Latvia's economy is witnessing a resurgence with GDP growth and declining unemployment rates, despite global uncertainties posing risks for 2012. Strong export performance and improved competitiveness have contributed significantly to this recovery, with inflation pressures primarily fueled by rising global prices and indirect taxes. Nevertheless, challenges such as tightening credit conditions and high unemployment remain as the country navigates its economic landscape.

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

2. Macroeconomic Overview
2

3. Economy is back to growth; risks to the outlook
for 2012 dominate on the downside due to high
uncertainty in the global environment
Real GDP growth (%)
6 5.6%
4 3.3% 3.4%
2
0
-2
-4
-6
2010 I II III IV 2011 I II 2011 F 2012 F
Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast 3

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 4

5. Global prices as well as indirect taxes
contributed most to the increase in inflation;
risks to the forecast are on the downside
Y-o-y inflation excluding food, energy prices and tax changes (%), contributions
(percentage points)
12
Energy Annual average inflation
Food forecast:
10 2011 – 4.7%
12 month inflation (%)
8 Inflation excluding food and energy (%)
Inflation excluding food, energy at constant tax rate
6
4.6
4
2
0.8
0
-0.2
-2
-4
-6
-8
I III V VII IX XI I III V VII IX XI I III V VII IX
2009 2010 2011
5
Source: Central Statistical Bureau of Latvia; Bank of Latvia’s calculations and forecast

6. Unemployment rate continued to decline
Unemployment rate (% of economically active population)
25
20.5
19.7 19.4
20 18.4
17.3 17.9
16.7 16.9 16.6 16.2
15 13.9
11.6
9.9
10
7.2
6.5 6.3
5
0
2011 I
IV
V
IX
X
IV
V
IX
X
IV
V
IX
X
IV
V
IX
II
III
II
VI
III
II
II
VII
VIII
XI
XII
VI
VII
VIII
XI
III
XII
VI
VII
VIII
XI
III
XII
VI
VII
VIII
2008 I
2009 I
2010 I
Registered unemployment rate Unemployment rate (Labour Force Survey)
6
Source: Central Statistical Bureau of Latvia; State Employment Agency

7. Hours worked grew again particularly
in the private sector and manufacturing
Hours worked (y-o-y changes by Hours worked (y-o-y changes in H1
institutional sector breakdown , %) 2011 by sectoral breakdown, %)
7
Source: Central Statistical Bureau of Latvia firms’ survey data

8. Competitiveness issues
8

9. Wage-productivity gap 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
9
Source: Central Statistical Bureau of Latvia; Bank of Latvia’ s calculations

10. 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
10

11. The price and cost competitiveness has improved
markedly as compared to the pre-crisis levels
130
The REER of the lats (Jan 2000 / Q1 2000) = 100)
125
120
115
110
105
100
95
90
85
80
2007 I
2008 I
2009 I
2010 I
IV
X
IV
X
IV
X
IV
X
2011 I
IV
VII
VII
VII
VII
VII
NEER REEER_CPI REEER_PPI REEER_ULC_manuf
Source: Bank of Latvia
11

12. Latvia’s export market shares are up in most of
our key markets reflecting gains in
competitiveness
Share of Latvian exports in particular country’s imports, % (4q-moving average),
2009 Q3–2011 Q2
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’s calculations
12

13. Merchandise export growth remains strong
and has surpassed its pre-crisis level
Nominal and real merchandise exports (Q1 2003 = 100)
450
Nominal exports
400 Real exports
350
300
250
200
150
100
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
2011 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
Source: Central Statistical Bureau of Latvia
13

14. External imbalances have seen a significant
improvement resulting in a sustainable
level of CA and its components
Current account main positions (% of GDP)
8.6
10.0
5.0 3.0
1.1 0.9
0.0
-5.0
-10.0 -13.1
-15.0
-20.0 -22.6 -22.4
-25.0
2006 2007 2008 2009 2010 2011 Q1 2011 Q2
Current Transfers Income Goods and Services Current Account
Source: Bank of Latvia ;F- forecast
14

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
27.0
60 20 Wood
40 Plastics
10
20 Chemical
0 Mineral products
0
Agricultural and food
-20 -10 products
VII
2011 I
VIII
IV
V
IX
X
III
VIII
II
XII
VII
XI
VI
Total exports y-o-y (%,
RHS)
Source: Central Statistical Bureau of Latvia
15

16. With the economic environment stabilizing,
Latvia has been able to attract considerably
more net FDI in H1 2011 than in previous year
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
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
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 6.7 months of import
Ratio of the net foreign assets of the Bank of Latvia in the months of imports of goods
12
10
8
6.7
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 above pre-crisis level point to
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
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
VI
VII
VIII
X*
II
III
II
III
II
III
II
III
I 2011
XI
XII
XI
XII
XI
XII
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 continued to be
significantly higher than the required minimum
of 8%
Capital adequacy ratios (%)
16
14
12
10
8
6
4
2
0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2006 2007 2008 2009 2010 2011
CAR Tier 1 ratio
Source: Financial and Capital Market Commission 22

23. Liquidity level remains very high
Liquidity ratio (defined by FCMC, %)
70
60
50
40
30
1Q 2011
1Q 2005
1Q 2006
1Q 2007
1Q 2008
1Q 2009
1Q 2010
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
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 lats
20 3000
Share of provisions in outstanding loans
18 2600
16 Share of loans over 90 days past due in
outstanding loans 2200
14
Provisions (right-hand scale)
12 1800
10 Loans over 90 days past due (right-hand 1400
scale)
8 1000
6
600
4
2 200
0 -200
1Q 2011
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
3Q
4Q
2Q
1Q 2006
1Q 2007
1Q 2008
1Q 2009
1Q 2010
Source: Bank of Latvia, Financial and Capital Market Commission 24

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