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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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Economic Developments in Latvia
December, 2012
Macroeconomic Overview
The strong economic growth in Latvia is supported by sound fundamentals
Real GDP growth in the 1st Half of 2012 (% y-o-y)
Source: Eurostat
-4 -3 -2 -1 0 1 2 3 4 5 6
LV
LT
EE
PL
SK
RO
SE
D
E
FI
AT
BG
IE
LU
FR
B
E M
T D
K
GB
N
L C
Z ES
HU
SI
IT
C
Y
PT
Economic growth remains strong; GDP growth in 2012 overall is expected to be around 5%
Real GDP growth (%)
-6.2
-4.0
3.1 2.8 3.6
5.7 6.6
5.7
6.9
5.0 5.3*
-8
-6
-4
-2
0
2
4
6
8
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3
Source: Central Statistical Bureau; * Flash estimate
Economic growth was led initially by exports, broadened to investment and private consumption
Real GDP growth (y-o-y, %) and contribution to the growth (percentage points)
Source: Central Statistical Bureau of Latvia; * - Flash estimate
-6.2 -4.0
3.1 2.8 3.6 5.7 6.6 5.7 6.9
5.0 5.3*
-18 -15 -12 -9 -6 -3 0 3 6 9
12 15 18 21
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3
Private consumption Public consumption GFCF Changes in inventories Exports Imports GDP, % yoy
GDP growth is broad based across sectors
-6.2 -4.0
3.1 2.8 3.6
5.7 6.6
5.7 6.9
5.0 5.3*
-10
-8
-6
-4
-2
0
2
4
6
8
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Agriculture Industry Construction Trade Transportation and storage Private services Public services Product taxes and subsidies GDP y/y, %
Source: Central Statistical Bureau of Latvia; * - Flash estimate
Real GDP growth (y-o-y, %) and sector contribution to the growth (percentage points)
Growth has been supported by regained competitiveness: wage-productivity gap has been closed
90
100
110
120
130
140
150
160
Q1
2005
Q3
Q1
2006
Q3
Q1
2007
Q3
Q1
2008
Q3
Q1
2009
Q3
Q1
2010
Q3
Q1
2011
Q3
Q1
2012
Q3
Labour productivity Real wage
Wage and productivity (2005 Q1 = 100; seasonally adjusted)
Source: Central Statistical Bureau of Latvia; Bank of Latvia’ s calculations
Export growth remains robust
Export growth of goods and services (y-o-y; %, in nominal terms )
-20
-15
-10
-5
0
5
10
15
20
25
2006 2007 2008 2009 2010 2011 2012 Q1-Q3
12.3%
Source: Central Statistical Bureau of Latvia
Current account stays close to balance
-13.1
8.6
2.9
-2.2 -3.1 -2.7 -1.9
-20
-15
-10
-5
0
5
10
15
2008 2009 2010 2011 Q1 2012 Q2 Q3*
Goods and Services Income Current Transfers Current Account
Source: Bank of Latvia; * Bank of Latvia GDP forecast used
Current account main positions (% of GDP)
Inflation on a declining trend, bringing compliance with the Maastricht inflation criteria
Impact of food and energy prices on total inflation (pp) and the y-o-y inflation rate (%)
Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations
5.0
1.6
-5
-3
-1
1
3
5
7
I 2010
III V VII IX XI I 2011
III V VII IX XI I 2012
III V VII IX
Food Energy Inflation (y-o-y) Inflation excluding food and energy (y-o-y)
Unemployment rate continued to decline
10.7
13.5
0
5
10
15
20
25
I 200
9 II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
I 2
010 II
II
I IV
V
V
I V
II
VII
I IX
X
X
I X
II
I 201
1 II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
I 2
012 II
II
I IV
V
V
I V
II
VII
I IX
X
Registered unemployment rate Unemployment rate (Labour Force Survey)
Unemployment rate (% of economically active population)
Source: Central Statistical Bureau of Latvia; State Employment Agency
Financial sector issues
12
Domestic deposits (mln lats)
In 2012, the average level of deposits is almost the same as in previous year - depositors’ confidence is rather stable
4000
4200
4400
4600
4800
5000
5200
5400
5600
5800
6000
I 200
8 IV
VII
X
I 200
9 IV
VII
X
I 201
0 IV
VII
X
I 201
1 IV
VII
X
I 201
2 IV
VII
X
Source: Bank of Latvia
Decline in credit stock reflects still ongoing deleveraging
-20
0
20
40
60
80
100
I 200
4 IV
VII
X
I 2
005 IV
VII
X
I 2
006 IV
VII
X
I 2
007 IV
VII
X
I 2
008 IV
VII
X
I 2
009 IV
VII
X
I 2
010 IV
VII
X
I 2
011 IV
VII
X
I 2
012 IV
VII
X
Annual growth of household credit stock Annual growth of nonfinancial corporation credit stock Annual growth of resident credit stock (without government)
Credit to private sector (y-o-y, %)
Source: Bank of Latvia
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
I 200
8 IV
VII
X
I 200
9 IV
VII
X
I 201
0 IV
VII
X
I 201
1 IV
VII
X
I 201
2 IV
VII
X
Net foreign assets Monetary base
The backing of the monetary base with foreign reserves is over 150%
Source: Bank of Latvia
Net foreign assets and Monetary base (mln lats)
Capital adequacy ratios at historically highest levels
0
2
4
6
8
10
12
14
16
18
20
Q1 2006
Q3 Q1 2007
Q3 Q1 2008
Q3 Q1 2009
Q3 Q1 2010
Q3 Q1 2011
Q3 Q1 2012
Q3
CAR Tier 1 ratio
Capital adequacy ratios (%)
Source: Financial and Capital Market Commission
Liquidity remains on a very high level
30
40
50
60
70
Q1
2006
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
Q1
2008
Q2
Q3
Q4
Q1
2009
Q2
Q3
Q4
Q1
2010
Q2
Q3
Q4
Q1
2011
Q2
Q3
Q4
Q1
2012
Q2
Q3
Source: Financial and Capital Market Commission
Liquidity ratio (defined by FCMC, %)
Non-performing loans are adequately provisioned; asset quality gradually recovers
0
400
800
1,200
1,600
2,000
2,400
2,800
0
2
4
6
8
10
12
14
16
18
20
Q3
Q4
Q1
2005
Q
2 Q
3 Q
4 Q
1 20
06
Q2
Q3
Q4
Q1
2007
Q
2 Q
3 Q
4 Q
1 20
08
Q2
Q3
Q4
Q1
2009
Q
2 Q
3 Q
4 Q
1 20
10
Q2
Q3
Q4
Q1
2011
Q
2 Q
3 Q
4 Q
1 20
12
Q2
Q3
mln lats %
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)
Amount of loans over 90 days past due, provisions and their share in outstanding loans
Source: Bank of Latvia, Financial and Capital Market Commission
-5
0
5
10
15
20
25
30
-5%
0%
5%
10%
15%
20%
25%
30%
jan
08
apr
08
jūl 0
8
okt 0
8
jan
09
apr
09
jūl 0
9
okt 0
9
jan
10
apr
10
jūl 1
0
okt 1
0
jan
11
apr
11
jūl 1
1
okt 1
1
jan
12
apr
12
jūl 1
2
okt 1
2
RIGIBOR-EURIBOR 3M spread (rhs) O/N 3M 1Y
bps
Money market rates remained stable at low levels for a long time
Source: Bank of Latvia
Lats money market interest rates (%, bps)
