Presentation by Governor of Latvijas Banka and member of the Governing Council of the European Central Bank Mārtiņš Kazāks during discussion on Latvia's economic developments in Brussels.

1. The Wind of Change:
Economic and Financial Outlook
Mārtiņš Kazāks, PhD
Governor of Latvijas Banka

2. Global growth set to remain moderate
Real GDP growth and forecasts (%)
Source: International Monetary Fund. 2
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020F
2021F
World
Advanced economies
Emerging market and
developing economies
Avg. since 2010

3. The business cycle is quite mature
Unemployment rate (%; s.a.)
Source: Bloomberg LP. 3
Economic expansion*:
► US – since 2009Q3 (42 quarters)
► Japan – since 2016Q1 (16 quarters)
► Germany – since 2013Q2 (27 quarters)
0
2
4
6
8
10
12
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
US
Japan
Germany
* Period without a technical recession (two consecutive quarters in which GDP contracts).

4. Source: Bloomberg LP, Reuters Datastream, St. Louis FED, CEPR, Conference Board Leading economic index, Latvijas Banka's calculations. Last observation CB Leading economic index December.
Conference Board Leading economic index (%; annual growth rate of index)
4
What do markets think about recession?
0-40
-30
-20
-10
0
10
20
30
40
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Euro area recessions US recessions Euro area US China

5. Source: Eurostat, US Department of Labor, Statistics Bureau of Japan.
Major stock index profit margins (%)
5
Stock markets have been rather optimistic
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
2
4
6
8
10
12
14
2005 2007 2009 2011 2013 2015 2017 2019
Euro area recessions US recessions S&P 500 MSCI EM STOXX 600
Profit margins calculated from trailing 12m net income divided by trailing 12m net sales
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
50
100
150
200
250
300
2005 2007 2009 2011 2013 2015 2017 2019
Major stock prices (2005=100)

6. Source: Bloomberg LP, Markit Economics.
Global PMI
6
Manufacturing is the weak link…
Euro area PMI
40
45
50
55
60
65
2017 2018 2019 02/2020
Composite
Manufacturing
Services
46
47
48
49
50
51
52
53
54
55
56
2017 2018 2019 02/2020
Composite
Manufacturing
Services

7. Source: CPB Netherlands Bureau of Economic Policy Analysis, Bloomberg LP, Latvijas Banka's calculations.
World Trade and Industrial Production (3M moving avg. y-o-y % change);
manufacturing PMI
7
… reflecting anaemic global trade
Will world trade
follow business
expectations?
-2
-1
0
1
2
3
4
5
6
2015 2016 2017 2018 2019 2020
World trade volumes
Industrial production
Manufacturing PMI
(diff. from 50)

8. Source: Eurostat, European Central Bank, International Monetary Fund, European Commission.
Euro area real GDP growth and projections (%)
8
Euro area is expected to stay in a low gear
Euro area inflation un ECB projections (%)
-1
0
1
2
3
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
- 1
0
1
2
3
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Actual ECB forecast EC forecast IMF forecast

9. Global financial crisis Start of the European
sovereign debt crisis
Brexit vote and US 2016
Presidential elections
Shift in US trade policy;
withdrawal from Iran deal;
instability in EM economies
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: http://www.policyuncertainty.com/global_monthly.html; Bloomberg LP.
Global Economic Policy Uncertainty Index
9
Geopolitical tensions add to uncertainty and
undermine investments

10. Photo: Shutterstock, SipaPress/Scanpix, Pexels. 10
Future outlook overshadowed by…

11. Trade war: tariffs are much higher than before 2018
Source: PIIE.
Since 2018 tariff war led to
extra import taxes being
levied on more than $450bn
worth of traded goods
15

12. Trade war: leads to trade diversion effects for other countries
Source: PIIE. 16
U.S. – China trade deal

13. EU must be united to
establish close
partnership with
the United Kingdom
Source:Shutterstock.

14. Coronavirus is a new source of uncertainty
Source: Institute of Medicine (US) Forum on Microbial Threats; National Academies Press (US), 2004. Photo: Pixabay. 20
► COVID-19 has disrupted economic activity in China.
► Global economic growth is at risk.
► IMF assumptions: relatively minor global impact (-0.1 pp from global growth in 2020), but situation can change.
► Most likely COVID-19 will have wider impact than SARS coronavirus:
Fatality rate
China's
economy
9.6% 1-3%, but more infectious
16% of global GDP4% of global GDP
Close to $US 40 billion (in 2003)
Largest impact: China (1.05 % of GDP),
Hong Kong (2.63 % of GDP)
Global
economic
loss
?
11/2002-07/2003 (SARS) NOW (COVID-19)

15. MONETARY POLICY

16. 0
20
40
60
80
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
ECB Federal Reserve System
Bank of England Bank of Japan
24
ECB, FRS, BoE, BoJ balance sheet (% of GDP)Central bank base rates and deposit rate (%)
-1
0
1
2
3
4
5
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
ECB MRO Federal Reserve System
Bank of England Bank of Japan
ECB deposit rate
Monetary policy will remain supportive
Source: European Central Bank, Reuters, Bloomberg.

17. -0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
3months
6months
9months
12months
15months
18months
21months
24months
27months
30months
33months
36months
39months
42months
45months
48months
51months
54months
57months
60months
End of 2014 28.02.2020
-1
0
1
2
3
3months
9months
2years
4years
6years
8years
10years
12years
14years
16years
18years
20years
22years
24years
26years
28years
30years
End of 2014 28.02.2020
Source: Bloomberg.
EONIA forward curve (%)
27
With ample monetary accommodation …
Euro area government bond yield curve
(synthetic yields; %)

18. Source: Eurostat, European Central Bank.
Option-implied distribution of average inflation over the
next five years (%)
28
… inflation stays low for a prolonged period
Euro area inflation rate and ECB projections (%)
-1
0
1
2
3
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

19. ► Expected to be concluded by the end of 2020
► Goal: making monetary policy strategy as effective as
possible to achieve our price stability mandate
► Will take stock of historical experience and recent
economic developments
► Based on thorough analysis and open minds,
engaging all stakeholders
► Despite the strategic review, the ECB will continue to
conduct monetary policy as usual and react to
economic developments where it deems appropriate
ECB has launched strategic review of monetary policy
29

20. Monetary policy should not be the only game in town
30
Sustainable
economic growth
Structural
reforms
Fiscal
policy
Monetary
policy

21. Source: International Monetary Fund. 31
Inertia of the current fiscal policy
Euro area government primary balance and debt (% of GDP; 2015–2019 vs 2019)
Cyprus
Estonia
Germany
Ireland
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Slovak Republic
Slovenia
0
20
40
60
80
100
120
140
160
180
200
-4 -2 0 2 4 6 8 10
Grossdebt
General government primary balance
2019
2015-2019 avg.
High debt
Expansionary fiscal policy
High debt
Contractionary fiscal policy
Low debt
Contractionary fiscal policy
Low debt
Expansionary fiscal policy

22. Long-term trends affecting Europe
Photo: Shutterstock, Pixabay. 34

23. Source: World Inequality Database; Blanchet et al. (2019).
European growth incidence curve (1980 to 2017)
35
Income inequality: a source of rising anxiety
Bottom 50% captured
15% of total growth
Top 1% captured
17% of total growth
0
50
100
150
200
250
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
99
99.1
99.5
99.91
99.95
99.991
99.995
99.999
Totalincomegrowth(%)
Income group (percentile)

24. Digitalisation: to compete globally, the EU needs to
reduce divergence
International Digital Economy and Society Index (I-DESI)*
*I-DESI measures performance in 5 areas: connectivity, digital skills, use of Internet by citizens, integration of
technology and digital public services.
36Source: European Commission, I-DESI 2018.

25. Digitalisation: transforming financial sector services
37
POSSIBLE GAPS: speed, cost,
transparency, access, security,…
USER NEEDS: pay, save, borrow,
manage risks, get advice
FINTECH SOLUTIONS
Big Data
distributed ledger
technology
artificial intelligence
cloud computing
Internet of
Things
TECHNOLOGICAL
INNOVATIONS
ROBO-
ADVISING
CROWDFUNDING
PAYMENTS
BLOCKCHAIN
BONDS
DIGITAL CURRENCIES
REGTECH
SMART
CONTRACTS
MONEY
TRANSFERS
IMPORTANT TOPICS: level playing field and competition, financial stability, financial integrity, consumer
protection, cybersecurity, impact on monetary systems, money laundering and terrorism financing risks

26. Climate change: delivering goals will be a challenge
Greenhouse gas emission trends, projections and targets in the EU
Source: EEA Report, 10/2019. 40

27. 5 4 3 2 1 0 1 2 3 4 5
<5
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80-84
≥85
Women 2050
Women 2018
Men 2050
Men 2018
Source: Eurostat.
Population pyramids, EU-28, 2018 and 2050 (% share of total population)
45
Ageing: a concern for future growth

28. Economic outlook for Latvia

29. 100
110
120
130
140
150
160
170
180
190
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Romania (65.6%)
Poland (70.3%)
Bulgaria (50.8%)
Slovakia (73.0%)
Czechia (90.4%)
Hungary (70.7%)
Slovenia (86.9%)
Croatia (62.9%)
Lithuania (80.2%)
Estonia (81.6%)
Latvia (68.9%)
47
Latvia ranks among top growth performers in Europe
Source: Eurostat, Latvijas Banka’s staff calculations.
Gross domestic product per capita (2004 = 100; volume index) (% of EU28 PPS,
current prices,in 2018)
* according to
data availablity

30. 0
10
20
30
40
50
60
70
2004 2009 2015 2019
Exports (% of GDP)
49
Economy: more open and balanced
Current account and net foreign debt (% of GDP)
-0.3
0
10
20
30
40
50
60
70
-25
-20
-15
-10
-5
0
5
10
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019*
Current Account
Net Foreign Debt (rhs)
Source: Eurostat, Latvijas Banka. * preliminary data for CA

31. 9
32
0%
25%
50%
75%
100%
2000 2019
Other services
Financial services
Transit related
transport (rail, sea)
Travel
Other transport (air,
road)
ICT, other bussiness
services
6
16
0%
25%
50%
75%
100%
2000 2019
Other goods
Textiles
Mineral products
Base metals
Food & Beverages
Chemical & Plastics
Agricultural
Machinery, electrical
Wood & Paper
Source: Latvijas Banka.
Services export (% of total)
50
Economy: more diversified and sophisticated
Goods export (% of total)

32. 15% 10% 9% 8% 7% 6% 4% 3% 3%3% 33%
Lithuania Estonia Russia Sweden Germany United Kingdom Denmark Poland Norway Netherlands Other
Source: Central Statistical Bureau, European Comission Autumn forecast 2019 and Winter forecast 2020.
Latvia’s goods and services export partners (% of total exports)
51
Modest growth outlook for main export markets
2020 growth forecast (%)
green – better than 2019
red – worse than 2019
2.6 2.2 1.4 1.2 1.1 1.2 1.5 3.3 1.9 1.3
LT EE RU SE DE UK DK PL NO NL

33. 6.0
4.4
2.4
2.0
3.1
1.6
3.8
4.5
2.2
2.6
0
1
2
3
4
5
6
7
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F
Source: Eurostat, F – Latvijas Banka's December 2019 forecasts.
Real GDP (y-o-y; %; s.a.)
52
Growth rate has passed its cyclical peak …

34. Source: Central Statistical Bureau.
Value added growth by sector (%; y-o-y; s.a.)
53
… remaining rather broad across sectors
-10 -5 0 5 10 15 20
GDP
Agriculture (3.6%)
Manufacturing (10.4%)
Mining, energy (3.1%)
Construction (5.8%)
Trade (12.1%)
Transport (7.8%)
Tourism (1.7%)
ICT (5%)
Finance (3.2%)
Real estate (10.7%)
Professional serv. (6.8%)
Public serv. (14%)
Art (2.6%)
2018 2019

35. Source: Central Statistical Bureau.
GDP expenditure side (%; y-o-y; s.a.)
54
… remaining rather broad across sectors
0 2 4 6 8 10 12 14 16
GDP
Private consumption (59.7%)
Government consumption (18.2%)
Gross fixed capital formation (22.9%)
Exports of goods and services (59.9%)
Imports of goods and services (-59.8%)
2018 2019

36. 80
85
90
95
100
105
110
115
2015 2016 2017 2018 2019
Risk:
6.4% ↓
?
-0.3
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
Employment
Realwages
Realprivateconsumption
Realinvestment
Realexports
GDP
Source: Central Statistical Bureau, Latvijas Banka’s staff estimation (CGE model).
Unit value index of exports of wood and wood products
(2015 = 100)
55
Slowdown affected also by one-off factors – timber prices
Estimated impact of lower wood prices on Latvia's
economy (%)

37. 7.8
6.3
0
2
4
6
8
10
12
14
16
18
2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020F
Average wage Unemployment
Source: Central Statistical Bureau, European Commission, E – estimate; F – December 2019 Latvijas Banka's forecast.
Average wage (y-o-y; %; gross nominal) and
unemployment (% of econ. active)
56
Economic slowdown to ease labour shortage; inflation
to stay moderate
Inflation (%; y-o-y)
2.4
2.1
-1
0
1
2
3
4
5
6
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F
Headline inflation Inflation excluding food and energy

38. Source: Krasnopjorovs,O. Anatomy of labour reserves in the Baltic countries: a snapshot 15 years after the EU accession. Latvijas Banka's Discussion paper 2/2019.
Labour market mismatch indicator (2016–2018
average)
Challenges on the use of labour remain:
high structural unemployment reflects skill mismatches…
Natural unemployment rate and labour market
mismatches in the EU countries
EE
LV
LT
0
2
4
6
8
10
12
14
16
18
0 20 40 60
NAIRU(2016–2018)
Labour market mismatch index (2016–2018)
57
0
10
20
30
40
50
60
Greece
Spain
Croatia
Italy
Lithuania
France
Latvia
Cyprus
Finland
Luxembourg
Estonia
Portugal
Belgium
Sweden
Bulgaria
Poland
Austria
Slovakia
Hungary
Ireland
Denmark
Czechia
UK
Germany
Romania
Malta
Slovenia

39. Source: Central Statistical Bureau, Latvijas Banka’s staff calculations. 58
and lack of geographic mobility
50
55
60
65
70
Total
Rīgaregion
Pierīga
Vidzeme
Zemgale
Kurzeme
Latgale
60
65
70
75
Total
Rīgaregion
Pierīga
Vidzeme
Zemgale
Kurzeme
Latgale
0
5
10
15
Total
Rīgaregion
Pierīga
Kurzeme
Zemgale
Vidzeme
Latgale
Unemployment rate
(% of economically active population; 2018)
Participation level
(% from working-age population; 2018)
Employment rate
(% from working-age population; 2018)

40. 400
420
440
460
480
500
520
540
Estonia
Finland
Poland
Ireland
UK
Slovenia
Netherlands
Denmark
Germany
Belgium
Switzerland
Norway
CzechRep
France
Portugal
Austria
Latvia
Lithuania
Hungary
Italy
Luxembourg
Croatia
SlovakRep.
Malta
Greece
Cyprus
Romania
Bulgaria
Average Reading Math Science
0
5
10
15
20
25
30
35
Malta
Italy
Sweden
Cyprus
Spain
France
Ireland
Luxembourg
Netherlands
UK
Austria
Belgium
Greece
Denmark
Finland
Germany
Portugal
Slovenia
Czechia
Croatia
Poland
Slovakia
Estonia
Romania
Hungary
Bulgaria
Lithuania
Latvia
healthy* unhealthy
Source: Eurostat and OECD, Latvijas Banka’s staff calculations.
PISA 2018 results (international test for 15-year-old
students)
60
Accumulation of human capital gains importance in
growth equation …
Life expectancy of 50-year-old men (years; in 2016)
*Healthy life expectancy without long-term activity limitation (self-assessment: EU-SILC survey data).

41. The impact of population age structure on the headline participation rate
(pp; compared to the age structure in 2002)
… more so as we face demographic headwinds
Source: Krasnopjorovs, O. Anatomy of labour reserves in the Baltic countries: a snapshot 15 years after the EU accession. LB Discussion paper 2/2019.
-4
-3
-2
-1
0
1
2
3
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Estonia
Latvia
Lithuania
projection
61

42. 0
5
10
15
20
25
30
2010 2011 2012 2013 2014 2015 2016 2017 2018
EU structural funds/investment_Latvia
Investment/GDP_EU average
Investment/GDP_Latvia
Source: Eurostat, Ministry of Finance, Latvijas Banka’s staff calculations.
Gross fixed capital formation (% of GDP) and EU
structural funds (% of investment)
62
Challenge – investment to boost productivity
50
70
90
110
130
150
170
190
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Labour productivity Real remuneration
Labour productivity and real remuneration per hour
worked (2005 Q1 = 100; s.a.)

43. Lending remains sluggish
Domestic enterprises and households’
loan-to-deposit ratio (%)
63
0.9%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Loans to domestic enterprises and
households* (%; y-o-y)
-20
0
20
40
60
80
100
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
To non-financial
enterprises
To households
-1.1%
Source: Latvijas Banka.
38.1%
0
20
40
60
80
100
120
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Credit to GDP ratio (% of GDP)
* For the sake of comparability, the one-off effects related to the restructuring of Latvia's banking sector have been excluded.

44. Source: Latvijas Banka, The Financial and Capital Market Commission.
Foreign client transactions in Latvia's
banking system (EUR billions)
64
Prompt action to strengthen AML/CFT framework leads to
success
Foreign client deposits (EUR billions)
0
3
6
9
12
15
2014 2015 2016 2017 2018 2019
EU non-EU
0
5
10
15
20
25
30
35
2014 2015 2016 2017 2018 2019
EUR Other RUB USD

45. Territorial reform to unlock reform potential
Source: Ministry of Environmental Protection and Regional Development. 65
119 40

46. General government budget balance in Latvia
(% of GDP)
66
Prudent fiscal policy allows for fiscal stimulus if needed
Source: Eurostat.
-10 -8 -6 -4 -2 0 2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019*
2020*
General government debt in 2018; EU countries
(% of GDP)
0 20 40 60 80 100 120 140 160 180 200
Greece
Italy
Portugal
Cyprus
Belgium
France
Spain
UK
EU avg.
Croatia
Austria
Slovenia
Hungary
Ireland
Germany
Finland
Netherlands
Slovakia
Poland
Malta
Sweden
Latvia
Romania
Denmark
Lithuania
Czechia
Bulgaria
Luxembourg
Estonia
*Budgetary Plan of the Republic of Latvia 2020

47. ►Inequality – benefits-based solution rather than tax policy
►Education and health care reforms – to increase labour force
quality within prevailing demographic trends
►Administrative territorial reform – to improve cost-efficiency of
currently fragmented municipal governance model
►Targeted investment policy and wise use of available financing
(incl. EU funds) – to boost productivity and skills, including fostering
adaptation to challenges brought by climate change and digitalisation
Areas where strategic approach is needed to boost
Latvia’s resilience towards long-term challenges
67