Recent Macroeconomic Developments in Latvia

March, 2014

Economic growth is expected to remain robust

0.7

2.2 1.6

1.2 1.7

0

1.2 0.7

7.1

4.9 4.6 4.6

3.8 4.3 4.5

3.5

0

1

2

3

4

5

6

7

8

2012 I II III IV 2013 I II III IV flash

q-o-q (s.a.) y-o-y

Real GDP growth (%)

Source: CSB; F – Latvijas Banka forecast

5.3 5.2

4.0

0

1

2

3

4

5

6

7

8

2011 2012 2013 F

2014 F

4.0

In 2013, real GDP was driven by private consumption growth; further role of export is expected to return

7.1 4.9 4.6 4.6 3.8 4.3 4.5

-15

-10

-5

0

5

10

15

20

2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 2013F 2014F

Private consumption Public consumption GFCF Changes in inventories Exports Imports GDP, % yoy

Contribution to real GDP growth (pp) and real GDP growth (%)

Source: CSB

Manufacturing is gaining strength

80

85

90

95

100

105

110

115

120

125

130

2006

'I

III V

VII

IX

X

I 20

07'I

II

I V

VII

IX

X

I 20

08'I

II

I V

VII

IX

X

I 20

09'I

II

I V

VII

IX

X

I 20

10'I

II

I V

VII

IX

X

I 20

11'I

II

I V

VII

IX

X

I 20

12'I

II

I V

VII

IX

X

I 20

13'I

II

I V

VII

IX

X

I

Volume index of manufacturing (2010=100)

Source: CSB

Unemployment dropped by 3.1 pp to 11.9% in 2013

21.3

11.3

18.7

9.8

6

10

14

18

22

2008

I III V

VII

IX

X

I 20

09 I III V

VII

IX

X

I 20

10 I III V

VII

IX

X

I 20

11 I III V

VII

IX

X

I 20

12 I III V

VII

IX

X

I 20

13 I III V

VII

IX

X

I 20

14 I

Job seekers rate (real unemployment; CSB) Registered unemployment (SEA)

Registered unemployment and job seekers rate (% of economically active population)

Source: Registered unemployment: State Employment Agency (SEA) data; Latvijas Banka staff adjustment of historical (pre 2012 IV) data in line with the results of 2011 Population Census. Job seekers rate: Central Statistical Bureau of Latvia data (adjusted for the 2011 Population Census).

Wage growth is broadly in line with labour productivity

60

70

80

90

100

110

120

130

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

2012

Q1

Q3

2013

Q1

Q3

Labour productivity per hour worked Real hourly wage

Source: Central Statistical Bureau of Latvia data; Latvijas Banka calculations

Real wage and productivity index (historical average = 100)

Increase of Latvian export market share reflects gains in competitiveness

80

100

120

140

160

180

200

220

240

260

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bulgaria

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovak Republic

Slovenia

Merchandise export shares in world import (2002=100)

Source: WTO, Latvijas Banka calculations

Export of machinery, wood and food products have the largest contribution to export growth; one-off effects determined export growth deceleration

Group's contributions to the y-o-y growth of merchandise export (pp) and average nominal export growth (%)

1.2

1.6

2.2

-5

0

5

10

15

20

2012 2013

Others

Transport vehicles

Machinery and electrical equipment

Base metals

Building materials

Textiles

Paper

Wood

Plastics

Chemical

Mineral products

Food

Agricultural

Source: CSB Latvia, Latvijas Banka calculation

15.7 %

1.5%

Import deceleration largely reflected moderation of investment activity

Merchandise import (I 2011 = 100)

Avots: Eurostat

50

70

90

110

130

150

170

190

210

230

250

2011

I III V

VII

IX

XI

2012

I III V

VII

IX

XI

2013

I III V

VII

IX

XI

Capital goods (13%)

Intermmediate goods (50%)

Consumer goods (27%)

Passenger cars and motor fuel (3%)

Moderate current account deficit is seen sustainable for Latvia

Current account main positions (% of GDP)

-3.9 -3.9 -2.2

-0.4 -2.1

0.8 -3.0

0.5

-20

-15

-10

-5

0

5

10

15

2012Q1 Q2 Q3 Q4 2013Q1 Q2 Q3 Q4E

Income Current transfers Services Goods

Source: Latvijas Banka, LB GDP forecast

-2.2 -2.5 -0.9

-15

-10

-5

0

5

10

2011 2012 2013E

current account

In 2013 FDI inflow in Latvia was 2.7% of forecasted GDP

FDI inflow in Latvia (% of GDP) 6.8

5.1 5.6

3.5

5.3

1.7

4.6 4.1

2.8 3.0

1.1

3.9

-1

0

1

2

3

4

5

6

7

2011

I II

III

IV

2012

I II

III

IV

2013

I II

III

IV

Source: Latvijas Banka

External debt as a proportion of GDP has been declining

165.7

133.8

59.1

34.5

30

35

40

45

50

55

60

65

110

120

130

140

150

160

170

Q1 2007

Q3 Q1 2008

Q3 Q1 2009

Q3 Q1 2010

Q3 Q1 2011

Q3 Q1 2012

Q3 Q1 2013

Q3

Gross and net external debt (% of GDP)

Gross External Debt % of GDP Left Axis)

Net External Debt % of GDP (Right Axis)

Source: Latvijas Banka

With smaller impact of global prices and sustainable wage–productivity growth the annual average inflation in 2013 was record low

-2

-1

0

1

2

3

4

I 2012

III V VII IX XI I 2013

III V VII IX XI I 2014

Food Energy Inflation (yoy) Inflation excluding food and energy (yoy)

Annual average inflation (HCPI): 0.0% in 2013 1.7% in 2014 (Latvijas Banka forecast)

Impact of food and energy prices on total inflation (%-points) and the annual inflation rate (%)

Source: Central Statistical Bureau of Latvia, Latvijas Banka staff calculations