An overview of macroeconomic developments in Latvia
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1. MACROECONOMICDEVELOPMENTSREPORTAPRIL2013
2. MACROECONOMIC DEVELOPMENTS REPORTApril 2013, No 14 Latvijas
Banka (Bank of Latvia), 2013Latvijas BankaK. Valdemra iela 2A,
Riga, LV-1050, LatviaTel.: +371 67022300 Fax: +371
67022420http://[email protected] source is to be indicated
when reproduced.ISSN 1 691 5925MACROECONOMIC DEVELOPMENTS
REPORTApril 2013
3. 2MACROECONOMIC DEVELOPMENTS REPORTApril
2013CONTENTSContentsAbbreviations 3Executive Summary 41. External
Sector and Exports 61.1 External economic environment 61.2 Latvias
competitiveness and commodity export growth 82. Financial Market
Developments 102.1 Foreign nancial markets 102.2 The Bank of
Latvias operations and credit institution liquidity 132.3
Securities market 152.4 Interest rates 152.5 Money supply 183.
Domestic Demand 223.1 Private consumption 223.2 Private investment
243.3 Government expenditure and budget 254. Aggregate Supply 274.1
Industry and construction 274.2 Services 294.3 Labour market 315.
Costs and Prices 356. Balance of Payments 387. Conclusions and
Forecasts 407.1 Economic developments 407.2 Ination 41Statistics
43Additional Information 95
4. 3MACROECONOMIC DEVELOPMENTS REPORTApril 2013AbbreviationsCIF
cost, insurance and freight at the importers borderCIS Commonwealth
of Independent StatesCPI Consumer Price IndexCSB Central
Statistical Bureau of LatviaEC European CommissionECB European
Central BankEMU Economic and Monetary UnionESA 95 European System
of Accounts 1995EU European UnionEU15 EU countries before 1 May
2004EU27 current EU countriesEURIBOR Euro Interbank Offered RateFOB
free on board at the exporters borderFCMC Financial and Capital
Market CommissionFRS Federal Reserve SystemGDP gross domestic
productHICP Harmonised Index of Consumer PricesIMF International
Monetary FundJSC joint stock companyMFI monetary financial
institutionNA no answerNI no informationOECD Organisation for
Economic Cooperation and DevelopmentOFI other financial
intermediary (other than an insurance corporation or a pension
fund)OMXR NASDAQ OMX Riga indexPMI Purchasing Managers IndexPPI
Producer Price IndexRIGIBOR Riga Interbank Offered RateRosstat
Federal State Statistics Service of the Russian FederationSEA State
Employment AgencySJSC state joint stock companyULC unit labour
costsULCM unit labour costs in manufacturingABBREVIATIONS
5. 4MACROECONOMIC DEVELOPMENTS REPORTApril 2013Executive
SummaryAccording to the latest IMF projections, the global economic
growth in 2013 could be fasterthan in 2012, albeit falling somewhat
behind the forecast made in October 2012. Likewise,higher growth
momentum is also expected in almost all major trade partners of
Latvia.Moreover, with the premium on debt securities of euro area
peripheral countries declining,external risks have recently been
mitigated somewhat. Nonetheless, those related to
slower-than-expected growth in the euro area, the political
situation in Italy, problems in Cyprus andthe potential impact on
the euro area from the lowered UK credit rating still
persist.Notwithstanding the unstable global growth and low total
external market demand, theactivity of commodity trade intensied in
the fourth quarter of 2012, with exports reachingpeaks in October
and November of 2012. Latvian producers continued to reafrm
theirsustained competitiveness with higher export market shares in
total global imports of goods.In the situation of brisker domestic
economic activity due to export-generated income, theinvestment
activity decreased and caused some moderation in the growth rate of
goodsimports in the second half of the year. Persistently low
investment activity is likely tohamper the development of
production and consolidation of business competitiveness in thelong
term. The inow of foreign direct investment in Latvia is
continuing, and it is a positivefactor for Latvias competitiveness;
at the same time, however, the inow of foreign directinvestment in
manufacturing moderated towards the close of 2012.With the excess
liquidity persisting, a further decline in the lats money market
rateswas observed in Latvia as they approached the euro rates.
Nevertheless, in January andFebruary, the movements of the money
market indices no longer played a signicant rolein determining the
lending and deposit rates. At the same time an improvement in
theeconomic situation of exporting sectors resulted in a higher
demand for corporate loans, atthe same time encouraging also the
credit institutions to step up lending to non-nancialcorporations,
and the loan portfolio of this sector remained stable, with the
quality of loansalso improving. The annual rate of change for loans
granted to non-nancial corporationsis projected to become positive
in 2013. The household loan portfolio, however, will stillproceed
on a downward trend, with gradual repayments of household loans for
housepurchase continuing.The Latvian economy continued to develop
buoyantly in 2012, achieving the highest growthrate in the EU. At
the beginning of 2013, investment had an important role in
supportinggrowth. Further on, private consumption became dominant,
whereas in the second half of theyear net exports made a very
signicant positive contribution to the GDP growth.The purchasing
power of households continued to improve in 2012. This was inter
aliareected by the rising spending. However, several opposing
factors currently exert theirinuence on consumption. On the one
hand, an increasingly larger number of householdsconrm in surveys
that their welfare is improving. On the other hand, the
averagetemperatures this winter were considerably lower than the
ones observed a year ago whichtranslated into higher spending on
heating.Investment growth continued to decelerate in 2012. The
slowdown in investment growthobserved in the fourth quarter was
primarily related to the fading of the resumed tendency toupgrade
equipment and vehicle eet, something which had been postponed
during the crisis.Manufacturing was a major positive contribution
of the supply side to the annual GDPgrowth by sector in 2012, its
growth being mainly driven by the expanding external
demand.Although the declining output observed in January may be
explained by the data volatility inEXECUTIVE SUMMARY
6. 5MACROECONOMIC DEVELOPMENTS REPORTApril 2013some subsectors
of manufacturing, objective reasons lead to a conclusion that
output in somesubsectors will decline in 2013. Hence the forecasts
of the overall manufacturing growth in2013 are more subdued than in
previous years.The decline in the unemployment rate is in line with
the forecasts. Unemployment isexpected to continue on a gradual
downward path in 2013. With the rate of jobseekersapproaching its
natural level, the future success in unemployment reduction will
depend notonly on the overall growth rate of the national economy
but increasingly on the effectivenessof the employment programmes
for specic groups of population and regions.Moreover, the data do
not conrm the hypothesis that unemployment is declining in
Latviaonly on account of individuals leaving the country. Quite on
the contrary, the number ofeconomically active population is
increasing and the rate of economically active populationto
working-age population is expanding.As regards the employment
growth in Latvia, it is among the highest in the EU. Allavailable
statistical data sources of differing coverage present a similar
picture, excludingthe possibility that the labour market is
recovering only under the impact of short-term andtemporary
factors. The majority of businesses project to increase rather than
reduce thenumber of employees in all major sectors of the economy
in the coming months.In January and February 2013, the annual
ination continued to decelerate, reachingthe lowest level since
September 2010. The overall impact of the supply side factors onthe
ination dynamics remained favourable, while the contribution of
demand was stillmoderate, being reected by negative annual core
ination.The ination data for January and February, the currently
observed drop in oil prices andthe expected Public Utilities
Commissions decisions on the reduction of heating tariffs inRzekne
and Riga from May and June 2013 respectively allow for quite
signicant (up to1%) reduction of the average annual ination
assessment for 2013.At the same time ination in Latvia might rise
from the current historical low due to anincrease in electricity
prices expected in the second half of the year. The assessment of
theimpact of food prices could also change in the middle of the
year when the rst estimates ofthe harvest of the new season are
made available. On the other hand, the price monitoringcampaign
launched in 2013 might act as one of the factors preventing price
rises in theremaining months of the year.EXECUTIVE SUMMARY
7. 6MACROECONOMIC DEVELOPMENTS REPORTApril 2013Table 1GDP
GROWTH IN LATVIAS MAJOR TRADE PARTNERSIN 2012 AND PROSPECTS FOR
2013(%)2012 2013120132Denmark 0.6 1.2 NISweden 0.8 2.2 NIFinland
0.2 1.3 NIGermany 0.7 0.9 0.6UK 0.3 1.1 1.0Estonia 3.2 3.5
NILithuania 3.6 3.0 NIPoland 2.0 2.1 NIRussia 3.4 3.8 3.7Euro area
0.6 0.2 0.2US 2.2 2.1 2.0Total global economy 3.2 3.6 3.5Sources:
Eurostat, Rosstat, October 2012 (1) and January 2013 (2)World
Economic Outlook (IMF).1. EXTERNAL SECTOR AND EXPORTS1. External
Sector andExports1.1 External economic environmentAccording to the
latest IMF projections, the globaleconomic growth in 2013 could be
faster than in 2012,albeit falling somewhat behind the forecast
made inOctober 2012. Likewise, higher growth momentumis expected in
most trade partner countries of Latvia,with relatively stronger
performance prospects forLithuania, Estonia and Russia (see Table
1).With the premium on debt securities of euro areaperipheral
countries declining, external risks haverecently been mitigated.
Nonetheless, those relatedto slower-than-expected growth in the
euro area, thepolitical situation in Italy, problems in Cyprus and
thepotential impact on the euro area from the loweredUK credit
rating still persist.The GDP growth in the euro area was negative
in2012, and the largest quarter-on-quarter decelerationin its pace
was recorded for the fourth quarter (seeChart 1.1). Except neutral
effects of governmentconsumption and net exports, the contribution
ofalmost all GDP components to its quarterly growthwas negative.
Even though the quarter-on-quartercontraction in Germanys GDP in
the fourth quarter of2012 could be assessed as particularly
destructive, therecent improved condence indicators suggest that
theeconomy in Germany is returning to a more positivegrowth
path.The growth in Lithuania, which is Latvias major tradepartner,
is still robust, and a 0.7% quarter-on-quarterGDP increase was
recorded in the fourth quarter of2012. The Lithuanian economy is
positively drivenby foreign trade. Formerly, the positive impact
camefrom the rapid expansion of re-exporting, whereaspresently,
primarily owing to good harvest, exportsof Lithuanian products are
also increasing. Labourmarket situation has also taken a turn for
the better. Inthe meantime, investment, which has been halted
forquite a time now, gives rise to serious concerns aboutthe
further economic growth in Lithuania.In Estonia in the fourth
quarter, GDP grew by0.9% quarter-on-quarter. While the increase
laggedsomewhat behind the expectations, the weak externaldemand
posted most signicant upside risks for thefuture economic growth.
At the same time, higherChart 1.1GDP ANNUAL AND QUARTERLY GROWTH
RATE IN Q42012 IN LATVIAS TRADE PARTNER COUNTRIES(%)
8. 7MACROECONOMIC DEVELOPMENTS REPORTApril 2013electricity
prices may result in a loss of householdspurchasing power and
reduce the domestic demandsomewhat.The UK GDP declined by 0.3% in
the fourth quarter.In part, this fall was spurred by one-off
factors,yet overall, such a development was anticipated,as the
recovery of the countrys economy has beenvery fragile throughout
2012. Given the continuingweakness in the UKs recovery and growth
outlook,Moodys downgraded the UKs government bondrating to Aa1.
This move adversely impacts theeconomic growth expectations of the
UK populationand underpins depreciation of the British
poundsterling.In Russia, the economy is generally developing
asexpected. In early 2013, the growth continued tolose some
momentum, which is conrmed by someyear-on-year shrinkage in
manufacturing and risingunemployment. With Russias accession to the
WTO,some tariffs were lowered or removed completely,which, in the
near future, may have an adverse effecton Russias trade balance.
Meanwhile in January,the business sentiment indicators in
manufacturingimproved, with a likely effect of somewhat
bettereconomic outlook for the country.In the fourth quarter of
2012, GDP in Poland pickedup 0.2% quarter-on-quarter. Private
consumptionbecame weaker, the shrinkage in investment was notso
pronounced, and net exports positively contributedto growth.
Despite persistent and generally weakeconomic growth, some positive
signs were surfacing.In January, retail trade data were better than
expected,manufacturing was recovering, and business andconsumer
condence indicators improved. ThePresident of Narodowy Bank Polski
has noted that theeconomy has most likely started to revive.In the
fourth quarter against the third quarter, thegrowth of Swedish GDP
was unchanged, while inthe third quarter an increase was still
observed. Itprimarily reected developments in the externalsector.
As around 40% of Swedish exports go to theeuro area, the recession
in the latter negatively affectsthe situation in Sweden as well.
The data for the initialmonths of 2013 also support the assumption
that sofar the growth in Sweden has been weak.In Finland, the
fourth-quarter GDP contracted by0.5% quarter-on-quarter as was
primarily reectedby falling exports, investment and
governmentconsumption. The country raised its VAT rate with1.
EXTERNAL SECTOR AND EXPORTS
9. 8MACROECONOMIC DEVELOPMENTS REPORTApril 20131 January 2013,
thus adversely impacting privateconsumption; it is expected,
however, that togetherwith stabilisation in income, Finland will
also seeprivate consumption gradually recovering.The
quarter-on-quarter GDP reduction in Denmarkwas 0.9% in the fourth
quarter. It was underpinnedby contracting private consumption and
weakeningexternal sector dynamics. In February 2013, however,the
government of Denmark presented a plan torestore competitiveness
and boost the economicgrowth, which foresees the opening of 150 000
newjobs by 2020. This could positively affect the overallsentiment
in Denmark, yet the outlook for exports isstill weak, since the
growth in Denmarks major tradepartners remains slow.1.2 Latvias
competitiveness and commodityexport growthNotwithstanding the
unstable global growth andlow total external market demand, the
activity ofcommodity trade intensied in the fourth quarter of2012.
With the export value reaching its peaks inOctober and November of
2012, the nominal valueof exports posted a 21.0% year-on-year
increase inthe fourth quarter. The situation did not differ fromthe
previous quarter: in the fourth quarter, the growthin commodity
exports exceeded that in commodityimports both quarter-on-quarter
and year-on-year (seeCharts 1.2 and 1.3).In the fourth quarter,
Latvian producers continuedto reafrm their robust competitiveness
with higherexport market shares in total global imports ofgoods.
Moderation in the economic activity of theEU countries
notwithstanding, the trend of exportmarket share growth in overall
imports of the EU27countries was preserved; the Baltic countries,
whereexport market shares were contracting for the
secondconsecutive quarter, and Sweden with its marketshares
contracting throughout the year, were the onlyexceptions.
Meanwhile, market shares of the rest ofmajor trade partners
remained unchanged or continuedto expand (see Chart 1.4).The
improvements in exporters competitivenesswere driven by
diversication of both output andexport markets as well as higher
labour productivityand producers value added. In the fourth
quarter,vegetable and food products, machinery andmechanical
appliances, electrical equipmentaccounted for the largest annual
growth in commodityChart 1.2EXPORTS OF GOODS(year-on-year; %)Chart
1.3IMPORTS OF GOODS(year-on-year; %)1. EXTERNAL SECTOR AND
EXPORTS
10. 9MACROECONOMIC DEVELOPMENTS REPORTApril 20131. EXTERNAL
SECTOR AND EXPORTSexports. A substantial increase in vegetable
productexports was determined by rising grain prices in theglobal
market and record-high harvests. However, itwas the real exports
that dominated in overall exportgrowth in the reviewed quarter,
with the formergrowing by 4.5% quarter-on-quarter and 14.5%
year-on-year.In the situation of brisker domestic economic
activitydue to export-generated income, the investmentactivity
decreased and caused some moderation inthe growth rate of goods
imports in the second halfof the year. It may be explained by
entrepreneursbeing hesitant regarding external-environment-related
decisions. Meanwhile, a weaker importgrowth combined with
decelerating investment islikely to hamper the development of
production andconsolidation of business competitiveness in
thelonger term.Condence indicators released by the EC suggestthat
the assessment of export order volume slightlydeteriorated in
January; in the rst quarter of2013, however, the respective
indicators improvednotably, while the self-assessment of
producerscompetitiveness deteriorated both domestically and inand
outside the EU, which is indicative of exportersfull awareness of
the growing competition.The inow of foreign direct investment in
Latviais continuing, and it is a positive factor for
Latviascompetitiveness (see also Chapter 6). It should benoted,
however, that due to the wait and see businessstances with regard
to external developments theinow of foreign direct investment in
manufacturingmoderated towards the close of 2012.
Consequently,foreign investment was primarily made in
servicesproviding branches, which require smaller fundinvestment
than manufacturing enterprises. In somecases, the result is a
larger number of new jobs, yet ina long-term perspective, it does
not boost productionand economic growth.According to the
information provided by theInvestment and Development Agency of
Latviaon foreign direct investment trends in the future, anumber of
positive decisions have been taken oninvestment in metalworking,
engineering, electronic,logistic, food and other industries. The
implementationof related projects will enhance the potential of
theLatvian economy.Chart 1.4LATVIAS EXPORTS AGAINST MAJOR
TRADEPARTNERS IMPORTS(moving average; Q1 2010Q4 2012; %)* Estonia
and Lithuania right-hand scale.
11. 10MACROECONOMIC DEVELOPMENTS REPORTApril 20132. Financial
MarketDevelopments2.1 Foreign nancial marketsIn the period from
mid-December 2012 to mid-February 2013, the political and economic
conditionsin euro area peripheral countries improved due
todetermined implementation of the reform process insome of them
and political consent obtained at theinterstate level.The ECB
Outright Monetary TransactionsProgramme, announced in August and
with itstechnical framework formulated in September2012, has served
for the nancial market as securityassurance; even though no bond
buying has takenplace under this programme as yet, it has
enhancedmarket participants condence that in the event of ashock it
would be possible to reduce the borrowingcosts of
problem-distressed euro area countries.A preliminary agreement has
also been reached onestablishing a single bank supervisory
mechanismunder the ECB; a bond (debt) buyback operationhas been
successfully conducted in Greece andensured the disbursement of the
next tranche ofbailout funding to this country. Market
participantscondence in the euro area growth outlook wasfurther
strengthened by euro area banks repaying early(ahead of schedule)
the ECB loans with 36-monthmaturity.Nonetheless in February 2013,
when marketparticipants anxiety concerning the
parliamentaryelection results in Italy intensied, the situation in
theEuropean nancial markets reversed. The discussionsfocused on
Cyprus, its bail-out programme, the sizeof the needed nancial
support, and public debtsustainability measures. Following the
election ofa new president and the formation of a new cabinetin
Cyprus in March, the postponed bail-out issueresurfaced with new
force. Even though around17 billion euro, which would be sufcient
for bankrecapitalisation in this small economy, in Europeancontext
is a relatively small-scale rescue nancing,its full disbursement
would jeopardise the publicdebt sustainability. On 16 March 2013,
the Cypriotauthorities and international creditors succeeded
inreaching a preliminary political agreement, foreseeingan upfront
one-off stability levy applicable to alldeposits, both made by
residents and non-residents(as is known, citizen and company
deposits from2. FINANCIAL MARKET DEVELOPMENTS
12. 11MACROECONOMIC DEVELOPMENTS REPORTApril 2013Russia
predominate) at Cyprus credit institutions asa solution to the
public debt sustainability problem.This preliminary agreement with
international lenders,and the proposed levy on deposits in
particular,set off a strong domestic wave of protests
andinternational repercussions. Anxiety gripped marketparticipants
who thought that other euro area publicdebt distressed economies
might follow suit, andtrust in the nancial and deposit insurance
systemdeteriorated. Only few days passed, and the Cypriotparliament
voted against the proposed terms ofthe European bailout, thus
rejecting the agreementand arousing market participants concerns
aboutthe countrys potential plunge into bankruptcy. Theimpact of
these developments in Cyprus on the globalnancial market was
negative and particularly strongfor the euro area market, where
peripheral countrybond yields soared, euro depreciated and stock
priceindices deteriorated, while the prices of safe assetswent up.
The stock prices plummeted in the Russiannancial market as well.
Finally on March 25, thePresident of Cyprus and the EU and IMF
ofcialsmanaged to reach a new deal on bail-out packageterms for the
Cypriot economy, which foresee theimmediate shutting down of the
Popular Bank ofCyprus, the second largest bank of Cyprus, while
fullycompensating (shifting to another bank) its depositsbelow 100
000 euro; in return, the amount of EU,ECB and IMF bail-out nancing
for Cyprus will be upto 10 billion euro. The banks in Cyprus
reopened on28 March.Meanwhile, the dynamics in the US nancial
marketwas determined by the developments related to theUS federal
budget and positive economic performanceconrming a gradual recovery
of the housing andlabour markets as well as the entire economy.With
market participants more often consideringinvesting in risky
assets, stock prices in globalstock markets as well as yields on
safer-deemedgovernment securities in government securitiesmarkets
tended to move up. Between 15 December2012 and 15 February 2013,
Japans stock marketprice index Nikkei 225 went up 29.0%, the
respectiveUS S & P 500 index increased by 10.6%, but
Europesstock market index DJ EURO STOXX 50 picked up3.6% (see Chart
2.1). The dynamics of yields ongovernment securities differed
across the peripheralcountries of the euro area (see Chart 2.2).
With thesovereign credit risk diminishing, government
securityyields were on a downward trend in Portugal, Irelandand
Spain, while in Italy they elevated due to theaugmenting political
risk.Chart 2.1MAJOR WORLD STOCK PRICE INDICES AND GERMAN10-YEAR
GOVERNMENT BOND YIELDS2. FINANCIAL MARKET DEVELOPMENTS
13. 12MACROECONOMIC DEVELOPMENTS REPORTApril 20132. FINANCIAL
MARKET DEVELOPMENTSBetween mid-December 2012 and mid-February2013,
the price of Brent crude oil was on an upwardtrend; later, however,
it started to decline gradually.In the reference period overall,
the price of Brentcrude oil, though uctuating within the range
of108 and 120 US dollars per barrel, remained almostunchanged
year-on-year (see Chart 2.3). The risein Brent crude oil price from
December 2012 toearly February 2013 was primarily on account of
oilsupply restrictions arising from geopolitical tensionswhose
effects were intensied by market participantsstronger optimism.
Whereas the downward trend inthe oil price since mid-February 2013
was determinedby political uncertainty, weak economic performancein
the EU peripheral countries, and slower-than-expected economic
growth in China. In the mediumterm, market participants anticipate
booming oilsupplies from oil producers outside the OECD
andconsequential downward dynamics of Brent crude oilprices.The
prices of the rest of raw materials and foodproducts were rising in
the period between mid-December 2012 and mid-February 2013. Thus,
forinstance, with manufacturing of already existingoutput growing
and innovative manufacturingexpanding in China, the demand for
various metals,including also precious ones, increased. Since
mid-February 2013, however, the prices of other rawmaterials and
food products, similar to oil prices,have been declining. These
oil, raw material andfood product price development trends
determineda gradual moderation in inationary pressures in
thedeveloped countries.Most market participants had expected the
ECB tohold its main renancing rate unchanged at 0.75% inthe
reference period (see Chart 2.4), as the euro areaination remained
close to the ECB ination targetand provisional economic data
suggested that theeconomic growth in the majority of core
countrieswas reviving. Regarding the reference period fromDecember
2012 to February 2013, market participantsdid not anticipate, at
least as strongly as before, theECB to lower the renancing rate
further. Moreover,the euro area credit institutions used the option
ofearly repayment of nancing borrowed under ECBDecember 2011 and
March 2012 special longer-termrenancing operations with 36-month
maturity. ByMarch 2013, the euro area credit institutions are
likelyto have repaid the ECB a total of 235.8 billion euro or23.1%
of the amount allotted under these operations.Due to the market
participants expectations about theChart 2.2YIELD SPREADS BETWEEN
10-YEAR GOVERNMENTBONDS OF EURO AREA PERIPHERAL COUNTRIES
ANDGERMANY(percentage points)Chart 2.3BRENT OIL PRICE AND EXCHANGE
RATE OF THEEURO AGAINST THE US DOLLARChart 2.4BASE RATES(%)
14. 13MACROECONOMIC DEVELOPMENTS REPORTApril 2013euro interest
rate and liquidity shrinking in the market(in connection with early
debt repayment to the ECB),EURIBOR started to rise in December
2012. As thesituation in the euro area nancial market turnedout to
be worse than expected, market participantsdeemed the lowering of
euro renancing rate asrealistic again from the middle of February.
As aresult, EURIBOR started to go down once again, withrisk-free
market interest rates following suit in thereference period.
Consequently, the spread betweenunsecured and risk-free euro money
market interestrates remained stable between December 2012
andFebruary 2013 and did not testify to tensions in theeuro area
interbank market.Against the US dollar, the euro was
appreciatingfrom mid-December 2012 to mid-February 2013,i.e. in the
period when market participants optimismabout euro area economic
growth prospects andinclination to obtain European assets
increased, thusboosting the demand for euro. However, since
themiddle of February 2013, the euro has again startedto
depreciate, reecting the concerns of marketparticipants about the
euro area development trendsas evidenced by contracting European
asset ratiosin their asset portfolios. In line with the
weakeningdemand for euro-denominated assets, the demandfor the euro
fell, while that for the other currenciesstrengthened.2.2 The Bank
of Latvias operations andcredit institution liquidityIn December
2012February 2013 market participantssold foreign currency in the
amount of 1.9 millionlats (as per transaction date) to the Bank of
Latvia.With the lats exchange rate to the euro moving awayfrom the
lower limit of the intervention band andapproaching the central
parity, foreign currencysale subsided in the next months. Demand
for latsmoderated on account of increasingly convincingsigns of the
prospective joining of the euro areaand a decrease in currency in
circulation followingthe household spending in December.
Observationsin other EU countries during the year before
theirjoining the euro area suggest that a downward trend incurrency
in circulation could be expected in 2013.In the reporting period
credit institution liquiditygrew by 58.3 million lats on average as
a result ofa decrease in the average government lats depositwith
the Bank of Latvia. Deposits of other nancialinstitutions with the
Bank of Latvia also contracted.2. FINANCIAL MARKET
DEVELOPMENTS
15. 14MACROECONOMIC DEVELOPMENTS REPORTApril 2013Payments to
the Deposit Guarantee Fund wereused for repaying its borrowing from
the Treasury,thus increasing the government revenue in lats,
andwere used for covering the growing governmentexpenditure at the
close of the year. At the sametime growth in currency in
circulation, minimumreserve requirements for credit institutions
andother international institution deposits in lats had adecreasing
effect on the credit institution liquidity.The government continued
to convert euro into latsin the foreign exchange market;
nevertheless it sawhigher expenditure at the end of the year. In
Januaryand February the redemption amount of governmentsecurities
exceeded 150 million lats. At the sameperiod currency in
circulation also saw a morepronounced drop than in previous years,
resulting inan increase in credit institution liquidity (see
Charts2.5 and 2.6).The Bank of Latvias overnight and 7-day
depositfacility expanded by 38.1%, to 448.6 million latson average.
The average excess reserves expandedby 32.9% (to 121.1 million
lats), but this amountwas mostly concentrated in a small number of
creditinstitutions. Credit institutions still had not resumedusing
the Bank of Latvias liquidity-providingoperations.In the reporting
period the Council of the Bank ofLatvia resolved to leave the
interest rates unchanged,recognising them to be appropriate for the
nationaleconomy. The latest economic developments andestimates of
future developments suggested that themedium-term risks to price
stability were containedand ination would remain low.With the
excess lats liquidity in the money marketpersisting, the weighted
average interest rate oninterbank overnight transactions shrank to
0.09%in DecemberFebruary, down from 0.11% inSeptemberNovember.
Consequently, 3-monthRIGIBOR declined from 0.54% to 0.51%,
and6-month RIGIBOR moved down from 1.11% to0.86%. Further decline
in the lats money market ratesalso resulted from the Bank of
Latvias Septemberresolution on reducing the interest rates and
Latviascommitment to join the euro area. In the reportingperiod the
spread between the 3-month RIGIBOR andEURIBOR was 0.30 percentage
points (3 basis pointssmaller than in the previous reporting
period; seeChart 2.7) and that of 6-month was 0.51
percentagepoints, recording a decline of 18 basis points.2.
FINANCIAL MARKET DEVELOPMENTSChart 2.5AVERAGE BALANCES OF THE BANK
OF LATVIASMONETARY OPERATIONS AND GOVERNMENT LATSDEPOSITS(billions
of lats)Chart 2.6NET FOREIGN ASSETS, MONETARY BASE AND BANKOF
LATVIA DEPOSIT FACILITY(average end-of-day balance; billions of
lats)Chart 2.7THE LATS AND EURO MONEY MARKET RATES(%)
16. 15MACROECONOMIC DEVELOPMENTS REPORTApril 20132.3 Securities
marketPrimary auctions of 12-month Treasury bills and3-year
Treasury bonds were held in December2012 February 2013 (see Chart
2.8). Securitieswere supplied in the amount of 60.0 million
lats;with demand 3.6 times exceeding supply, allsecurities were
sold. The weighted average yield on12-month Treasury bills fell
from 0.67% to 0.44%.With the demand being high, the weighted
averageyield declined as a result of a larger-scale bondredemption
in February providing credit institutionswith additional funds for
purchasing newly-issuedsecurities. As regards 3-year government
bonds, theirauctions had not been held since August 2010 whenthe
weighted average bond yield stood at 5.55%; atthe auction in
February it was a mere 1.39%.The quoted bid yield on Latvian
government bondsdenominated in US dollars and maturing in 2021was
3.23% at the end of November, reaching 3.34%at the end of February.
The quoted bid yield on theLatvian government eurobonds maturing in
2018rose from 1.88% to 2.04% over the reporting period.The above
rise was related to an increase in thebid rates on securities of
the developed countriesin DecemberFebruary rather than a higher
riskperception associated with Latvia. The continuouslynarrowing
bid rate spreads also testied to that. At theend of February the
spread between the bid yields onLatvian government bonds
denominated in US dollarsmaturing in 2021 and the US government
bonds of thesame maturity narrowed to 184 basis points, and
thespread between the bid yields on Latvian governmenteurobonds
maturing in 2018 and German governmentbonds of the respective
maturity was 164 basis points.At the end of February OMXR, NASDAQ
OMX Rigashare price index, was 3.0% higher than at the end
ofNovember, while in annual terms the increase was amere 1.3%. On
the major global stock exchanges theindices posted a higher average
rate of increase duringthe reporting period. In this period the
developmentsof the major global stock market indices had a
lesspronounced effect on the Latvian stock market due toits smaller
scale and fewer investors.2.4 Interest ratesIn January and
February, the movements of the moneymarket indices no longer played
a signicant role indetermining the lending and deposit rates. Most
creditinstitutions left the bank margins applied on top ofChart
2.8AUCTIONS OF LATS-DENOMINATED GOVERNMENTDEBT SECURITIES(millions
of lats)2. FINANCIAL MARKET DEVELOPMENTS
17. 16MACROECONOMIC DEVELOPMENTS REPORTApril 2013the money
market indices to new loans granted tohouseholds or non-nancial
corporations unchanged.Nevertheless, in some lending segments the
bankmargins increased in January and February incomparison with the
previous months. This suggestedthat either smaller credit
institutions which often grantloans to higher-risk customers at
higher interest rateshave increased their activity in the
particular marketsub-segment, or some larger credit institutions
havetightened their pricing conditions. With the interestrates on
time deposits with MFIs declining and therespective lending rates
growing, the spread betweennew MFI loans and new time deposits with
MFIswidened to 4.0 percentage points in February (seeChart 2.9).The
interest rates on new euro loans granted tonon-nancial corporations
lingered between 3% and4%. Most of the new euro loans granted to
non-nancial corporations exceeded 1 billion euro (or anequivalent
amount in lats). Due to this reason, thevolatile rates on those
loans were the primary driversof the overall developments in the
rates on new eurolending to non-nancial corporations. The
interestrates on new medium-sized (from 250 thousand euroto 1
million euro or an equivalent amount in lats)euro loans granted to
non-nancial corporationsremained unchanged in January and
February,whereas the respective rates on small-size loans (upto 250
thousand euro or an equivalent amount in lats)slightly increased.
In both non-nancial corporationlending sub-segments an upward
pressure on theinterest rates was exerted by the increased activity
onthe part of smaller credit institutions. This conrmsthat higher
interest rates on new small and medium-sized loans granted to
non-nancial corporations arean indication of a higher risk prole
associated withthe new loans rather than of changes in the
pricingconditions applied by credit institutions.The interest rates
on new lats loans granted to non-nancial corporations were also
characterised byvolatility and were highly dependent on the
interestrates on large-size loans. Most credit institutionsdid not
change the bank margins on lending to non-nancial corporations.
Nevertheless, as some largercredit institutions re-focussed from
one marketsub-segment to another market sub-segment
eitherdecreasing or, as the case may be, increasing theinterest
rates on loans offered in the particular sub-segment, it affected
the overall borrowing costs of non-nancial corporations and the
borrowing costs in eachsub-sector of lending to non-nancial
corporations.2. FINANCIAL MARKET DEVELOPMENTSChart 2.9SPREAD
BETWEEN INTEREST RATES ON NEW LOANSAND NEW DEPOSITS(percentage
points)
18. 17MACROECONOMIC DEVELOPMENTS REPORTApril 2013In January and
February, oating interest rates andinterest rates with the initial
rate xation period ofup to 1 year on new euro loans to households
forhouse purchase lingered roughly around the level ofDecember
2012. In the case of those particular loans,the bank margins above
the 3-month EURIBOR wereslightly higher in the period from December
2012 toFebruary 2013 in comparison with the respective levelof the
previous year (by 0.3 percentage point; at 3.1percentage points on
average), as some major marketplayers tightened their pricing
conditions and the shareof higher-risk loans in aggregate loans
expanded.The bank margin on the respective householdloans for house
purchase granted in lats remainedstable (2.3 percentage points in
February 2013;2.4 percentage points in December 2012) and
werenarrower in comparison with the one applied to euroloans. At
the same time, the interest rates on newloans with an initial
interest rate xation period ofover 1 year granted to households for
house purchaseremained volatile which can be explained by the
lackof depth in the particular market segment.Following a dive in
January, the interest rates onnew consumer credit granted to
households in latswith an initial interest rate xation period of
over1 year returned to the level observed in the precedingmonths.
The respective rates of euro loans, in turn,continued to uctuate
within the interval of 6%8%(see Charts 2.10 and 2.11). Within the
relativelyshallow consumer credit segment, the interest rateson new
loans were largely inuenced by the changesin interest rates and the
structure of new loans acrossvarious credit institutions.The
interest rates on new time deposits of non-nancial corporations
remained broadly unchanged:still close to zero. Considering the low
level of thedeposit rates, the amount of free liquidity placed
bynon-nancial corporations on time deposits in Januaryand February
was again smaller than in the respectiveperiod of the previous
year. In December 2012 andJanuary 2013, the interest rate on new
time depositsof households made in lats increased, as
creditinstitutions offered better deposit terms and conditionsto
households and smaller credit institutions increasedtheir household
deposits: time deposits by householdstend to be with longer
maturities (6 months and1 year) and normally have higher interest
rates. InFebruary, the impact of all the above-mentionedfactors
faded or disappeared and the interest rates onhousehold deposits
returned to a level slightly belowthe one observed in November
2012.2. FINANCIAL MARKET DEVELOPMENTSChart 2.10INTEREST RATES ON
MFI SHORT-TERM LOANS INLATS*(%)* Floating interest rates and
interest rates with an initial interest ratexation period of up to
1 year.Chart 2.11INTEREST RATES ON MFI SHORT-TERM LOANS INEURO*(%)*
Floating interest rates and interest rates with an initial interest
ratexation period of up to 1 year.
19. 18MACROECONOMIC DEVELOPMENTS REPORTApril 20132.5 Money
supplyIn the rst two months of 2013, the growthof the monetary
aggregates remained broadlystable, reecting the favourable
macroeconomicdevelopments and the stability of the nancialmarkets.
A slight drop in the money supply in Januarywas followed by a
moderate rise in February, largelyresulting from an increase in
deposits of non-nancialcorporations placed with credit
institutions. Thegrowth of deposits by non-nancial corporationswas
supported by both the recovery of the domesticconsumption as well
as the income of well-performingexport sectors. Household deposits
were depletedbecause of increasing consumption, whereas
thehousehold preference for decreasing the proportionof currency
holdings in their savings, possibly relatedto less uncertainty
vis--vis the euro introductionprospects, supported an increase in
those deposits. Asa result, the demand for cash decreased
considerablyin the rst two months of the year. An improvementin the
economic situation of exporting sectors resultedin a higher demand
for corporate loans, at the sametime encouraging also the credit
institutions to stepup corporate lending. The loan portfolio of
this sectorremained stable. At the same time, the quality of
loansimproved. As a result of the GDP growth, the ratio ofloans to
GDP continued to decline reaching 65.5%(79.6% in 2011; see Chart
2.12).Aggregate money supply totalled 6.9 billion lats inFebruary,
representing a 3.4% year-on-year increase(see Chart 2.13). M1, the
most liquid component ofmoney supply, continued to dominate in the
broadmoney M3 and its annual growth rate reached 12.3%in February
(see Chart 2.14 for the developmentsof currency in circulation). As
the remunerationpaid on deposits was negligible, the rise in
depositsconcentrated primarily in the overnight segment:overnight
deposits grew by 2.8% in January andFebruary. Deposits redeemable
at notice alsoexpanded by 4.3%, whereas deposits with an
agreedmaturity of up to two years contracted by 2.7%.The annual
growth rate of deposits made by residentnancial institutions,
non-nancial corporations andhouseholds remained moderate at 5.2% in
February.Euro deposits expanded, whereas the deposits made inlats
contracted, with both annual rates still remainingsimilar (4.4% and
3.5% respectively; see Charts 2.15and 2.16 for the developments in
deposits). Againstthe background of growing deposits, the ratio
ofdomestic deposits to loans increased from 56.0% in2. FINANCIAL
MARKET DEVELOPMENTSChart 2.12RESIDENT LOANS TO GDP(%)Chart
2.13ANNUAL RATE OF CHANGE IN MONETARYAGGREGATES(%)Chart
2.14CURRENCY IN CIRCULATION(%)
20. 19MACROECONOMIC DEVELOPMENTS REPORTApril 2013December 2012
to 56.9% in February 2013. At thesame time, nancing received from
foreign parentbanks continued to contract and the growth of
non-resident non-MFI deposits decelerated (see Charts2.17 and
2.18).Chart 2.15ANNUAL RATE OF CHANGE IN RESIDENT DEPOSITS(%)Chart
2.16RESIDENT DEPOSIT DYNAMICS(billions of lats)Chart 2.17NON-MFI
DEPOSIT DYNAMICS(in billions of lats)2. FINANCIAL MARKET
DEVELOPMENTS
21. 20MACROECONOMIC DEVELOPMENTS REPORTApril 2013At the end of
February, aggregate loans granted toresidents had shrunk by 0.5% in
comparison withthe end of December (see Chart 2.19 for
monthlychanges in lending). The annual rate of decrease inresident
loans continued to decelerate and dropped to10.1% in February (or
3.7% when excluding creditinstitutions whose licences were revoked
in 2012; seeChart 2.20). The loan portfolio shrank as a result of
adecline in household loans (1.3% in two months). Atthe same time,
loans granted to nancial institutionsand non-nancial corporations
grew by 0.1% duringthis period. Loans granted in euro continued on
adownward trend, whereas the loan portfolios ofother foreign
currencies and the lats expanded. Theproportion of the lats loans
in the aggregate domesticloan portfolio was 13.9% in
February.Lending to manufacturing of fabricated metalproducts,
water supply, wholesale, storage andnancial services increased in
the course of themost recent months. In January, a positive
lendinggrowth rate was demonstrated by agriculture andall its
primary sub-sectors, some sub-sectors ofmanufacturing
(manufacturing of wearing apparel,metals, fabricated metal products
and paper), energysector, water supply, transportation by land and
othersectors (see Chart 2.21 for changes in the structure ofthe
domestic loan portfolio).The changes observed in money supply in
January andFebruary reected the balanced development of theeconomy.
Although household deposits could continueto shrink under the
impact of certain factors, corporateaccounts will receive further
inows generated by thedomestic demand and persistently
well-performingexport sectors. Thus the aggregate money supply
willcontinue to expand moderately in 2013. Moreover,Chart
2.18CREDIT INSTITUTION FOREIGN LIABILITIES(billions of lats)Chart
2.19MONTHLY CHANGE IN LOANS TO RESIDENTHOUSEHOLDS AND NON-FINANCIAL
CORPORATIONS(millions of lats)Chart 2.20ANNUAL RATE OF CHANGE IN
LOANS TO RESIDENTS(%)2. FINANCIAL MARKET DEVELOPMENTS
22. 21MACROECONOMIC DEVELOPMENTS REPORTApril 20132. FINANCIAL
MARKET DEVELOPMENTSTable 2MONETARY AGGREGATES(quarterly gures are
averages)Outstanding amountas percentage of M32013 IIAnnual growth
rates (%)2012 2013Q1 Q2 Q3 X XI XII Q4 I IIM1 70.9 15.5 12.9 14.5
15.9 8.0 10.9 11.6 13.3 12.3Currency in circulation 14.8 28.8 23.6
19.7 18.0 12.4 4.1 11.5 1.0 0.7Overnight deposits 56.1 11.9 9.9
13.1 15.3 6.8 13.0 11.7 17.1 16.3M2 M1 (= other short-term
deposits) 26.8 20.9 15.0 16.2 16.9 3.5 11.0 10.5 12.9 13.7Deposits
with an agreed maturity ofup to 2 years 23.5 20.9 15.1 17.0 17.9
3.4 12.0 11.1 15.5 16.5Deposits redeemable at notice of upto 3
months 3.3 20.4 14.7 8.4 7.0 4.3 1.7 4.3 11.9 13.1M2 97.7 0.3 1.5
2.6 3.7 4.4 3.8 4.0 4.7 3.7M3 M2 (= marketable instruments) 2.3
42.8 28.1 25.3 27.9 53.5 29.2 17.4 29.1 8.3M3 100.0 0.9 1.1 3.0 4.0
5.1 2.8 4.0 3.7 3.4Credit to residents 8.2 10.8 11.0 10.6 10.0 9.4
10.0 9.3 9.6Credit to general government 12.3 15.5 15.5 11.1 0.5
14.2 1.2 9.0 2.5Credit to the private sector 8.0 10.6 10.8 10.5
10.5 10.4 10.5 10.1 9.9Loans to the private sector 9.0 11.5 11.4
11.0 10.9 10.6 10.8 10.4 10.1Longer-term financial
liabilities(excluding capital and reserves) 43.3 18.5 12.1 4.6 5.0
53.2 20.9 52.4 50.1Source: the Bank of Latvia.Chart 2.21STRUCTURE
OF CHANGES IN THE DOMESTIC LOANPORTFOLIO(millions of lats)following
the nal decision about Latvia joining theeuro area, an additional
supporting factor for a rise indeposits will be the opportunity to
convert non-cashcurrency into euro easier, at the same time
decreasingthe use of the cash currency. Movement towardsjoining the
euro area will also gradually increase therole of the euro in the
structure of money supply.For the time being, the demand for
corporate loans,particularly for investment in exporting
businesses,will increase. Credit institutions have also conrmedthat
such businesses can rightfully apply for loans;therefore, there is
a potential for further recoveryof corporate lending. As a result,
the annual rate ofchange of corporate loans will most likely
returnto a positive territory in 2013. The household loanportfolio
will proceed on a downward trend, withgradual repayments of
household loans for housepurchase continuing.
23. 22MACROECONOMIC DEVELOPMENTS REPORTApril 20133. Domestic
DemandThe GDP of EU27 and the euro area contracted by0.3% and 0.6%
respectively, whereas the Latvianeconomy continued to develop
buoyantly in 2012,achieving the highest growth rate in the EU
(5.6%;see Chart 3.1). Just a year ago, with a roughly thesame
growth rate Latvia was the third fastest growingeconomy in the
EU.Exports, investment and private consumptioncontributed equally
to GDP growth in 2012, yet theirparticular dynamics changed over
the year. At thebeginning of 2012, investment played an
importantrole in supporting growth. Further on, privateconsumption
became dominant, whereas in the secondhalf of the year net exports
made a very signicantpositive contribution to the GDP growth (see
Chart3.2).In the fourth quarter, the leading position in terms
ofdevelopment was occupied by exports: its impressivegrowth rate of
8.4% contributed 4.7 percentagepoints to the GDP growth. Imports of
goods andservices expanded at a considerably lower rate
incomparison with exports (by 1.0%); therefore, thepositive
contribution of net exports amounted to4.0 percentage
points.Although the growth of private consumption at 4.2%was twice
as low as that of exports, its contributionto the annual changes of
the GDP was relatively large(2.8 percentage points) as consumption
remained asizeable component accounting for 69% of the realGDP.The
growth of the gross xed capital formationdecelerated in comparison
with the beginning of theyear, nevertheless contributing 1.2
percentage pointsto the GDP growth.The negative contribution of
inventories (2.9percentage points) still dampened the GDP
growthsignicantly, yet the effect of the changes ininventories
gradually faded.3.1 Private consumptionThe purchasing power of
households continued toimprove in 2012. This was inter alia reected
by therising spending. Moreover, the private consumptiongrowth
accelerated notably in the second quarter.Retail trade followed a
slightly different path inChart 3.1CHANGES IN GDP(at constant
prices; %)Chart 3.2CONTRIBUTION TO ANNUAL CHANGES IN GDP(demand
side; percentage points)3. DOMESTIC DEMAND
24. 23MACROECONOMIC DEVELOPMENTS REPORTApril 2013the course of
the year: steeper growth of the salesvolumes (particularly, of the
demand for consumernon-durables) was observed with a one-quarter
lag(i.e. in the third quarter; see Chart 3.3).The growth of
consumption decelerated slightly at theturn of the year. In the
fourth quarter, consumptionexpanded by 0.6% quarter-on-quarter and
by 4.2%year-on-year (see Chart 3.4). The growth could
remainmoderate also in the rst quarter of 2013, althoughseveral
opposing factors currently exert their inuenceon consumption.With
the average wage and salary as well as theincome of self-employed
and the employmentnumbers on a rise, the disposable income
ofhouseholds is also growing. An increasingly largernumber of
households conrm in surveys that theirwelfare is improving (see
Chart 3.5). Nevertheless, theaverage temperatures this winter were
considerablylower than the ones observed a year ago whichtranslated
into signicantly higher spending onheating. The deterioration of
the consumer and retailtrade condence in February was most likely
directlyrelated to the growing housing expenditure whichhad a
negative effect on the purchasing power ofhouseholds and their
spending habits in points ofsales, thereby dampening the prots
earned by salesbusinesses.The decline in the numbers of customers,
however,does not apply to all points of sales. The demand formotor
vehicles has been rising in the most recentmonths. In January and
February, the number ofcars newly registered with the Road Trafc
SafetyDepartment increased very signicantly (see Chart3.6). This
increase was achieved primarily on accountof cars registered in the
ownership of physical personsand produced more than two years ago.
Car purchaseswere nanced mainly by previously-accumulatedsavings.
The number of cars purchased on a basisof leasing agreements has
also increased graduallyin the course of the recent years. At the
same time,households continue decreasing their debt
obligations,hence further shrinking of loans, including loans
forpurchasing consumer goods, can be observed.Low ination will also
act to support a more rapidrecovery of consumption in 2013.
Considering thatthe heating season will be over and the
observedprice rises are negligible, the increases in wages
andsalaries will result in an almost equal improvement ofthe
purchasing power.Chart 3.3INDICATORS CHARACTERISING
CONSUMPTION(consumer condence, net responses; 2010 = 100;
percentagepoints)Chart 3.4CHANGES IN GDP AND PRIVATE
CONSUMPTION(year-on-year; %)Chart 3.5CONSUMER CONFIDENCE AND
UNDERLYINGFACTORS(net responses; percentage points)3. DOMESTIC
DEMAND
25. 24MACROECONOMIC DEVELOPMENTS REPORTApril 20133.2 Private
investmentInvestment growth continued to decelerate: in thefourth
quarter of 2012, investment increased by 3.3%quarter-on-quarter and
by 4.2% year-on-year. Thisshould be viewed as a rather moderate
growth ratein comparison with the beginning of 2012, when
thequarterly rate amounted to 12.6% and the annual ratereached
39.0%.The slowdown in investment growth was primarilyrelated to the
fading of the resumed tendency toupgrade equipment and vehicle eet,
something whichhad been postponed during the crisis. The imports
ofcapital goods (mechanical appliances and electricalequipment as
well as transport vehicles) contractedsignicantly (see Chart 3.7).
Nevertheless, the importsof capital goods resumed growth in the
fourth quarter.The structure of non-nancial investment suggeststhat
the contribution of public administration andpublic services
(education, health) expanded inthe fourth quarter of 2012, the same
as every year;nevertheless, it was smaller than in the
previousyear. Therefore, it can be concluded that privateinvestment
is growing at a higher pace (see Chart 3.8).Investment in transport
and storage continues to growdynamically (see Chart 3.9).In the
coming years, investment could increase, withits rate of growth
even accelerating in 2013. This isalready conrmed by the rising
number of vehicleregistrations in January and February. The
nancingconditions are also favourable: an impressiveimprovement of
prots, relatively low borrowingrates, availability of EU funding.
The plannedintroduction of the euro will also make the
businessenvironment more attractive to foreign investors.Chart
3.6NUMBER OF VEHICLES NEWLY-REGISTERED WITHTHE ROAD TRAFFIC SAFETY
DEPARTMENT(thousands)Chart 3.7INDICATORS CHARACTERISING
INVESTMENT(2010 = 100; %)Chart 3.8CONTRIBUTION OF PRIVATE AND
GOVERNMENTINVESTMENT TO GDP(%)3. DOMESTIC DEMAND
26. 25MACROECONOMIC DEVELOPMENTS REPORTApril 20133. DOMESTIC
DEMAND3.3 Government expenditure and budgetAccording to the ofcial
information by the Treasury,the decit of the consolidated general
governmentbudget estimated on a cash ow basis amounted to13.9
million lats or 0.1% of the forecast GDP in therst two months of
2013 (see Chart 3.10).The consolidated general government budget
revenuecontinued to grow in the rst two months of 2013 (seeChart
3.11), increasing by 5.6% in comparison withthe respective period
of the previous year. Tax revenueexpanded by 7.2%, primarily on
account of thepersonal income tax and social insurance
contributioncollections (a rise of 9.0% and 10.3%
respectively),conrming the continued strength of the
economicdevelopment. The observed decline in the VATcollections by
1.4% year-on-year can be explained bythe effects stemming from the
reduction of the tax ratefrom 22% to 21%. Inows of the EU funding
(foreignnancial assistance revenue) expanded by 3.6%.In January and
February 2013, the consolidatedgeneral government budget
expenditure grew by9.0% over the respective period of the previous
year(see Chart 3.12). The increase was determined by arise in
non-capital expenditure by 7.6%, with boththe current expenditure
as well as expenditure onsubsidies and grants contributing
signicantly at thebeginning of 2013. Capital expenditure increased
by38.4% in the rst two months of 2013 in comparisonwith the
respective period of 2012, primarily onaccount of larger local
government investment.The general government debt stood at 5
781.5million lats (35.4% of the GDP projected in 2013;5 652.0
million lats at the end of 2012) at the end ofChart
3.9NON-FINANCIAL INVESTMENT BY SECTOR(% of total non-nancial
investment)Chart 3.10ACCRUED BALANCE OF THE CONSOLIDATEDGENERAL
GOVERNMENT BUDGET BY LEVEL(billions of lats)Chart 3.11SELECTED TAX
REVENUE(JanuaryFebruary; millions of lats)
27. 26MACROECONOMIC DEVELOPMENTS REPORTApril 2013February 2013.
The increase was primarily explainedby changes in the applied
methodology: short-termdeposits of local governments and businesses
withthe Treasury were added to the general debt. Lookingpast the
effect of methodology changes, the generalgovernment debt decreased
by 81.2 million lats sinceDecember. The domestic debt shrank by
96.6 millionlats as a result of maturing government
securities,whereas the external debt grew by 15.3 million lats
onaccount of the US dollar appreciation.3. DOMESTIC DEMANDChart
3.12RATE OF CHANGE IN CONSOLIDATED GENERALGOVERNMENT BUDGET
EXPENDITURE(year-on-year; %)
28. 27MACROECONOMIC DEVELOPMENTS REPORTApril 20134. Aggregate
Supply4.1 Industry and constructionIn the fourth quarter of 2012,
the value added ofmanufacturing at constant prices recorded a
year-on-year rise of 6.2%. At the same time, the value addedof
manufacturing (seasonally adjusted) increasedin the fourth quarter
by 1.3% in comparison withthe previous quarter (see Chart 4.1).
Hence in thefourth quarter manufacturing was one of the
majorpositive contributors to the annual GDP growth in thebreakdown
by sector (0.8 percentage point), as wasthe case in the previous
quarters.Expansion of manufacturing in the fourth quarter
wasattributable to a quarterly rise in the manufacturingof
chemicals and chemical products (15.5%),basic pharmaceutical
products and pharmaceuticalpreparations (16.6%), fabricated metal
products(2.8%) as well as wood and articles of wood andcork (2.8%).
At the same time, a declining volume ofoutput in manufacturing of
metals (7.4%), computers,electronic equipment and optical products
(10.1%),motor vehicles, trailers and semi-trailers (8.5%) andrepair
and installation of machinery and equipment(3.6%) had an adverse
impact on the increase inmanufacturing (see Chart 4.2 for the
annual changesin industrial output).The turnover in manufacturing
at current pricesreported a year-on-year rise of 9.1% in the
fourthquarter of 2012, of which an increase of 3.2% on thedomestic
market and that of 16.9% on the externalmarket. This is again
conrmed by the fact thatexpanding external demand is the major
contributorto the manufacturing growth. It should be noted,however,
that the increase in external demand is moremoderate than the rise
in manufacturing turnover,pointing to a higher competitiveness of
Latviasmanufacturing and new markets.Industrial condence indicator
aggregated by the ECfor the fourth quarter was 1.7 points higher
quarter-on-quarter. The above development was primarilyattributable
to a more positive assessment of theorder volume by the
manufacturers. At the sametime, the assessment of stocks has
remained negative(manufacturers point to insufcient stock
levels),which, along with the assessment of the order volume,conrms
a further growth of the sector.Production capacity utilisation
projected for therst quarter of 2013 rose to 72.1% (see Chart
4.3).Chart 4.1DYNAMICS OF MANUFACTURING OUTPUT(at constant prices;
%)Chart 4.2ANNUAL INDUSTRIAL OUTPUT CHANGES IN Q4 2012(working-day
adjusted; %)Chart 4.3PRODUCTION CAPACITY UTILISATION
INMANUFACTURING(%)4. AGGREGATE SUPPLY
29. 28MACROECONOMIC DEVELOPMENTS REPORTApril 2013Chart
4.4GROWTH-RESTRICTIVE FACTORS INMANUFACTURING(% of replies from
respondents)Situation differed notably by subsectors.
Productioncapacity utilisation remained high in manufacturingof
wearing apparel (74.6%), wood and articles ofwood and cork (78.4%),
fabricated metal products(72.3%) and furniture (74.5%). At the same
time, lowproduction capacity utilisation was observed in
themanufacturing of beverages (58.9%), non-metallicmineral products
(60.7%) and chemicals and chemicalproducts (64.3%). A notable
predictable fall inproduction capacity in manufacturing of metals
has tobe noted as well from 77.9% in the fourth quarter of2012 to
61.0% in the rst quarter of 2013.Businesses still reported the
limited demand to bethe major growth-restrictive factor (36.0% of
thetotal number of respondents; see Chart 4.4) in therst quarter of
2013; however, the value of theabove indicator persistently follows
a downwardpath. Rather many respondents (29.0%) identiedno
substantial growth-hampering factors at the time.The above is the
indicators highest indication sincethe commencement of the data
collection in 2004.A decreasing number of respondents pointed to
labourshortage (8.0%) or technical problems (8.1%) andonly 4.3% of
respondents indicated access to fundingto be the primary
growth-restrictive factor.The manufacturing data for January were
negative.The output volume fell by 3.6% in comparison withDecember
2012, while the annual growth rate wasclose to zero. Such data
contradict other industrialindicators slightly; hence the produced
output volumein manufacturing is most likely expected to grow inthe
coming months. Although the declining outputobserved in January may
be explained by the datavolatility in some subsectors of
manufacturing,objective reasons lead to a conclusion that output
insome subsectors will decline in 2013.The volume of output may
decline in those sectorswhere output is related to the stagnating
EUconstruction market (wood industry, manufacture ofbasic metals,
etc.). The output of fabricated metalproducts and motor vehicles,
trailers and semi-trailers is also likely to decline due to the
stagnatingEU automotive industry. The year is expected to
berelatively favourable, as regards the manufacturingof food
products, electrical equipment, chemicalproducts, basic
pharmaceutical products andpharmaceutical preparations and
computers, electronicequipment and optical products. Hence
substantialgrowth in manufacturing is still forecast in 2013(about
5%), albeit more subdued than in the previousyears.4. AGGREGATE
SUPPLY
30. 29MACROECONOMIC DEVELOPMENTS REPORTApril 2013In the fourth
quarter, the value added of theconstruction sector recorded a
year-on-year rise of9.3%. A quarter-on-quarter increase in the
value addedof the construction sector was 3.5%. The contributionof
the construction sector to the annual GDP growthwas 0.6 percentage
point. In the fourth quarter,construction output at current prices
rose by 16.2%year-on-year. Engineering structures (9.3
percentagepoints), including the construction of motorways,streets
and roads, ports and blocks of industrialbuildings (see Chart 4.5),
accounted for the majorcontribution to the annual increase.
Construction ofindustrial production buildings, museums and
librarieswas the largest contributor to the segment of
non-residential buildings (4.0 percentage points). At thesame time,
residential buildings contributed rathermoderately (2.9 percentage
points) to the expansionof construction, with the apartment houses
accountingfor the primary contribution.The construction condence
indicator assessed by theEC deteriorated by 7.6 points in the
fourth quarter.It was underpinned by a deteriorating assessmentof
the overall volume of orders and employmentexpectations. The
construction condence indicatordeteriorated, most likely, on
account of two factors.First, compared with the previous years,
weatherconditions of the current winter are very unfavourablefor
the performance of construction works. Second,the information about
a smaller amount of fundingthat might be allocated for the road
construction in thecoming years was released in mass media. This is
alsoconrmed by the replies of the builders to the surveyquestion
about the growth-restrictive factors: the lackof demand and weather
conditions were mentioned asthe main constraints in the fourth
quarter of 2012.The construction condence indicator
improvedsomewhat in the rst two months of 2013. Sectorexperts
acknowledge that the construction sector willreport growth in 2013,
albeit lower than in 2012.Access to funding (both budget funding
and EUfunding) that has remained approximately the same asin the
previous year supports the above trend. Thus,private funding will
mostly contribute to the growth ofthe construction sector in 2013.
Hence the segmentsof residential buildings and some
non-residentialbuildings (industrial structures, commercial
buildingsand warehouses) should expand.4.2 ServicesIn the fourth
quarter, the value added of theservices sector at constant prices
recorded a year-Chart 4.5CONTRIBUTION OF SOME TYPES OF
CONSTRUCTIONTO THE ANNUAL CONSTRUCTION GROWTH ATCURRENT
PRICES(percentage points)4. AGGREGATE SUPPLY
31. 30MACROECONOMIC DEVELOPMENTS REPORTApril 2013on-year
increase of 4.1%. The overall contributionof the services sector to
the annual GDP growthwas 2.8 percentage points (see Chart 4.6 for
thechanges in the value added of the main types ofservices).
Wholesale and retail trade (1.6 percentagepoints), information and
communication services(0.4 percentage point) and professional,
scientic andtechnical services (0.3 percentage point) accounted
forthe major positive contribution.In the fourth quarter, retail
trade turnover declinedmoderately quarter-on-quarter (by 0.5%),
followingthe accelerated increase in the third quarter, whilethe
annual rate of increase remained relatively high(6.7%). In the rst
half of the year the demand formotor vehicles shrank, whereas in
the second halfof the year the above sector resumed growth. Hencein
the fourth quarter the overall retail trade turnover,including the
sale of motor vehicles, expanded by1.1% quarter-on-quarter (see
Chart 4.7) and by 5.5%in comparison with the fourth quarter of
2011.In the fourth quarter, the value added of the transportand
storage sector increased merely by 1.1% year-on-year (see Chart 4.8
for the annual changes in freightturnover in the major areas of
transportation). Thevalue added of the sector decreased by 0.9%
quarter-on-quarter (seasonally adjusted data). Since the annualrate
of increase moderated notably, the contributionof the transport and
storage sector to Latvias GDPgrowth also shrank substantially (to
0.1 percentagepoint). Such dynamics of the transport sector
hadalready been projected, with low capacity of thesector and some
problems associated with the lack ofdemand for the transportation
services pointing to theabove development.The volume of cargoes
loaded and unloaded atLatvias ports in the fourth quarter recorded
an overalldecline of 4.0% year-on-year. It was the rst
quarterconrming a negative annual growth rate since mid-2010. The
shrinking volume of cargoes loaded andunloaded at Ventspils port
(by 16.9%) was the primarydriver of a negative annual rate of
increase. Cargoesloaded and unloaded at Riga port also
decreasedmoderately (2.6%), while the annual growth rateremained
high at Liepja port (54.7%).The volume of freight transported by
rail in the fourthquarter recorded a 17.6% year-on-year
decrease.The overall drop in the volume of rail freight
wasattributable to the shrinking transportation to and fromthe
ports by 17.8%. The volume of cargo transit alsodeclined notably
(45.3%).Chart 4.6CHANGES IN VALUE ADDED OF MAIN TYPES
OFSERVICES(year-on-year; seasonally adjusted data; %)Chart
4.7BREAKDOWN BY QUARTERLY CHANGES IN RETAILTRADE(percentage
points)Chart 4.8ANNUAL CHANGES IN FREIGHT TURNOVER BY THEMAIN TYPES
OF FREIGHT TRAFFIC(%)4. AGGREGATE SUPPLY
32. 31MACROECONOMIC DEVELOPMENTS REPORTApril 2013In the fourth
quarter, the volume of roadtransportation shrank by 7.1%
year-on-year. Thisdevelopment was attributable to narrowing
roadtransportation in domestic trafc (9.1%), whileinternational
trafc recorded an increase (4.0%).However, the share of domestic
transportation washigher regarding the structure of road
transportation,consequently the overall annual increase in
roadtransportation remained negative. At the same time,the freight
turnover, expressed as tonne-kilometres(the volume of transported
freight multiplied by adistance in kilometres), picked up by 7.3%,
suggestingthat the distance of the transported freight
increasedsubstantially in the fourth quarter of 2012. The abovedata
are likely to explain the difference between thegrowth rate of the
rail freight volume and that ofcargoes loaded and unloaded at ports
(the volume ofrail freight shrank more notably than that of
cargoesloaded and unloaded at ports).According to preliminary data
for the rst quarterof 2013, the annual rate of increase in the
volume ofcargoes loaded and unloaded at ports and that of
railfreight has remained negative. This suggests that adecline in
the demand for freight transportation in theregion affected the
performance of the sector at thebeginning of 2013. In March,
however, the freezingof the northern part of the Baltic Sea might
contributepositively to the operation of ports, with some
freightows being diverted to Latvias ports.4.3 Labour marketDecline
in unemployment was consistent with theBank of Latvias forecast:
according to the CSBslabour survey data, the average rate of
jobseekers was14.9% of the economically active population in 2012(a
year-on-year decline of 1.3 percentage points). Theannual decline
was similar at the end of 2012 as well,with the rate of jobseekers
reaching 13.8% (see Chart4.9) in the fourth quarter. Unemployment
is expectedto continue on a gradual downward path in 2013. Withthe
rate of jobseekers approaching its natural rate(the average 15-year
rate of jobseekers amounts to12.7%), the future success in reducing
unemploymentwill depend not only on the overall economic
growthrate, but also increasingly on the effectiveness of
theemployment programmes provided for particulargroups of
population and regions.The degree of mismatch between the demand
for andsupply of labour has remained broadly unchangedin comparison
with the period prior to the economic4. AGGREGATE SUPPLYChart
4.9REGISTERED UNEMPLOYMENT RATE AND THAT OFJOBSEEKERS(%)
33. 32MACROECONOMIC DEVELOPMENTS REPORTApril 20134. AGGREGATE
SUPPLYoverheating. The Beveridge curve, reecting the jobvacancy and
unemployment ratio, gradually returns tothe level of 2004 (see
Chart 4.10).Moreover, the data do not conrm the hypothesisthat
unemployment is declining in Latvia only onaccount of individuals
leaving the country. Quiteon the contrary, the number of
economically activepopulation increases and the rate of
economicallyactive population to working-age populationis
expanding. Although an increasing numberof economically active
population is a positivephenomenon and reects the populations
higherexpectations for nding a job, it should be takeninto account
that the above leads to a deterioratingunemployment statistics in
the short term. Had thenumber of economically active population not
risen inthe last two years, the rate of jobseekers would havebeen
close to 11% currently (see Chart 4.11).Employment growth in Latvia
is among the highestin the EU. All statistical data sources of
differingcoverage that are available present a similar
picture,excluding the possibility that the labour market
isrecovering only under the impact of short-term andtemporary
factors. Thus, for instance, according to theCSBs labour survey
data, the number of the employedpersons rose in the fourth quarter
of 2012 by 25.6thousand year-on-year. The State Revenue Servicedata
point to a similar increase, which contrary to thelabour survey
excludes the grey economy: the numberof employees paying their
social security contributionshas risen by 23.0 thousand over the
year.The data ofthe national accounts also conrm the fact that
theemployment has grown on account of the number ofemployees:
employees (22.3 thousand) accountedfor the majority of the total
rise in the number ofemployed persons (24.5 thousand over the
year).According to the CSBs business survey data, thenumber of
occupied posts was 36.5 thousand higherin the country in the fourth
quarter of 2012 than a yearago, driven by the developments in
private sector.Employment expectations of businesses haveimproved
notably over the last three months, rebuttingthe concerns that the
process of new job creationmight cease. The majority of businesses
project anincrease rather than a decrease in the number ofemployees
in all major sectors of the economy in thecoming months (see Chart
4.12).In January 2013, the registered unemployment raterose by 0.4
percentage point (to 10.9%) on accountof short-term factors. The
traditional indicatorChart 4.10BEVERIDGE CURVE: NUMBER OF
UNEMPLOYEDPERSONS REGISTERED WITH THE SEAAND THAT OFVACANCIES(in
thousands)Chart 4.11IMPACT OF THE DYNAMICS OF THE NUMBER
OFECONOMICALLY ACTIVE POPULATION ON THE RATEOF JOBSEEKERSChart
4.12DATA FROM BUSINESS SURVEYS ON THE PROJECTED3-MONTH EMPLOYMENT
DYNAMICS(net responses; percentage points)
34. 33MACROECONOMIC DEVELOPMENTS REPORTApril 20134. AGGREGATE
SUPPLYof seasonality in January (0.2 percentage point)was
accompanied by the impact of legislativeamendments: the
disbursement of unemploymentbenet was extended up to nine months
irrespectiveof the length of service since January 2013, hencea
number of individuals who had lost their job atthe end of 2012
postponed the registering of thestatus of unemployed until the
beginning of 2013.Uncommon decline in the registered
unemploymentrate in November and December 2012 (by0.2 percentage
point) also points to the impact oflegislative amendments. In
February, the registeredunemployment rate stood at 10.9%, however,
theabove rate is expected to follow a downward path inspring and
reach one-digit level during 2013.The annual rate of increase in
the average monthlygross wage and salary remained stable (4.0%) in
thefourth quarter of 2012. However, the real net wageor the
purchasing power of a wage rose ever morerapidly (by 2.5% over the
year; see Chart 4.13).Declining ination was the primary contributor
to theabove development.Rising wages and salaries continue to be
attributableto the labour productivity growth (see Chart 4.14),and
hence no risks to price stability and economiccompetitiveness
emerge. The EC data suggest thatthe number of businesses that
single out the labourshortage as the main constraint for business
growthhas stabilised below 10% (see Chart 4.15). It iseven less
than in 20022004 and reects a normalequilibrium situation,
fostering investment inowsand at the same time also labour
productivity growthrather than an accelerated further rise in wages
insteadof labour productivity growth due to the
labourshortage.Overall, a moderate increase in the average wageof
the employed persons in 2012 (3.7%) was partlyattributable to the
fact that high unemployment ratecontributed to higher output, since
new employeeswere paid a lower wage than the average wage andsalary
of the enterprise, thus leading to a deterioratingaverage wage
statistics. As unemployment rateis gradually moving closer to the
natural rate ofunemployment, businesses will nd it more difcult
toenhance employment rapidly and will have to channelmore funds
into the labour productivity growthfostering investment. This would
also be the basisfor a more buoyant rise in remuneration which
mightrange between 4% and 5% in 2013, without creating asubstantial
inationary pressure in the economy.Chart 4.13ANNUAL CHANGES IN THE
AVERAGE MONTHLYNOMINAL AND REAL WAGE FOR FULL-TIME JOB(%)Chart
4.14REAL WAGE AND SALARY AND LABOURPRODUCTIVITY INDICES(Q1 2005 =
100; seasonally adjusted data)Chart 4.15THE RATE OF BUSINESSES WHO
FIND LABOURSHORTAGE THE MAIN OBSTACLE FOR BUSINESSGROWTH(%)
35. 34MACROECONOMIC DEVELOPMENTS REPORTApril 2013The CSB has
revised upwards the compensation ofemployees gure for the rst half
of 2012, whilerevising downwards the above gure for 2011. HenceULC
follow a gradual upward trend and are notablylower than in 2008
(see Chart 4.16).4. AGGREGATE SUPPLYChart 4.16ULC INDEX(Q1 2000 =
100; seasonally adjusted data)
36. 35MACROECONOMIC DEVELOPMENTS REPORTApril 20135. Costs and
PricesIn January and February, annual ination continued
todecelerate, reaching the lowest level since September2010 (0.3%;
see Chart 5.1). The overall impact of thesupply side factors on the
ination dynamics remainedfavourable, while the contribution of
demand wasstill moderate and reected by negative annual
coreination.Unusual for January, in the rst month of the
yearmonthly deation (0.2%) instead of a consumer pricerise was
observed. January is mostly the month wheneither increases of
indirect taxes or new tariff plansof goods and services with
administered prices takeeffect, resulting in the price lists of
goods and servicesoffered for consumption of different other
sectorsreviewed due to cost pressures. This did not happen
inJanuary 2013, when not only the prices of the wearingapparel and
footwear (as a result of seasonal sales)but also (unusual for
January) those of natural gas andheating energy decreased (see
Chart 5.2).In January, the sales of the wearing apparel andfootwear
slightly exceeded the historically observedlevel, with the monthly
decline in prices reaching7.4%, thus suggesting that the
contribution of demandon the rising prices of goods is still
moderate. Asthe inuence of this factor was less pronounced
thanusually in February, such price changes are probablyrelated to
the peculiarities of the regional market, i.e.in Estonia, February
historically is already the monthof the new seasonal goods with the
typical price rise,while in Latvia seasonal sales is still in
progress.Products from Estonia have already been sold on theLatvian
market over a longer period time; however,this year most of the
seasonal clearances in the Latvianmarket were made in January. The
trading strategyis likely to have changed slightly also in autumn
of2012 as a result of the international trade chains of thewearing
apparel entering the Latvian market.At the same time, monthly
deation was drivenby administrative prices in January as the
averagemovements of oil product prices of the preceding ninemonths
had facilitated lower natural gas and heatingtariffs for consumers
respectively. In February,heating tariffs declined further as the
price of naturalgas delivered to business customers (including
manyproducers of heating energy) changes every month,but the
natural gas price for household consumptionhas been set for half a
year and was reduced morerapidly already in January.Chart
5.1CHANGES IN CPI BY COMPONENT(percentage points)Chart 5.2IMPACT OF
ENERGY AND FOOD PRICE CHANGES ONANNUAL CONSUMER PRICE
INFLATION(percentage points)5. COSTS AND PRICES
37. 36MACROECONOMIC DEVELOPMENTS REPORTApril 2013Following a
temporary rise in February (it waspartly triggered by the improving
assessment of theeconomic growth in major global economies,
forinstance, China), global oil prices (see Chart 5.3)tend to
return to a lower level. The average level ofoil prices in the rst
two months of 2013 remainedsimilar to that of the corresponding
period of theprevious year, but the value of the US dollar waslower
than the average level observed in January andFebruary 2012, and
this helped to maintain a moderateprice level of some energy
resources in lats.The average global price level of the main food
andagricultural products (see Chart 5.4) has also recordeda
downward trend since October 2012. The risingprices of dairy
products and oils and fats (affectedby the limited supply and
harvesting difcultiescaused by rain) are currently being offset by
thefalling prices of sugar (the decrease could persistaccording to
the current assessment by the Food andAgriculture Organisation of
the United Nations assugar production has reported an increase not
only inthe traditional sugar-exporting countries) as well asthe
declining prices of cereal products, mainly wheat.The wheat price
drop was triggered by the favourablenew harvest forecasts in the
US.The price changes for services with non-regulatedprices were not
unusual. Following a drop in theprices of communication services
observed in thefourth quarter of 2012, these prices did not start
toreturn to the previous level due to competition, buta rise in the
prices of tourism services (an increaseof 4.8% in February) is
evident quite often in thisseason and is related both to the
willingness to enjoythe tourism offers in warm countries and the
seasonalkinds of winter sports when weather conditions arestable
and favourable for winter sports.The cost factors already mentioned
moderate pricesof resources and raw materials (i.e. mainly
energyand food prices) allowed the producer price levelto remain
fairly stable, and the data for January andFebruary suggest that
the producer prices of goodssold on the domestic market and
increasing at a lowerrate than those of exported goods ensure
domestic costcompetitiveness, without triggering a rise in
consumerprices. Data on the changes in the real effectiveproducer
price dynamics-based exchange rate of thelats provide evidence that
the competitiveness ofLatvian producers on the external market
improvedin 2012, although the dynamics of this ratio wasless stable
than the changes in the real effectiveconsumer price dynamics-based
exchange rate of theChart 5.3OIL PRICES ON GLOBAL
MARKET(lats/barrel)Chart 5.4GLOBAL FOOD PRICES(average monthly
indicator of 20022004 = 100)5. COSTS AND PRICES
38. 37MACROECONOMIC DEVELOPMENTS REPORTApril 2013lats. However,
a decrease in the production costs ofenergy resources determined by
external factors aswell as the domestic methodology for the
calculationand determining of administered tariffs might have
apositive effect on the cost competitiveness also in therst months
of 2013.The actual ination data for January and February,the
current drop in fuel prices and the expectedPublic Utilities
Commissions decisions on a declinein heating tariffs in Rzekne and
Riga from Mayand June 2013 respectively, on the one hand, allowfor
signicant reduction of the average inationassessment in 2013;
however, it is currently difcultto estimate the impact of some
factors, and they canexert pressure on the price rise in the second
half ofthe year (see Chart 5.5). This is mainly related to
theindirect effect of the expected rise in electricity prices:the
mandatory procurement component of electricityrates for business
customers is expected to increasealready in April, whereas for
households along withthe possible liberalisation of the electricity
market, inautumn. The amount of the mandatory procurementcomponent
announced in February had an effect onthe consumer expectations:
despite ination abating,the expectations of households of a more
moderateaverage price rise than in the preceding 12 monthsdeclined
(Chart 5.6).The assessment of the impact of food prices couldalso
change in the middle of the year when the rstestimates of the
harvest of the new season (mainlygrain and potatoes) are made
available. The pricemonitoring campaign launched in anticipation
ofthe introduction of the euro, with its rst resultsalready being
published and available to consumersfor comparison on the web site
of the Ministry ofEconomics is one of additional factors that
mighttemporarily prevent price rises in several popularconsumer
goods and services. By acquiring new datain the course of time, it
will be possible to establishwhen the so called psychologically
attractive (endingwith 9) or convenient (ending with 0 and 5)
prices inlats will tend to change to become
psychologicallyattractive and convenient in euros.Chart 5.5HICP AND
HICP AT CONSTANT TAX RATE(January 2008 = 100)Chart 5.6ANNUAL
INFLATION AND INFLATION EXPECTATIONS(%)5. COSTS AND PRICES
39. 38MACROECONOMIC DEVELOPMENTS REPORTApril 2013Chart
6.1CURRENT ACCOUNT OF LATVIAS BALANCE OFPAYMENTS AND ITS
COMPONENTS(% of GDP)Chart 6.2GROWTH RATE OF EXPORTS AND IMPORTS OF
GOODSAND SERVICES(year-on-year; %)Chart 6.3FOREIGN DIRECT
INVESTMENT IN LATVIA(% of GDP)6. Balance of PaymentsThe current
account decit of Latvias balance ofpayments was 259.9 million lats
or 1.7% of GDPin 2012 (see Chart 6.1). It was driven by a declinein
foreign trade decit in goods and services andthe growing amount of
current transfers received.Preliminary data for January 2013
suggest that thecurrent account, in line with the forecast, still
recordsa small decit (36.5 million lats).In 2012, the goods and
services foreign trade decitdecreased, amounting to 467.3 million
lats or 3.0%of GDP. Growth in exports of goods and services wasmore
rapid than that in imports (see Chart 6.2). Theincrease in exports
of goods was affected by one-offfactors (a good grain harvest) and
improved long-term competitiveness (a rise in labour
productivityand producer value added). Exports of servicesalso
continued to grow. Although a downslide intransportation services
was observed at the closeof the year, exports of transportation
services of alltypes have increased for the year overall. Rises
werealso recorded in information and computer, travel,construction
and communication services provided tonon-residents.The decit of
the income account increased to239.1 million lats or 1.5% of GDP in
2012. Againstthe background of the development of the
Latvianeconomy, both the dividends received by foreigndirect
investors and reinvested earnings increased.At the same time, the
ow of EU funds was themajor factor affecting the increase of the
surplus inthe current transfers account (to 446.6 million latsor
2.9% of GDP) and the capital account (to 458.7million lats or 3.0%
of GDP) of Latvias balance ofpayments. In 2012, overall 836.3
million lats werereceived from EU funds.The nancial account
recorded a decit of 216.6million lats or 1.4% of GDP in 2012. The
issue ofthe Latvian government bonds (2.25 billion USdollars) and
the repayments of the IMF loan (810.5million lats) contributed to
major nancial ows inthis account. Although credit institutions
continuedrepaying their long-term liabilities, their
short-termliabilities grew, hence no net capital outow wasobserved
in the private sector.In 2012, the inows of foreign direct
investmentin Latvia amounted to 540.1 million lats (3.5% ofGDP)
including 145.6 million lats (3.4% of GDP;see Charts 6.3 and 6.4)
in the fourth quarter. Already6. BALANCE OF PAYMENTS
40. 39MACROECONOMIC DEVELOPMENTS REPORTApril 2013in November
2012, the international rating agenciesStandard & Poors and
Fitch Ratings, in February2013 Rating and Investment Information
and inMarch Moodys raised Latvias credit rating, thuspointing to
the stable improvement of the economicsituation and future foreign
direct investmentopportunities.Chart 6.4NET FLOWS OF FOREIGN DIRECT
INVESTMENT(millions of lats)6. BALANCE OF PAYMENTS
41. 40MACROECONOMIC DEVELOPMENTS REPORTApril 20137. Conclusions
andForecastsIn 2012, Latvias economic growth rate remained
highdespite the adverse developments observed in theglobal markets
and major trade partner states. Thus,the concerns expressed
previously about the potentialslowdown in growth did not
materialise.In 2013, the