSource: Bank of Latvia ;F- forecast
  19. 19. With the economic environment stabilizing, Latvia has been able to attract considerably more y net FDI in 2011 than in previous year Net FDI inflows (% of GDP) 10 8.4 8.1 5.5 5 3.8 1.6 0.4 0 2006 2007 2008 2009 2010 2011Source: Bank of Latvia
  20. 20. Monetary and Financial Market Developments
  21. 21. Both tight lending standards and low demand for loans determined credit decline Credit to private sector (y o y %) (y-o-y, 100 80 60 40 20 0 -20 I 2004 IV X I 2005 IV X I 2006 I 2007 IV X I 2008 IV X IV X I 2009 IV X I 2010 IV X I 2012 IV X VII VII VII VII VII VII VII VII I 2011 Annual growth of h A l th f household credit stock h ld dit t k Annual growth of nonfinancial corporation credit stock Annual growth of resident credit stock (without government)Source: Bank of Latvia
  22. 22. The backing of the monetary base with foreign reserves is high Net foreign assets and Monetary base (mln lats) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 08 09 I 2010 I 2012 II II II II II II II II II 11 IVV V VI II II IXX X XI II IVV V VI II II IXX X XI II IVV V VI II II IXX X XI II IVV V VI II II IXX X XI II I II I II I II I II I V VI VII X XI V VI VII X XI V VI VII X XI V VI VII X XI I 201 I 200 I 200 Net foreign assets Monetary baseSource: Bank of Latvia
  23. 23. Foreign exchange resources are adequate to meet 5 4 months of import 5.4 Ratio f the t foreign R ti of th net f i assets of th B k of L t i i the months of i t f the Bank f Latvia in th th f imports of goods t f d 12.00 10.00 8.00 6.00 4.00 2.00 0.00 I 2004 IV X I 2005 IV X I 2006 IV X I 2007 IV X I 2008 IV X I 2009 IV X I 2010 IV X I 2011 IV X VII VII VII VII VII VII VII VIISource: Bank of Latvia
  24. 24. Sector capital adequacy ratios at historically highest levels Capital adequacy ratios (%)201816141210 8 6 4 2 0 Q1 2006 Q3 Q1 2007 Q3 Q1 2008 Q3 Q1 2009 Q3 Q1 2010 Q3 Q1 2011 Q3 CAR Tier 1 ratioSource: Financial and Capital Market Commission
  25. 25. Liquidity level remains very high q y y g Liquidity ratio (defined by FCMC %) FCMC, 70 60 50 40 30 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q Q Q Q QSource: Financial and Capital Market Commission Q
  26. 26. 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 lats 20 Share of provisions in outstanding 2,800 , 18 loans Share of loans over 90 days past 16 2,400 due in outstanding loans 14 Provisions (right-hand scale) 2,000 2 000 12 Loans over 90 days past due (right- 1,600 10 hand scale) 8 1,200 1 200 6 800 4 400 2 0 0 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 011 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 20Source: Bank of Latvia, Financial and Capital Market Commission
  27. 27. Fiscal consolidation and implemented reforms helped to stabilize economy and financial p y markets: interest rates below pre-crisis level Money market rates (%) 30% 25% 20% 15% 10% 5% 0% jan mar mai jūl sep nov jan mar mai jūl sep nov jan mar mai jūl sep nov jan mar mai jūl sep nov jan mar 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11 11 11 12 12 RIGIBOR 3M RIGIBOR 6M RIGIBOR 12MSource: Bank of Latvia
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