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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 Latviain Latvia
May 2012May, 2012
Macroeconomic Overview
Inflation shows a declining trend; past increases driven byp ycommodity prices and tax hikes
Impact of food and energ prices on total inflation (pp) and the o inflation rate (%)Impact of food and energy prices on total inflation (pp) and the y-o-y inflation rate (%)
5
7
2.83
5
-1
1
-3
Bank of Latvia forecasts:2012: 2.4%2013: 2.0%
-5I 2011 II III IV V VI VII VIII IX X XI XII I 2012 II III IV
Food Energy Y-o-y inflation Y-o-y inflation excluding food and energy prices
Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations
gy y y g gy p
No domestic demand pressures with real wagegrowth flat and unemployment rate still high; g p y g ;core inflation on low level
Inflation (% of coresponding period of previous year)
5
6
Inflation (% of coresponding period of previous year)
2.8
4.14
5
2.8
1.42
3
0
1
-1
I 201
1 II III
IV V VI
VII
VII
I
IX X XI
XII
I 201
2 II III
IV
12-month inflation 12-month average inflation Core inflation
Source: Central Statistical Bureau of Latvia, Bank of Latvia’s calculations
A moderate nominal wage growth has resumed; however real wages remain flatresumed; however, real wages remain flat
Average gross wage changes by institutional breakdown (y o y %)
10
Average gross wage changes by institutional breakdown (y-o-y, %)
4.54.0
5.45
-5
0
2010
Q1
Q2
Q3
Q4
2011
Q1
Q2
Q3
Q4
-10
5 2 2-15
Total Public sector Private sector
Source: Central Statistical Bureau of Latvia
Unemployment rate, although still high, has continued to declinehas continued to decline
Unemployment rate (% of economically active population; LFS)
25
Unemployment rate (% of economically active population; LFS)
Methodology change (population census) impact:
20
Unemployment rate: ~ + 0.7 pp as from Q1 2011
10
15
5
10
0
009
I II III
IV
010
I II III
IV
2011
I II III
IV
012
I
2 2 2 2
Source: Central Statistical Bureau of Latvia; State Employment Agency
Wage-productivity gap has closed, restoring competitivenessrestoring competitiveness
Wage and productivity (2005 Q1 = 100 s a )150
Wage and productivity (2005 Q1 = 100, s.a.)
130
90
110
70
90
1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3
2000
Q1
Q3
2001
Q1
Q3
2002
Q1
Q3
2003
Q1
Q3
2004
Q1
Q3
2005
Q1
Q3
2006
Q1
Q3
2007
Q1
Q3
2008
Q1
Q3
2009
Q1
Q3
2010
Q1
Q3
2011
Q1
Q3
Labour productivity Real wagep y g
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
Latvia’s export market shares are up in most of our key markets reflecting gains in y g gcompetitiveness
Share of Latvian exports in particular country’s imports (%; 4q-moving average, Share of Latvian exports in particular country s imports (%; 4q moving average, 2010 Q1–2012 Jan.-Feb.)
120.45
9
12
0.30
6
9
0.153
0.00 0E i Li h iEU27
72.4%Germany
8.3%UK
3.1%Sweden
6.3%Denmark
3.4%Finland 3.1%
Poland 5.9%
Russia 10.6%
Estonia 13.6%
Lithuania 18.1%
Source: Eurostat, Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
share ofexports2011
Current account is close to balance; main factors behind the deficit - increase of imports forbehind the deficit increase of imports for productionCurrent account and its components (% of GDP)
15
20
p ( )
8.7
5
10
15
5.5
-0.3 -0.8 0.7-1.1
1.2-2.9-5
0
-5.3
-15
-10
-202010 1Q Q2 Q3 Q4 2011 1Q Q2 Q3 Q4 2012 1Q E
Current Transfers Income Services Goods Current AccountCurrent Transfers Income Services Goods Current Account
Source: Bank of Latvia, E- estimated operational data
Latvian export trends in the geographicaldistribution: the Baltic market integration and gemergence of new marketsMerchandise export breakdown by country (%)
6.1 9.2 13.0 15.090%
100% Other – including Asian countries 8.3% (Turkey, Afganistan, India, UAE, China etc.), African countries(Egypt, Morocco, Algeria etc.)
Merchandise export breakdown by country (%)
23.1 20.9 14.2 15.870%
80%Other EU – Poland 7.2%, Netherlands 2.4%, France 1.7% and Southern euro area countries (Greece, Portugal, Spain, Italy) 2.0%
gyp g )
44.133.8
26.526.9
50%
60%OtherOther EU
21.631.7 28.130%
40% Scandinavia+UK+GermanyBaltic StatesCIS
13.2 14.4 14.6 14.2
13.5
0%
10%
20%
0%2000 2005 2011 2012 Q1
, Source: Central Statistical Bureau of Latvia
Sectorwise, Latvia’s merchandise export has undergone a significant diversification, creatingg g , ga stable export base
100% Others
Structure of merchandise exports (%)
70%
80%
90%Textiles
Transport vehicles
50%
60%
70%
Mineral products
Chemical
20%
30%
40%Chemical
Machinery and electrical equipmentB l
0%
10%
2000 2005 2011 2012 Q1
Base metals
Food products Q
Wood
Source: Central Statistical Bureau of Latvia, Bank of Latvia
Export growth has decelerated recently as external demand weakens, but it still remains on ,a solid footing
Merchandise exports by commodity groups (in nominal terms y o y growth)
50
60150 Other goods
Transport vehicles
Merchandise exports by commodity groups (in nominal terms, y-o-y growth)
40
50
100
flat
s
Transport vehicles
Machinery and electrical equipmentBase metals
16 7
20
30
50
y, m
illio
nsof Base metals
Textiles
Wood 16.7
0
10
0
Y-o-
y
Plastics
Chemical
-20
-10
-50
Mineral products
Agricultural and food d t2050
2011
I II
III
IV
V
VI
VII
VII
I
IX
X
XI
XII
2012
I II
III products
Exports yoy, % (RHS)
Source: Central Statistical Bureau of Latvia
Intermediate goods dominate in the import t t d d i i t thstructure and drive import growth
Import by BEC product group (million EUR)Import by BEC product group (million EUR)
1000
1100
1200
800
900
1000
Other items
500
600
700Motor spirit and passenger motor cars
Consumption goods
200
300
400p g
Intermediate goods
0
100
10 I III V
VII IX XI
11 I III V
VII IX XI
12 I III
Capital goods
Source: Eurostat
20 20 20
With the economic environment stabilising, Latvia has attracted considerably more foreigny gdirect investment (FDI) in 2011 vs 2010
Net FDI inflows (% of GDP)Net FDI inflows (% of GDP)8.4 8.1
6 2 6.7
10
3.8
5.5
3.6
6.25.6
6.7
3.85
0.41.6 1.6 1.6 2.1
0
-0.9
-5
2006
2007
2008
2009
2010
2011
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
2012
E
Q Q Q Q Q Q Q Q
Q1
Source: Bank of Latvia
Drivers of GDP growth, initially led by exports broadened to include investmentexports, broadened to include investment
Real GDP growth (y-o-y %) and contribution to the growth (percentage points)Real GDP growth (y-o-y, %) and contribution to the growth (percentage points)
20
25
3.5 3.6 3.55.6 6.6 5.7 6.8
5
10
15
-5.5-3.5
-5
0
5
-15
-10
-20Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012
flash
Private consumption Public consumption GFCF Changes in inventories
Source: Central Statistical Bureau of Latvia
Private consumption Public consumption GFCF Changes in inventoriesExports Imports GDP, % yoy
Merchandise export recovery has been remarkably strong – placing the countryy g p g yamong the European leaders
Merchandise export revenue growth 2011/2009 (% in EUR terms)
8590
Merchandise export revenue growth 2011/2009 (%, in EUR terms)
72 71 71
55 5360
70
80
44 44 43 43 4238 35 34 34 33 33 32 31 30 29 29 26 23 21
30
40
50
21
102
0
10
20
Est
onia
Bul
gari
aL
atvi
aL
ithua
nia
Rom
ania
Gre
ece
h R
epub
licM
alta
Swed
enC
ypru
sSl
ovak
iaPo
land
Hun
gary
d K
ingd
omPo
rtug
alSl
oven
iaN
ethe
rlan
dsG
erm
any
Spai
nA
ustr
iaB
elgi
um Ital
yFi
nlan
dFr
ance
Den
mar
kIr
elan
dux
embo
urg
Cze
c
Uni
ted N Lu
Source: Eurostat
Latvia has experienced a strong rebound in investment last yearinvestment last year
Gross fixed capital formation (% y-o-y)
2924 2530
40
Gross fixed capital formation (% y-o-y)
22 24 25
10
20
30
-10
0
-30
-20
-50
-40
I 200
7 II III
IV
I 200
8 II III
IV
I 200
9 II III
IV
I 201
0 II III
IV
I 201
1 II III
IV
Source: Central Statistical Bureau of Latvia
Despite unfavorable external conditions, inQ1 2012, manufacturing growth remainedQ , g gstrong, albeit volatile
Man fact ring ol me inde (2005 100; s a )
120
130
Manufacturing volume index (2005 = 100; s.a.)In Q1 2012,
3.5% q-o-q, s.a.and 14 8% y o y
110
120 and 14.8% y-o-y
90
100
70
80
60
2009
I II III
IV V VI
VII
VII
IIX X X
IX
II20
10 I II III
IV V VI
VII
VII
IIX X X
IX
II20
11 I II III
IV V VI
VII
VII
IIX X X
IX
II20
12 I II III
Source: Central Statistical Bureau of Latvia
Transport sector has been booming in Q1 20122012
Cargo turnover in transport (% y o y)Cargo turnover in transport (% y-o-y)
40
22.6
16.020
30
0
10
n.a.
-20
-10
-40
-30
2008 2009 2010 2011'Q1 Q2 Q3 Q4 2012'Q1
Source: Central Statistical Bureau of Latvia
Ports Railway By road
Retail trade has been growing in Q1 2012
Selected indicators (2005=100)
g g Q
150 In Q1 2012,3.4% q-o-q, s.a.
Selected indicators (2005=100)
100
q q,and 11.7% y-o-y
5050
0
2008
I
VII
2009
I
VII
2010
I
VII
2011
I
VII
2012
I
Private consumption Retail trade turnover
Source: Central Statistical Bureau of Latvia
Financial sector
Deleveraging is ongoingalthough at a slower pacealthough at a slower pace
Domestic lending annual change (%) and contribution to the change (pp)
10
15Domestic lending annual change (%) and contribution to the change (pp)
*significant lending decrease due to withdrawal of credit institution’s
5
10 withdrawal of credit institution slicence to Parex banka
-5
0
-15
-10
I 2009
III V VII IX XI I 2010
III V VII IX XI I 2011
III V VII IX XI I 2012
III*
Government Financial institutions Non-financial corporations
Households Total Total (with Parex effect correction)
Source: Bank of Latvia
In 2012, the average level of deposits is almost unchanged vs 2011 – the depositors’ confidence
Domestic deposits (mln lats)
g pis quite stable
Domestic deposits (mln lats)
5600
5400
5200
5000
4800
08 II II V V VI II II X X XI II 09 II II V V VI II II X X XI II 0 II II V V VI II II X X XI II 11 II II V V VI II II X X XI II 2 II II V
I 200
I II IV V V VI
VII IX X X XI
I 200
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV
Total deposits (mln. lats) Total deposits (with Parex effect correction; mln. lats)Source: Bank of Latvia
The backing of the monetary base with foreign reserves is around 200%foreign reserves is around 200%
Net foreign assets and Monetary base (mln lats)
4000
4500Net foreign assets and Monetary base (mln lats)
3000
3500
2000
2500
1000
1500
0
500
09 10 II II V V VI II II X X XI II 11 II II V V VI II II X X XI II 12 II II V
XII
200
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV
Net foreign assets Monetary baseSource: Bank of Latvia
Banking sector capital adequacy ratios –at historical highsat historical highs
Capital adequacy ratios (%)
18
20
Capital adequacy ratios (%)
12
14
16
18
8
10
12
2
4
6
0
2
Q1 2006 Q3 Q1 2007 Q3 Q1 2008 Q3 Q1 2009 Q3 Q1 2010 Q3 Q1 2011 Q3 Q1 2012
CAR Tier 1 ratio
Source: Financial and Capital Market Commission
Liquidity remains on a very high levelq y y g
Liquidity ratio (defined by FCMC %)
70
Liquidity ratio (defined by FCMC, %)
60
50
40
30
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
Q Q Q Q Q Q Q
Source: Financial and Capital Market Commission
NPLs have peaked in Q3 2010; signs of improvement are evidentimprovement are evident
Amount of loans over 90 days past due, provisions and their share in outstanding
2,80018
20mln lats%
Share of provisions in outstanding loans
Amount of loans over 90 days past due, provisions and their share in outstanding loans
2,000
2,400
,
14
16
18 loansShare of loans over 90 days past due in outstanding loansProvisions (right-hand scale)
1,200
1,600
,
8
10
12Loans over 90 days past due (right-hand scale)
400
800
1,200
4
6
8
0
400
0
2
Q3
Q4
2005 Q
2Q
3Q
420
06 Q2
Q3
Q4
2007 Q
2Q
3Q
420
08 Q2
Q3
Q4
2009 Q
2Q
3Q
420
10 Q2
Q3
Q4
2011 Q2
Q3
Q4
2012
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Source: Bank of Latvia, Financial and Capital Market Commission
Money market rates remained stableat low levels for a long period of timeat low levels for a long period of time
Money market rates (%)
25%
30%
Money market rates (%)
20%
25%
15%
5%
10%
0%
5%
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 12
jan
0
mar
0
mai
0
jūl 0
sep
0
nov
0
jan
0
mar
0
mai
0
jūl 0
sep
0
nov
0
jan
mar
mai
jūl
sep
nov
jan
mar
mai
jūl
sep
nov
jan
mar
mai
RIGIBOR 3M RIGIBOR 6M RIGIBOR 12MSource: Bank of Latvia