Major economic developments of Latvia

1
Major economic developments of Latvia

• Helmuts Ancans
• Deputy Chairman of the Board
• Bank of Latvia
• Riga, June 21, 2006

2
Latvias Stylized Facts Small Open Economy

• Population - 0.5 of EU 25
• Area - 1.6 of EU 25
• GDP 0.1 of EU 25
• Openness of economy - 110 of GDP
• Share of trade with EU 25 - 76 of total foreign
  trade
• Latvias market share in EU 25 - 0.07

3
Latvia on a rapid growth track
Real GDP annual growth ()
4
Growth picking up in all sectors
GDP and gross value added by sectors, growth
5
Notable investments, particularly in
manufacturing, will drive further growth
Nonfinancial investments, mln lats
6
With growth rates being above the average in the
EU, Latvia converges to the EU income level
Source Central Statistical Bureau of Latvia,
Eurostat
7
Latvia has been successful in catching-up with EU
income level
Catching-up the EU 25 GDP per capita level in PPS
terms ( points, 2005 vs. 1996)
8
Economic growth and productivity gains stimulate
increase in labour compensation
Source Central Statistical Bureau
9
Wage level still notably lower compared to
other CEEC and 8 times lower than EU average
Gross average monthly wage (EUR) in 2003-2005 and
annual wage growth ( ) in 2005
10
Real convergence implies price convergence
Relationship between income and price levels in
EU countries, in 2004
EU 10 members
EU 15 members
LV
Source Eurostat
11
Disinflation path interrupted by the surge in
inflation after EU accession
Source Central Statistical Bureau of Latvia
12
Inflation - largely determined by supply side
factors, though convergence and demand factors
strengthen
Annual consumer price changes, in and
contributions by main categories, in -points
13
Gradual decrease in inflation expected
14
Rapid growth and better tax administration
boosted budgetary revenues, thus improving fiscal
accountsGoverment debt stays low
General government consolidated budget deficit
and gross debt, of GDP
In 1Q 2006 financial budgetary surplus
reached 5.4 to estimated 2006 GDP (on cash flow
basis)
Source Treasury, forecasts Ministry of
Finance
15
Robust export growth rates
Merchandise export and import, annual growth,
16
Increasing trade integration within the
neighbouring countries
Geographical breakdown of merchandise trade,
2005, yoy
17
Competitive position confirmed by increasing
market shares in major exports markets
2002 2005,
18
FDI inflows picked up after EU entry
FDI, of GDP
2006 1Q operative data
19
CAD fully financed by net FDI and long term
borrowing from foreign (mostly mother) banks
of current account
2006 1Q operative data
20
Growth rates of lending mostly driven by mortgage
loans
2006 III/ 2005 III,
Lending to residents by credit type, mln lats
Total 64.0
96.3
Source Bank of Latvia
21
In 1Q 2006, only 12 of households held a
mortgage. Level of housing loans still
relatively low compared to EMU average.
Source LB, FCMC, CSB
22
Household debt rose, but it's relatively low
compared to the EMU average
Source BoL, LLDA, CSB
23
Stability of lats reflected in the smooth
operation within the ERM II
Deviation of LVL exchange rate from the central
parity,
Appreciation
24
Euro changeover prospects are primarily related
to further disinflation path
VI 2005 - V 2006 on cash flow basis to
estimated 2006 GDPIV2006 Source BoL, Ministry
of Finance, Eurostat
25
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