Managing the Crisis. The Case of Latvia

Valdis DombrovskisPrime Minister of Latvia

30.04.2010

Liquidity of accounts of the State Treasury in 2009 was completely assured

2

Finansēšanai pieejamie resursi perioda beigās 2009.-2010.gadā (t.sk. finanšu sektora stabilizācijas pasākumiem rezervētie resursi)

0

200

400

600

800

1 000

1 200

1 400

1 600

Jan 09 Feb 09 Mar 09 Apr 09 Mai 09 Jūn 09 Jūl 09 Aug 09 Sep 09 Okt 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10

mLVL

saņemta SVF aizdevuma 2.daļa

saņemta EK aizdevuma

1.daļa

saņemta EK aizdevuma 2.daļa

saņemts Pasaules bankas aizdevums

saņemta SVF aizdevuma

3.daļa

saņemta EK aizdevuma

3.daļa

Available Funding Resources at the End of the Period in 2009-2010 (incl. resources reserved to ensure stability of the financial sector)

1st tranche of EC loan received

2nd tranche of IMF loan received

2nd tranche of EC loan received

1st tranche of WB loan received

3rd tranche of IMF loan received aizdevuma 3.daļa

3rd tranche of EC loan

Strong and Broad-Based International Support

3

▌ Both the EU and the IMF have disbursed the third tranches of their respective loans following successful economic and other reform measures implemented by the government in the 2010 budget in accordance with these agreements

▌ EU/IMF review mission is planned in May 2010 ▌ Loan agreement with the World Bank on next EUR 100 mn has been signed▌ Loan agreements with Poland, Czech Republic and Nordic lenders are being

negotiated to include the possibility of credit line format

Tough adjustment measures have earned international financial support for Latvia International Assistance Loans Planned and Disbursed (millions of EUR)

Source: Treasury,18

Received Planned

years 2008 2009 2010 2010 2011 TOTAL

Received till 29

April 2010

European Commission   2 200 500 200 200 3 100 2 700

Nordics (SE, DK, FI, NO, EE)        1 000 900 1 900  

The World Bank   200   200   400 200

Czech Republic       100 100 200  

EBRD   100       100 100

Poland       100   100  

IMF 600 200 200 300 400 1 700 1000

Total 600 2 700 700 1 900 1 600 7 500 4 000

4

Promotion of national competitiveness

Economic growth

Measures of the Social Sector

Efficiency of Public

Administration

Budget and structural reforms, incl. implementation of LOI and MOU

Economic trends at the time when the new Government took the office:

dramatic fall in GDP

5

6,5 7,28,7

10,612,2

10,0

-4,6

-18,0

-3,5

3,3 4,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Forecast

Export and import of goodsLVL million, seasonally equalized

6Datu avots: CSP

As a Result of Economic Crisis, the Unemployment Level has Inscreased Significantly

7

Above factors have contributed to current account surplus since the beginning of

2009

8

-25

-20

-15

-10

-5

0

5

10

15

2007 2008 2009Op.

2008Q1

Q2 2008Q3

Q4 2009Q1

Q2 Q3 Q4 2010P

Goods and services Revenues

Current transport Current account

Remuneration has been radically reduced in public administration...

9Data source: Data aggregated by the Ministry of Finance Percentage decrease was calculated against the average index of 2008

Average salary

Average salary of 2008

Average salary of 2009

Average monthly salary (calculated by the MoF) in state budget institutions by month in 2009 and 2010 and compared with average indicators of 2008 and 2009, LVL and %

The financing needed for funding of salaries in the state budget declined from LVL 895.1 million in 2008 to LVL 557.7 million in 2010 creating total economy of LVL 337.4 million

... as well as the number of employees has been significantly reduced

10Data source: Data aggregated by the Ministry of Finance Percentage decrease was calculated against the average index of 2008

In January 2010, 62 205 employees were employed in the state financed institutions or 14.2 thousand less than in January 2009

Number of employees (calculated by MoF) in the state budget institutions by month in 2009 and 2010 and compared with average indicators of 2008 and 2009, thousands

Number of employees

Average number of employees in 2008 Average number of employees

in 2009

Nu

mb

er

of

em

plo

yees,

th

ou

san

ds

Annual rate of change in credits issued during the year continues to decline, but the

decline has slowed significantly

11

12

Return of Investor Confidence

200

250

300

350

400

450

500

550

600

650

700

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

Sp

read

vs

MS

(b

ps)

Recent demand for domestic debt and recovery in credit spreads underpins investors’ confidence in Latvia’s recovery

Source: The Treasury.

Regular and successful domestic debt auctions are evidencing the recovery in Latvia’s financial markets

Since June 2009 the Treasury has steadily been increasing the average maturity of its domestic securities portfolio by issuing longer dated securities (2 and 3 year benchmarks)

Average weighted yield rates have markedly decreased over the last quarter of 2009 and 1st quarter of 2010

Credit spreads on Latvia’s Eurobond have substantially rallied, tightening by around 240bps since their highs

Eurobond 2018 Performance

Source: Bloomberg22

Average Weighted Yields Domestic T-bills Competitive Multiprice Auctions)

0

2

4

6

8

10

12

14

16

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

1M 3M 6M 12M 2Y 3Y

%

4.712%

3.038%

1.804%

3.18%

5.093%

5.933%

Cyclically adjusted budget balance of the consolidated state budget

13

Cyclically adjusted (primary) budget balance in Latvia, in % of GDP

-10

-8

-6

-4

-2

0

2

4

2005 2006 2007 2008 2009 2010

% o

f G

DP

Cyclically adjusted budget balance (% of GDP)

Cyclically adjusted budget balance (against previous year in % points of GDP)

Since middle of 2009 the capital outflow from Latvia has not been observed

14

Lats exchange rate and interventions of the BL

Improvement of macroeconomic indicators and reduction of government spending

promote confidence in the financial system of Latvia

15

RIGIBID & RIGIBOR indexes

0%

5%

10%

15%

20%

25%

30%

Nov.08 Jan.09 Mar.09 Mai.09 Jūl.09 Sep.09 Nov.09 Jan.10 Mar.10

RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M

Conjuncture of the manufacturing sector continues to improve; the key development

factor - exports

16

-70

-60

-50

-40

-30

-20

-10

0

10

20

I 20

09 II III

IV V VI

VII

VII

I

IX X XI

XII

I 20

10Confidence index

Production demand

incl. Export demand

Level of produced production stocks

Expected changes in production activity

-35

-30

-25

-20

-15

-10

-5

0

5

I 20

09 II III

IV V VI

VII

VII

I

IX X XI

XII

Total Domestic market Export

Industry Confidence Index (balance, in %)

Real Changes in Manufacturing Turnover (%)

Avots: CSP

Retail growth - a sign of economic recovery

17

In 2008, the statistics start consolidation of data according new NACE2 classification of economic activity . Starting from 2008, re-calculation was made in data chart according to new classification

18

External market update CDS levels have fallen significantly since their

highsLatvia’s 10 year CDS level (April 29)

Source: The Bloomberg.

Latvia’s 10Y CDS level is 355 bp (April 29, 2010)

Eurobonds outstanding in amount of €800mn (2 issues) as of 31st Mar. 2010

– €400mn due in April 2014

– €400mn due in March 2018

24

Source: The Bloomberg.

5 year CDS of Greece, Latvia, Portugal, Spain and Ireland

Moody's(kredītreitings ilgtermiņa saistībām ārvalstu valūtā)

A/ A2

Standard&Poor's(kredītreitings ilgtermiņa saistībām ārvalstu valūtā)

A-/ A3

BBB+/Baa1

BBB/Baa2

Moody's nākotnes novērtējums BBB-/ Baa3STABILS STABILS

NEGATĪVSBB+/Ba1

Standard&Poor's nākotnes novērtējums BB/Ba2 STABILS STABILS

NEGATĪVS NEGATĪVS

NEGATĪVS (Credit watch)īstermiņa vērtējums

2006 2007 2008 2009 2010

Reitinga skala

19

Achievements of the Government are recognizedThe rating of long-term committments performed by rating agency Standart&Poor’s and Moody’s remains unchanged, but the future outlook is becomming positive

▌ ..... agency "Standard&Poor’s“:▌ has re-evaluated the future assessment of Latvia and increased the future assessment of

credit ratings from negative to stable▌ ... agency Moody’s:

▌ “The recent measures which Latvia implemented to reduce the budget deficit will help avoid the bankruptcy or currency crisis, as well as from deterioration of credit rating”

▌ .... The Economist:▌ ...Jörg Asmussen, a German minister, praised Latvia for its self-discipline... ▌ ... despite a fall in GDP last year of 17.5%, Latvia seems to have achieved something many

thought impossible: an internal devaluation...

▌ ....European Commission:

...we may conclude that Latvia has taken the appropriate steps to prevent excessive budget deficit. The Commission concluded that the Latvian authorities have acted effectively. In particular, it refers to general reduction in expenditure as planned...

International organizations and authoritative financial publications have recognized the achievements of the Government in ensuring national solvency and prevention of bankruptcy...

20

21

Valdis Dombrovskis, Prime Minister of Latvia

36 Brīvības blvd., Rīga, LV-1520 www.mk.gov.lv

Thank you for attention!