Economic Developments in Latvia 2001-2002
Ilmārs Rimšēvičs Governor of the Bank of Latvia
Year 2001 Witnessed Robust Growth in All Major Sectors of the Economy Annual Growth, %
GDP hotel and restaurants trade forestry transport manufacturing finances energy construction agriculture public administration education
0 7.6 13.7 10.6 10.2 9.5 9.5 7.3 6.6 6.1 5.3 2.7 1.2 3 6 9 12 15
GDP Growth in 2001 Determined by Strong Domestic Demand and High Investment Rate
15 10 5 0 -5 -10
GDP
Factors contributing to GDP growth, % points
Domestic consumption 1999
Investments
External sector 2001 pr.
-15 1998 2000
Latvia is the Fastest Growing Country in Central and Eastern Europe
8 7 6 5 4 3 2 1 0 0.7 1.1 3.4 5.5 5.7 7.6
GDP Growth, %
5.3 5.4 4.6 3.8 3.7 4.2 3.5 3.6 3.1 4.4
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1997- 2001
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Rapid economic growth has been achieved in a low inflation environment
25 20 15 10 5 0
I I I I I I IX IX IX IX IX 96 97 98 99 00 01 IX V V V V V V 19 19 19 19 20 20 20 02 I
Inflation Brought To Levels Comparable To EU Annual CPI changes, %
Latvia
EMU average
Productivity Growth Exceeds Real Wage Growth
Average annual growth, %
9 8 7 6 5 4 3 2 1 0 7.7 6.8 4.4 3.4
2000 Real net wages
2001 Value added per employed person
Peg to SDR Basket Ensures Nominal Exchange Rate Stability
0.85 0.70 0.65
LVL/USD
0.90 0.95
EUR/USD
1.00 0.60 0.55 0.50 0.45
I II III IV I 1997 II III IV I 1998 II III IV I 1999
1.05 1.10 1.15 1.20 1.25
II III IV I II III IV I 2000 2001 2002
LVL/USD
EUR/USD
SDR Peg Justified by Economic Fundamentals
SDR Basket and Currency Structure of Selected Economic Sectors in Latvia, 2001
SDR basket Foreign trade of goods LT external debt Bank credits to private sector Bank deposits of residents
5.2
0% 13%
30
46
40.7
38.8
5.6
32.7
44.2
15.4
16
37.8
43.6
36.9
25% 38% 50% 63%
56.9
75% 88% 100%
EUR
USD
LVL
Other
Low Inflation Supports Stable Real Exchange Rate
Real exchange rate of the lats against major trading partners January 2001=100 (upward movement implies appreciation)
105
100
95
I II III IV V VI VII VIII IX X XI XII
RER against Eastern trade partners Total REER
RER against Western trade partners
Real Appreciation Against Western Partners Stems from Convergence Towards Equilibrium
Price Level in Latvia (% of EU average)
0.5 0.4 0.3 0.2 0.1 0 1995 1996 1997 1998 1999 2000
Source: Eurostat
Despite Economic Slowdown in the EU, Export Growth Remains Robust
Annual Exports Growth, %
30 20 10 0 -10 -20 2000 Total EU CIS 2001 Lithuania, Estonia Other
Widening of the Current Account Deficit in 2001 Was the Result of Strong Domestic Demand And LaSCo Fleet Renewal
Current Account Deficit (% of GDP)
0 -2 -4 -6 -8 -10 -12 1997 1998 1999 2000 2001 pr
Current Account Deficit Impact of LaSCo transactions Impact of Strong Domestic Demand
Current Account Deficit Represents Country’s High Investment Needs
30 25 20 15 10 5 0 1997 1998 1999 2000 Investments (% of GDP) 2001
Domestic Savings (% of GDP)
Current Account Deficit Largely Covered by FDI and Long-term Capital Inflows
Current Account Deficit and Capital Inflows (% of GDP)
7 5 3 1 -1 -3 -5 -7 -9 -11 1998 1999 2000 2001
Current Account Deficit
FDI and long-term capital inflows
Latvia Has Been Successful In Attracting FDI Inflows
FDI stock in 2001, % of GDP
Estonia Hungary Czech Republic Latvia Bulgaria Slovak Republic Poland Lithuania Romania Slovenia
(1.4 bln. LVL)
0
10
20
30
40
50
60
BoL Foreign Currency Reserves Cover Monetary Base by 118% (March 2002)
800 600
mln. LVL
400
200
0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III
1999
2000
Monetary base
2001
Net Foreign Assets
2002
Budget Deficit Narrowed in 2001
Fiscal balance (% of GDP)
2 1 0 -1 -2 -3 -4 -5
1.2 0.2
-1.8 -2.8 -4
1997
1998
1999
2000
2001
Eurobond Emission Raised Government’s External Debt in 2001, But It Is Still Low
18 15 12 9 6
Government Debt (% of GDP)
3.9
0
1998
1999
3.9
2000
5.1
2001
Internal
External
5.4
3
6.5
9.2
8.0
9.6
Situation in Labour Market Improves
Official Unemployment Rate, %
10
9
8
7
6
5
1998
1999
2000
2001
2002
Banking Sector Developed Successfully in 2001
Annual growth rates, %
50 40 30 20 10 0 Assets Loans Deposits Equity Profits (mln.lats)
2000
2001
Banking System in Latvia Owned Largely by European Investors
Banking Systems Equity Structure by Countries (%) 2001
Other 19% USA* 5% Latvia 33%
Germany 11% Estonia 15%
Sweden 17%
* 6.7 mln. LVL in Rietumu Banka
Credit Expansion Does Not Lead to Worsening of Credit Portfolio
Non-performing loans (% of credit portfolio)
10 8 6 4 2 0 1997 1998 1999 2000 2001
EU Accession and BoL Monetary Policy
BoL Monetary Policy Framework Already Now Similar To That Adopted By The ECB
– Price stability – main goal of the BoL monetary policy
– Institutional independence from the government decisions
– No direct government financing – Personal independence of the members of the Governing Board – Financial independence - all expenses of the Bank of Latvia are financed from the Bank's revenue
Latvia And The Euro
No obstacles to changing currency peg to the euro
– Systems ready, sufficient foreign exchange reserves
No immediate plans to do so
– SDR basket more appropriate for Latvian economy
In Latvia’s future
– If Latvia joins the EU:
the lats will be pegged to the euro under the ERM II framework; after all the Maastricht criteria are met, Latvia will introduce the euro BoL intends to maintain the fixed exchange rate regime peg will be changed to the euro only if it is supported by changes in currency structure of foreign trade, banking
– If Latvia opts out of the EU membership:
Latvia is Approaching Economic Criteria Set for EMU Membership
Baltic states and Maastricht criteria in 2001 Maastricht criteria
Inflation (12 month average, %), 2001
Latvia
Lithuania
Estonia
3.3 6.7 -3.0 60.0
2.5 8.1 -1.8 14.8
1.3 6.5 -1.5** 28.0***
5.8 0.4 2.9***
Long term government bonds , %*
Fiscal balance (% no GDP), 2001 Government debt (% no GDP)
* EMU – 10 years (XII 2001), Lithuania – 7 years (XII, 2002), Latvia – 5 years gov. bonds (IV, 2001) **Central government budget balance *** I-IX 2001
Latvia – Winner of 2001 among 100 Emerging Economies! (EIU)
EIU has recognized Latvia as a winner of 2001 among 100 emerging economies in both – overall and economic policy risk categories, grounding Latvia’s success with its :
firm growth rate low inflation stable exchange rate strong export growth prudent fiscal policy ample CB reserves stable banking system and good progress in EU negotiations.
Bank of Latvia Forecasts for 2002
GDP growth, % Annual inflation, % (end of year) Current account deficit, % of GDP Budget deficit, % of GDP
5.0 2.5 8.5 2.5