republic of latvia a performing eurozone economy presentation november/december 2015
TRANSCRIPT
Republic of Latvia
A Performing Eurozone Economy
PresentationNovember/December 2015
Disclaimer
2
This presentation and its contents are confidential and may not be reproduced, redistributed, published or passed on to any other person, directly or indirectly, in whole or in part, for any purpose and should not be treated as offering material of any sort. If this presentation has been received in error it must be returned immediately to the Ministry of Finance of the Republic of Latvia (“Latvia”). This presentation is not directed at, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution or use would be contrary to law or regulation or which would require any registration, licensing or other action to be taken within such jurisdiction. THIS PRESENTATION IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN OR ANY OTHER JURISDICTION IN WHICH SUCH PUBLICATION, RELEASE OR DISTRIBUTION WOULD BE UNLAWFUL. This presentation and the information contained herein are not an offer of securities for sale in the United States or any other jurisdiction. No action has been or will be taken by Latvia in any country or jurisdiction that would, or is intended to, permit a public offering of securities in any country or jurisdiction where action for that purpose is required. In particular, no securities have been or will be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) or with any securities regulatory authority of any state or other jurisdiction of the United States and securities may not be offered, sold or delivered within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws and may only be sold outside of the United States in reliance on Regulation S under the Securities Act and otherwise in compliance with all applicable laws and regulations in each country or jurisdiction in which any such offer, sale or delivery of securities is made. Latvia does not intend to register or to conduct a public offering of any securities in the United States or any other jurisdiction. This presentation and its contents may not be viewed by persons within the United States (within the meaning of Regulation S under the Securities Act). This presentation is directed solely at (i) persons who are outside the United Kingdom, (ii) persons in the United Kingdom who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended (the “Order”) and (iii) those persons in the United Kingdom to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). In the United Kingdom, this presentation is directed only at relevant persons and persons who are not relevant persons should not in any way act or rely on this presentation. Any investment activity to which this presentation relates will only be available to and will only be engaged with relevant persons.This presentation does not constitute or form part of, and should not be construed as, an offer or invitation to sell securities of Latvia, or the solicitation of an offer to subscribe for or purchase securities of Latvia, and nothing contained herein shall form the basis of or be relied on in connection with any contract or commitment whatsoever. Any decision to purchase any securities of Latvia should be made solely on the basis of the conditions of the securities and the information contained in the offering circular, information statement or equivalent disclosure document prepared in connection with the offering of such securities. Prospective investors are required to make their own independent investigations and appraisals of the business and financial condition of Latvia and the nature of any securities before taking any investment decision with respect to securities of Latvia. By accessing this presentation the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the information contained herein. The information in this presentation has not been independently verified. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the presentation and the information contained herein and no reliance should be placed on such information. None of Latvia, its advisers, connected persons or any other person accepts any liability for any loss howsoever arising, directly or indirectly, from this presentation or its contents. This presentation should not be construed as legal, tax, investment or other advice and any recipient is strongly advised to seek their own independent advice in respect of any related investment, financial, legal, tax, accounting or regulatory considerations. There is no obligation to update, modify or amend this presentation or to otherwise notify any recipient if any information, opinion, projection, forecast or estimate set forth herein changes or subsequently becomes inaccurate or in light of any new information or future events. This presentation contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or including the words “anticipates,” “estimates,” “expects,” “believes,” “intends,” “plans,” “aims,” “seeks,” “may,” “will,” “should” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Latvia's control that could cause Latvia’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements speak only as at the date of this presentation. Latvia expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or any new information or change in events, conditions or circumstances on which any of such statements are based.
For convenience, an exchange rate of EUR/LVL: 0.702804 was used throughout this presentation and it is the exchange rate Latvia used to adopt euro as lawful currency on 1 January 2014.
Presentation Overview
1. Overview 4
3. Stable and Well Capitalised Banking Sector Prepared to Restore Credit Growth 19
2. Latvia’s Economy Continues to Perform Strongly 9
5. Government Debt and Funding Strategy 31
4. Outstanding Track-record of Fiscal Consolidation and Structural Reforms 24
6. Credit Positioning of Latvia 36
7. Conclusion 38
8. Tender Offer 40
9. New EUR Issuance 43
Overview
Latvia Overview
5
Key Facts on Latvia
Latvia’s historic strides to become a robust global economy
• Territory: 64,569(3) sq. km
• Capital: Riga (population 0.64 million(3))
• Population (1/1/2015): 2.0 million(3)
• GDP per capita (2014): EUR 11,824(3)
• Nominal GDP (2014): EUR 23.6 billion(3)
• Currency: Euro €(4)
• Credit ratings: A- (S&P), A3(Moody’s), A- (Fitch), BBB+ (R&I)
• Borders: Estonia, Russia, Belarus, Lithuania
• Main economic sectors:
— Services (74.5%(3) GDP in 2014): logistics, IT, financial, trade— Manufacturing (12.2%(3) of GDP in 2014): wood, metal, chemicals, pharma, food
Becomes a Member of the UN
Sep 1991
Mar 2004
May 2004
Dec 2008
Entry into EU
Admitted to NATO
Approval of Loan Programme with IMF, EC and Bilateral Lenders
1991
Latvia Regains Independence
Dec 2011/ Jan 2012
May 2012
All rating agencies rate Latvia investment grade
May 2013
Initial Memorandum delivered to OECD
January2014
Latvia joins Eurozone/ EMU
International Loan Programme with IMF/EC Closed Successfully
May-June 2014
S&P and Fitch upgrades rating to A-
February 2015
Moody`s upgrades Latvia’s rating to A3
1991Sep 1991
Mar 2004
May 2004
Dec 2008
Dec 2011/Jan 2012
May 2012
May 2013
Jan 2014
May-Jun 2014
Jan-Jun 2015
Feb 2015
2016
Latvia’s Presidency of EU Council
Target for OECD membership
- High income(1), advanced economy(2)
Source: (1) - World Bank classification; (2) - IMF classification;(3) - Central Statistical Bureau of Latvia, (4) - formerly the Lat (LVL), Euro adopted as lawful currency on 1 January 2014
6
● Average 3.9% GDP growth rate since 2011(1), when the post-crisis recovery started
● GDP growth was led by rising exports (driven by regained competitiveness), rebound of investments, and is supplemented by rising domestic demand in recent years
● Increased resilience to external risks, as net external debt is rapidly declining, and current account balance improved to a sustainable level
Sustained growthreached through a
successful economic
adjustment
Source : The Treasury (unless noted otherwise) Note: (1) - Central Statistical Bureau of Latvia; (2) – Financial and Capital Market Commission, capitalisation and liquidity ratios at the end of September 2015
Key Features of Latvia’s Sovereign Credit Profile
● Latvia joined the Eurozone on 1 January 2014, adopting the Euro as its lawful currency
● Latvia was already well integrated in the Eurozone's economy and the Eurozone membership reduced foreign exchange risks, eliminated currency conversion costs, improved financial stability and will facilitate trade and investments in the long term
● Participation in the Eurozone’s European Stability Mechanism brings additional financial security
Eurozone member since January 2014
● Over the last three years Latvia has consistently achieved one of the lowest fiscal deficits in the EU. General government budget deficit was 1.5% of GDP in 2014, while in the 2015 deficit is forecasted to be 1.4% of GDP
● Recent reform of social security system notably enhanced sustainability of government finance in the long term● Fiscal prudence is ensured by the implementation of the Fiscal Discipline Law, including fiscal rules with an
automatic correction mechanism (based on Swiss model), multi-year targets and independent oversight
Strong fiscal position & rigorous
fiscal discipline
● At the end of 2014, general government debt amounted to 41% of GDP and was one of the lowest in the EU
— With a repayment of EUR 1.2bn to the European Commission in January 2015, Latvia’s general government debt is set to decline further relative to GDP in 2015
● Latvia has successfully extended its EUR yield curve with a 7 and 10 year benchmark issues in 2014
● Government debt has smooth redemption profile, while investor base is diversified across Europe and the US
Low government indebtedness &
sound public debt management
● Well capitalised (21.6% CAR) and highly liquid (67,05% liquidity ratio) banking sector (2), predominantly owned by strong international owners
● The banking sector returned to profitability in 2012 and reached an 12,6% ROE in the-end-September 2014, as the quality of loan portfolio has been gradually improving since the mid of 2010(2)
● The three largest banks successfully passed the European Central Bank’s (ECB) comprehensive assessment in 2014, and are subject to the ECB’s Single Supervisory Mechanism since November 2014
Stable and well capitalised banking
sector
Latvia is Benefiting from Eurozone Membership Since January 2014
7
Strong economic rationale
Solid political foundationCompetitive economy with capacity to adjust
● For Latvia as a small, open economy with most of the trading partners in the euro area and EU, EMU membership brought greater exchange rate stability, reduced foreign exchange risks, and eliminated currency conversion costs
● In the long term Euro will give further boost to the economy and living standards by providing stimulus to trade and investments
● Fully integrated in the EU political, economic and financial system
● Eurozone membership has contributed to credit rating upgrades and further eased access to international capital markets, as Latvia re-opened EUR market in 2014 with a 7 and 10 year benchmark bond offerings achieving high oversubscription and record low borrowing costs
● Currently, Latvia benefits from ECB’s quantitative easing policy with the government bonds yields and spreads tightening on the back of ECB’s Public Sector Purchase Program
● Eurozone membership enhances financial stability through the Single Supervisory Mechanism and European Stability Mechanism
● Euro introduction has also helped to improve tax compliance since cash usage in the economy has fallen substantially, as evidenced by cash rate to monetary base dropping from an average of 38.6% in 2013 to an estimated 12.6% in 2014(1)
● Latvia has demonstrated that it has the structural flexibility needed to adjust to external imbalances and remained competitive in the context of a fixed currency regime
Euro brings significant economic gains, reduces risk and enhances stability
Source: (1) Bank of Latvia; Since joining of the Eurozone, the cash ratio is approximated by the ratio, which is based on Latvia’s share to the ECB capital.
Rating Upgrades Reflect Latvia’s Successful Adjustment Efforts
8
Rating agencies have recognised Latvia’s recovery from the crises, it’s continuing institutional strength, bold reforms, flexible labour markets and falling indebtedness
Long-term Foreign Currency Rating development
A/A2
A-/A3
BBB+/Baa1
BBB/Baa2
BBB-/Baa3
BB+/Ba1
BB/Ba2
BB-/Ba3
Source: S&P, Fitch, Moody’s
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
S&P
Fitch
Moodys
Sovereign Moody’s S&P Fitch
Germany Aaa AAA AAA
Belgium Aa3 AA AA
Czech Republic A1 AA- A+
Estonia A1 AA- A+
Slovakia A2 A+ A+
Poland A2 A- A-
Latvia A3 (stable) A- (stable) A- (stable)
Lithuania A3 A- A-
Ireland Baa1 A+ A-
Italy Baa2 BBB- BBB+
Slovenia Baa3 A- BBB+
Spain Baa2 BBB+ BBB+
Hungary Ba1 BB+ BB+
Source: S&P, Fitch, Moody’s
Source: Standard and Poor’s (29 May 2015, 28 November 2014), Fitch (20 June 2014, 5 December 2014, 15 May 2015) Note: (1) Selected quotes. Full report can be obtained from respective rating agency
Credit highlights (Standard & Poor’s) (1)
• “Latvia benefits from generally strong institutional and governance effectiveness.” “In our view, the government will maintain its focus on sustainable public finances, and energy supply diversification, as well as the efficient absorption of EU funds.”
• “Latvia's fiscal position remains a ratings' strength.”• “Latvia has one of the lowest net general government debt levels in
the eurozone.”• “With eurozone membership, Latvia now benefits from the highly
developed capital market of the monetary union as well as the credibility of ECB monetary policy.“
Credit highlights (Fitch) (1)
• “Eurozone membership enhances the sovereign’s creditworthiness with the reduction of foreign exchange rate risks, greater fiscal financing flexibility via the euro’s reserve currency status, and allows Latvian banks access to European Central Bank liquidity facilities.“
• “Latvia is one of the fastest growing eurozone countries, with growth in line with 'A' rated peers.“
• “Latvia’s ratings are currently supported by the sovereign’s stronger fiscal position relative to its ‘A’ range peers, its stable banking sector, as well as Fitch’s baseline assumption that economic growth will stay resilient against geopolitical risks.”
• Over the last 2 years, Latvia benefitted from the rating upgrades to the upper medium grade category from all three major agencies
Latvia’s Economy Continues to Perform Strongly
The Latvian Economy Remains Resilient
10
Contribution to real GDP growth (%)
Economy is in the fifth year of stable growth
Economic growth softened to 2.4% in 2014 and 2.7% in the first nine months of 2015, while the outlook is robust with strengthening of domestic demand projected to be the main growth driver in
2015-2016
Source: Central Statistical Bureau of Latvia
Gross Domestic Product (current prices, EUR billion) and Growth (n.s.a., %)
2010
2011
2012
2013
2014
2015
F
2016
F
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
17,921,450.020,244,383.0
21,810,516.022,762,890.023,580,868.024,146,808.824,871,213.1
-3.8
6.2
4.03.0
2.4 2.43.0
GDP (EUR billion) GDP growth, YoY (%)
Source: Central Statistical Bureau of Latvia, European Economic Forecast, Autumn 2015, European Commission No assurances can be given that forecasted information will prove to be correct and actual results may differ materially
2010 2011 2012 2013 2014 1H 2015
-10
-5
0
5
10
15
20
Private consumption Public consumption GFCF Exports Imports (-)
Manufacturing 12.2%
Real estate activities 12.4%
Wholesale and retail trade, repair of motor vehicles and motorcycles 14.0%
Transportation and storage 10.1%
Information and commu-nication 4.6%
Construction 6.8%
Public administration, de-fence, compulsory social
securit; Education; Human health and social work ac-
tivities 15.3%
Agriculture, Forestry and Fishing 3.3%
Other sectors 21.3%
Source: Central Statistical Bureau of Latvia
Composition of Gross Value Added by sectors in 2014 (%)
Gre
ece
Cypru
s
Port
ugal
Italy
Spain
Cro
ati
a
Fin
land
Slo
venia
Neth
erl
ands
Denm
ark
Cze
ch R
epublic
Fra
nce
Belg
ium
Aust
ria
Bulg
ari
a
Hungary
Sw
eden
Germ
any
Rom
ania
Slo
vakia
Unit
ed K
ingdom
Irela
nd
Luxem
bourg
Malt
a
Pola
nd
Latv
ia
Lit
huania
Est
onia
-5
-3
-1
1
3
5
7
3.9
EU-28 0.7%
Average GDP growth 2011-2014 (YoY, %)
Source: Eurostat
Latvia has been one of the fastest growing EU economies over the last 4 years
In 2014 and first half of 2015 GDP growth was balanced between household consumption and exports
Leading Indicators Point to Strengthening Domestic Demand and Sustained Economic Growth
11
Economic sentiment indicators (Balance, %)
Retail trade turnover, S.A. data (2010=100)
Amid rising consumer confidence retail sales growth has increased to 3.7% in 2014 and further accelerated to 6.3% in the first half of 2015
Source: Eurostat; Note: Data on October 2015
Renewed confidence following recession
Retail trade turnover is steadily increasing
Source: Central Statistical Bureau of Latvia Note: Data on September 2015
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
60
70
80
90
100
110
120
European Union (28 countries) Latvia
Real manufacturing output, S.A. data (2010=100)
Source: Central Statistical Bureau of Latvia Note: Data on September 2015
Manufacturing output has surpassed pre-recession peak level
Jan-
08
May-0
8
Sep-0
8
Jan-
09
May-0
9
Sep-0
9
Jan-
10
May-1
0
Sep-1
0
Jan-
11
May-1
1
Sep-1
1
Jan-
12
May-1
2
Sep-1
2
Jan-
13
May-1
3
Sep-1
3
Jan-
14
May-1
4
Sep-1
4
Jan-
15
May-1
5
Sep-1
5
80
90
100
110
120
130
Consumer confidence indicator (Balance, %)
Source: Central Statistical Bureau of Latvia Note: Data on October 2015
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
-60
-50
-40
-30
-20
-10
0
Consumer confidence rises
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
May
-13
Sep
-13
Jan-
14
May
-14
Sep
-14
Jan-
15
May
-15
Sep
-15
90
100
110
120
130
140
150
Resilient and Well Diversified Exports Continue to Support the Economy
12
Composition of merchandise exports by country (2014)
Exports of goods and services
Source: Central Statistical Bureau of Latvia
Source: Eurostat
The economy has shifted towards tradable sector driven by regained competitiveness
Composition of merchandise exports by sector (2014)
Source: Central Statistical Bureau of Latvia
In 2014 Latvian exports of goods managed to grow by 2.3 percent, in spite of challenging external environment, including Russian sanctions, the falling rouble and slow recovery in Europe
Lithuania 18.7%
Estonia 11.9%
Russia 10.7%
Germany 6.9%Poland 6.5%Sweden 5.4%
UK 5.0%
Denmark 3.8%
Other EU 14,1%
Other 12,9%
CIS (ex. Russia) 4.2%
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
5000000
10000000
15000000
20000000
0
10
20
30
40
50
60
8,363,199.09,513,749.09,739,396.0
8,484,461.09,624,987.0
10,784,387.011,839,004.011,966,975.012,339,356.0
49
42 4045
54 53 54 53 52
Exports of goods and services (EUR billion) Exports of goods and services (% of GDP)
Merchandise exports revenue growth - (2014 over 2009,%)
Source: Eurostat
Latvia remains among the leaders in terms of export growth in EU
Wood and articles of wood 16.6%
Machinery and mechan-ical appliances; electri-cal equipment 16.8%
Prepared foodstuffs 9.4%
Base metals and articles of base metals 9.1%
Mineral products 8.3%
Products of the chemi-cal and allied industries
6.8%
Vegetable products 5.4%
Transport vehicles 5.1%
Live animals and animal products 4.3%
Textiles and textile ar-ticles 4.0%
Other 14.2%
Lithu
ania
Bulgar
ia
Roman
ia
Slovak
ia
Gre
ece
Cypru
sSpa
in
Nethe
rland
s
Hunga
ryIta
ly
Belgium
Franc
e
Finlan
dM
alta
-20
0
20
40
60
80
100
120
98.1
Flexible and Diversified Exports Help Limiting the Impact of Russia’s Economic Downturn and Trade Sanctions
13
Merchandise exports to Russia and Ukraine (% of total exports)
Past experience show high degree of export flexibility
Source: Central Statistical Bureau of Latvia
Merchandise exports to Russia by product category (%)
Exports to Russia are diversified
Impact of Russia’s sanctions and weaker rouble contained
● Direct impact of Russian sanctions on Latvian economy is limited, and exports to Russia affected by sanctions do not exceed 0.2% of GDP
● In 2014, a direct impact of Russia’s sanctions and weaker rouble on Latvia’s economy was not significant. The drop in exports to the CIS, in particularly to Russia, was fully compensated by growth in exports to the EU countries and other markets.
● The provisional data for Jan-Sep 2015 suggest the same trend with the total merchandise export up by 2.0% y-o-y, in spite of 19.0% y-o-y decline in merchandise exports to CIS.
● However, increased uncertainty and cross border spill-overs from sanctions and economic downturn in Russia has an additional negative indirect impact on business and consumer confidence that has materialized in somewhat slower economic growth.
Source: Central Statistical Bureau of Latvia
Sanctions affect only small part of Latvian exports
Source: Central Statistical Bureau of Latvia
Weight adjusted merchandise exports index (2007 = 100)
Drop in exports to Russia and other CIS countries has been compensated by growth in core export markets in 2014
Source: Central Statistical Bureau of Latvia export data
1995 1996 1997 1998 1999 2000 2005 2011 2012 2013 2014 2015 Jan - Sep
0
5
10
15
20
25
30
35
25.3 22.8 21.0
12.16.6 4.2
7.9 10.6 11.4 11.6 10.77.7
5.56.2
3.9
2.9
2.92.4
1.40.9 1.0 0.9 0.7
0.6
Russia Ukraine
0102030405060708090
100 Others
Transport vehicles
Mechanic / Electr appliance
Metals
Textile
Wood
Plastics and articles thereof
Chemical manufacture
Agriculture and food
Beverages
2007 2008 2009 2010 2011 2012 2013 20140
20406080
100120140160180200
+2.3%
+4.6%
-5.0%
Total EU-27 CIS
Improved Competitiveness is a Major Export Growth Driver
Adjustment in labour costs and increased productivity have restored competitiveness
Growing export market shares point to a favourable competitive position
Export market shares (2002=100)
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
80
100
120
140
160
180
200
220
240 Bulgaria
Czech Repub-lic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Repub-lic
Slovenia
Source: World Trade Organization
Source: Eurostat
Unit Labour Cost (ULC) index (2005 = 100; seasonally and working day adjusted)
ULC is increasing slightly in the context of improving non-cost competitiveness and broadly in line with developments in major trading partners
Source: Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2014–2015
The Global Competitiveness Index 2014-2015 Rankings
Finland
Germany
Sweden
Denmark
Belgium
Ireland
Estonia
Spain
Portugal
Czech Republic
Lithuania
Latvia
Poland
Italy
Bulgaria
Romania
Hungary
Slovenia
Slovak Republic
Croatia
45
1013
182529
353637414243
4954
5960
707577
FinlandGermanySwedenDenmarkBelgiumIrelandCzech RepublicEstoniaLatviaLithuaniaSpainSloveniaPortugalPolandHungaryItalyBulgariaSlovak RepublicRomaniaCroatia
34
710
1420
2425262729303234
38404143
5355
Latvia ranks as a top 4 CEE country, and consideration of sustainability indicators lifts Latvia to top 3 in CEE
‒ Global Competitiveness Index Ranking
‒ Sustainability-adjusted Global Competitiveness Index Ranking
14Source: Eurostat, Note: data on 2015/Q2
20
05
Q2
20
05
Q4
20
06
Q2
20
06
Q4
20
07
Q2
20
07
Q4
20
08
Q2
20
08
Q4
20
09
Q2
20
09
Q4
20
10
Q2
20
10
Q4
20
11
Q2
20
11
Q4
20
12
Q2
20
12
Q4
20
13
Q2
20
13
Q4
20
14
Q2
20
14
Q4
20
15
Q2
90100110120130140150160170
REER (deflator: consumer price indices - 37 trading partners)REER (deflator: unit labour costs in the total economy - 37 trading partners)
Real Effective Exchange Rate (REER) index (2005 = 100)
Real Effective Exchange Rate remains in check after significant adjustment
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-20-10
01020304050607080
ULC nomin
Labour Market Remains Highly Flexible
15
Registered Unemployment and Jobseekers Rate (%)
Unemployment rate continues to fall. Recent wage increases will foster domestic demand and household consumption
Unemployment rate continuous to decline together with increased economic activity
Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations
Increase in wages has been accompanied by rise in productivity
Source: Central Statistical Bureau of Latvia
Wages and productivity (historical average=100)
Source: Eurostat
Employment rate (% of population aged 20-64)
On track to reach 73% policy target by 2020
Gre
ece
Ma
lta
Ita
ly
Au
str
ia
Hu
ng
ary
Cy
pru
s
Be
lgiu
m
Fin
lan
d
Ne
the
rla
nd
s
UK
De
nm
ark
Cze
ch
Re
p.
Po
rtu
ga
l
Ge
rma
ny
Sw
ed
en
Cro
ati
a
Slo
ve
nia
Sp
ain
Ire
lan
d
Slo
va
kia
Ro
ma
nia
Esto
nia
Bu
lga
ria
Po
lan
d
La
tvia
Lit
hu
an
ia
-1
0
1
2
3
43.3
Real productivity growth 2010-2014 (per worker, average YoY, %)
Source: Eurostat data
Latvia’s labour productivity has demonstrated one of the strongest growth rates in recent years
EU-28 1.1%
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Jan-
11
Apr-1
1
Jul-1
1
Oct-1
1
Jan-
12
Apr-1
2
Jul-1
2
Oct-1
2
Jan-
13
Apr-1
3
Jul-1
3
Oct-1
3
Jan-
14
Apr-1
4
Jul-1
4
Oct-1
4
Jan-
15
Apr-1
5
Jul-1
5
8
10
12
14
16
18
20
22 Registered unemployment rate (%)
Job seekers rate (%)
2000
Q2
2001
Q1
Q4
Q3
2003
Q2
2004
Q1
Q4
Q3
2006
Q2
2007
Q1
Q4
Q3
2009
Q2
2010
Q1
Q4
Q3
2012
Q2
2013
Q1
Q4
Q3
2015
Q2
0
20
40
60
80
100
120
140
Labour productivity per hour Real hourly wage
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
55
60
65
70
75
62.6
72.6
Employment rate (% of population aged 20-64)
The Pre-crisis External Imbalances Have Been Unwound, Resulting in a More Sustainable Balance of Payments Position
16
Private sector debt (% of GDP, 2013)
Source: Eurostat
Source: Bank of Latvia
Net external debt is progressively declining as a % of GDP
Source: Bank of Latvia
External Debt (Gross: EUR billion, Net: % GDP)
Current Account and its components (% of GDP)
Source: Bank of Latvia
Current Account balance has reached a more sustainable level
Latvia has one of the lowest private sector debts in the Eurozone
Financing of the Current Account (% of GDP)
Financial account flows reflect an orderly deleveraging of the economy
Lith
ua
nia
Slo
va
kia
La
tvia
Slo
ve
nia
Ge
rma
ny
Es
ton
ia
Ita
ly
Au
str
ia
Gre
ec
e
Fra
nc
e
Ma
lta
Fin
lan
d
Be
lgiu
m
Sp
ain
Po
rtu
ga
l
Ne
the
rla
nd
s
Ire
lan
d
Cy
pru
s
Lu
xe
mb
ou
rg
0
50
100
150
200
250
300
350
400
91
Eurozone = 163
Resilience to external risks is increasing as net external debt is declining rapidly
2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2
-30
-25
-20
-15
-10
-5
0
5
10
15
20
Goods Services Primary incomeSecondary income Current account
2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2
0
5000
10000
15000
20000
25000
30000
35000
-10%
0%
10%
20%
30%
40%
50%
60%58.1%
29.2%
Direct investment: Intercompany Lending MFIs (excl. Central Bank)General Government Other sectorsCentral Bank Net Exernal Debt % of GDP (right axis)
2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2
-50
-40
-30
-20
-10
0
10
20
30
Current account Capital account Financial account
Growth Supported by FDI and Healthy Investments Shifts Towards Tradable Sector
17
FDI Stock (EUR billion and % of GDP)
Source: Bank of Latvia
Source: Bank of Latvia
Cumulative FDI geographic diversification in 2Q 2015 (%)
FDI is well diversified by source and sectors
FDI has recovered after slowdown during recession
EU countries have been dominant sources of FDI
FDI distribution by sector 2Q 2015 (%)
Source: Bank of Latvia
Source: Central Statistical Bureau of Latvia
Non-financial investments (constant prices, structure in %)
Structure of investments has shifted towards tradable sector
2008 2010 2012 2014
0
10
20
30
40
50
60
70
80
90
100
2014 17 17
47 4 5
96 5 5
11
6 6 7
10
14 17 18
1723 19
20
28 30 31 27 Industry
Public administration and defence
Transportation and storage
Trade
Real estate and construction activi-tiesInformation and com-munication
Other
Significant FDI inflows were in financial and insurance activities, real estate and manufacturing
2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2
0
2
4
6
8
10
12
25%
35%
45%
55%
65%
75%
8.1 8.1 8.29.4
10.3
11.612.1 12.5 12.8
33%
43%45% 46% 47%
50% 50% 52% 52%
Stock of FDI (EUR billion) Sotck of FDI (% of GDP)
27.0
16.4
11.7
10.6
3.9
3.13.62.7
21.0
Financial and insurance activities
Construction and real estate activities
Manufacturing
Wholesale and retail trade, auto repair
Electricity, air conditioning and utilities supply
Transportation and storage
Agriculture, forestry and fishing
Information and communication
Other
Sweden 19.6
Netherlands 8.0Cyprus 7.1
Russia 6.8
Norway 5.6
Germany 5.4
Estonia 4.5
Denmark 3.6
Lithuania 3.6UK 2.9
Luxembourg 2.9
Other 29.9
Inflation Driven by External Factors Remains Low
18
Currently low level of inflation reflects oil price effects and subdued food prices
Recent developments and outlook
Inflation (CPI)
● The level of inflation reflects moderate growth of economy, and particularly negative contribution of oil price and subdued food prices. Lower global energy and food prices are expected to influence inflation in the short-term.
● In the medium-term, economic growth and a gradual increase in purchasing power could intensify the impact of demand on inflation and that will determine further convergence of the price level to the European Union average.
Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations
Inflation (HICP, YoY, %)
Inflation pressures are contained over the medium-term
Source: Eurostat
12-month average HICP in October 2015 (YoY, %)
Source: Eurostat
Ja
n-1
1M
ar-
11
Ma
y-1
1J
ul-
11
Se
p-1
1N
ov
-11
Ja
n-1
2M
ar-
12
Ma
y-1
2J
ul-
12
Se
p-1
2N
ov
-12
Ja
n-1
3M
ar-
13
Ma
y-1
3J
ul-
13
Se
p-1
3N
ov
-13
Ja
n-1
4M
ar-
14
Ma
y-1
4J
ul-
14
Se
p-1
4N
ov
-14
Ja
n-1
5M
ar-
15
Ma
y-1
5J
ul-
15
Se
p-1
5
-2
-1
0
1
2
3
4
5
October-0.2%
Energy (contribution, pp) Food (contribution, pp) Inflation (y-o-y, %)
Inflation excl. energy and food (y-o-y, %)
Ma
lta
Au
str
ia
Sw
ed
en
Be
lgiu
m
Po
rtu
ga
l
Cz
ec
h R
ep
ub
lic
La
tvia
De
nm
ark
Ne
the
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nd
s
Ge
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ny
(u
ntil 1
99
0 f
orm
er
te..
.
Fra
nc
e
Ita
ly
Es
ton
ia
Ire
lan
d
Fin
lan
d
Lu
xe
mb
ou
rg
Hu
ng
ary
Ro
ma
nia
Cro
atia
Slo
va
kia
Lith
ua
nia
Slo
ve
nia
Sp
ain
Po
lan
d
Bu
lga
ria
Gre
ec
e
Cy
pru
s-1.6
-1.2
-0.8
-0.4
0
0.4
0.8
1.2
0.3
EU-28 0.0%
-10
-5
0
5
10
15
20
October-0.1%
A Stable and Well Capitalised Banking Sector Prepared to Restore Credit Growth
Stable and Well Capitalised Banking Sector (1/2)
20
Latvia’s largest banks successfully passed the comprehensive assessment conducted by the European Central Bank (ECB) in 2014
● The banking system returned to profits in 2012, as the quality of the banks’ loan portfolio increases steadily since the mid of 2010 — The banking sector has reached an 12.6% ROE in the end-September
2015(1)
● While total loan portfolio continues to shrink, the most recent Euro area bank lending survey indicates increasing demand for loans from both household and business sector in the near future(2)
● The three largest banks, including the largest bank focused on non-resident deposit business, were subject to ECB’s comprehensive assessment in 2014, and successfully passed the asset quality review and the forward looking stress tests— Since November 2014 the three largest banks are subject to the Single
Supervisory Mechanism led by the ECB.
Key highlights Assets and Profits of the Banking system
Source: (1) - Financial and Capital Markets Commission; (2) – Bank of Latvia Source: Financial and Capital Market Commission
2011 2012 2013 2014
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Mortgage loans (EUR million) Other loans to households (EUR million)
Rising new household loans point to a credit recovery
Source: Financial and Capital Market Commission
Loans to residents (annual change, %) and contribution to the change (pp)
Source: Bank of Latvia; Note: *Lending data are corrected to exclude one-off effects due to withdrawal of credit institution’s licences (for the period March 2012–May 2013 Parex banka and Krājbanka effects; for the period 2013 June-2014 May GE Money Bank, Mortgage and Land bank and UniCredit Bank effects)
Growth in loan portfolio hasn’t recovered fully, as newly granted loans do not offset amortization of loans issued in pre-crisis years and write offs
New Loans granted to households 2011-2014 (EUR million)
2008 2009 2010 2011 2012 2013 2014 2015 IX*
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
-1,500
-1,000
-500
0
500
1,00033.130.8 31.3
29.8 28.8 29.230.8 31.6
85
-1,100
-513
-254
174 246311 419
Total Assets (EUR billion) Profit (EUR million, rhs)
I2006
IIIIIIVVVIVIIVIIIIXXXIXIII2007
IIIIIIVVVIVIIVIIIIXXXIXIII2008
IIIIIIVVVIVIIVIIIIXXXIXIII2009
IIIIIIVVVIVIIVIIIIXXXIXIII2010
IIIIIIVVVIVIIVIIIIXXXIXIII2011
IIIIIIVVVIVIIVIIIIXXXIXIII2012
IIIIIIVVVIVIIVIIIIXXXIXIII2013
IIIIIIVVVIVIIVIIIIXXXIXIII2014
IIIIIIVVVIVIIVIIIIXXXIXIII2015
IIIIIIVVVIVIIVIIIIX
-20-10
010203040506070
-3.4
Government Financial institutions Non-financial corporations HouseholdsTotal
Stable and Well Capitalised Banking Sector (2/2)
21
Capital Adequacy (%)
Latvia’s banking sector capitalisation is well above regulatory requirements(1)
Source: Financial and Capital Markets Commission Note: *Capital adequacy has been calculated in accordance with the Capital requirements regulation as from Q1 2014 and is not directly comparable to the previous calculations due to methodology differences.** Tier 1 ratio equals CET 1 ratio.
Note: (1) The regulatory minimum capital adequacy comprises 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer Source: Financial and Capital Market Commission
Composition of FCMC liquidity ratio (EUR billion)
● The banking sector is in position to satisfy anticipated increase in demand for loans and restore credit growth, as sector’s capitalisation is high with Tier 1 ratio comprising 18.8% and liquidity ratio amounting to 67% at the end of September 2015, well in excess of regulatory requirements
● At the end-September 2015, around 62%(1) of banking capital, about 48%(2) of assets and nearly 80% of total resident loan portfolio were held by subsidiaries and/or branches of banks from European Economic Area, mostly Nordics, which have maintained their commitment to local subsidiaries, reducing contingent liability risk to government
● In April 2015 Latvia concluded sale of its shareholdings in AS Citadele bank, marking a successful exit from a successor of Parex bank, which was taken over by the Government of Latvia in November 2008
Key highlights
Liquidity remains at high level
Source: (1) - Financial and Capital Markets Commission; (2) - Association of Commercial Banks of Latvia
Latvia’s banking sector consists primarily of foreign owned institutions that have shown commitment to their local subsidiaries and branches, reducing contingent liability risk to the government
Source: Financial and Capital Market Commission
Capital ownership of the Banking system (3Q 2015)
Foreign owned banks
86%
Domestically owned banks
14%
Nordic Banks 62%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-24
-20
-16
-12
-8
-4
0
4
8
12
16
30
35
40
45
50
55
60
65
70
75Other liabilities with residual maturity up to 30 days
Deposits with residual matu-rity up to 30 days
Liabilities to MFIs with residual maturity up to 30 days
Liquid securities
Claims on MFIs with residual maturity up to 30 daysClaims on the BoL with residual maturity up to 30 days
Vault cash
FCMC liquidity ratio (rhs)
%
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
02468
10121416182022
14.2 14.215.2 14.6 15.2 15.1
17 17.4 18.117.2 17.7 17.6 18.2 18.5 18.8 18.9
20.7 20.8 20.6 20.9 20.7 21.3 21.6
11.1 11.212 11.5 12 12
14 1414.9 14.9 15.2 15.2
16.3 16.6 17 17.318 18.1 17.9 18.1 18 18.4 18.4
Total capital ratio (%) CET1 ratio (%) CET ratio (%)
22
Households (EUR million)
Assets of Banks (EUR billion)
Source: Financial and Capital Market Commission. Data on 3Q 2015 Note: *The credit institution’ s license of Parex banka was withdrawn in 2012 Q1 and that of Latvijas Krājbanka – in 2012 Q2
Source: Bank of Latviia
Source: Financial and Capital Market Commission. Data on 3Q 2015 Note: *The credit institution’ s license of Parex banka was withdrawn in 2012 Q1 and that of Latvijas Krājbanka – in 2012 Q2
Non-financial Corporations (EUR million)
Liabilities of Banks (EUR billion)
Source: Bank of Latvia
Quality of Loan Portfolio Improves Steadily
Loan-to-deposit ratio has fallen below 70% on a back of growing deposits base and shrinking loan portfolio
A contraction of the banks’ loan portfolio, which replicates deleveraging of the real sector, has stabilized in 2014
Still decreasing loan portfolio reflects deleveraging of the real sector
1Q2008
2Q2008
3Q
4Q
1Q2009
2Q2009
3Q
4Q
1Q2010
2Q2010
3Q
4Q
1Q2011
2Q2011
3Q
4Q
1Q*2012
2Q*2012
3Q
4Q
1Q2013
2Q2013
3Q
4. 1Q2014
2Q2014
3Q
4Q
1Q2015
2Q
3Q
0
500
1,000
1,500
2,000
2,500
0
5
10
15
20
25
5.3
Loan loss pro-visions
Loans over 90 days past due
Share of loan loss provisions in outstanding loans (rhs)
Share of loans over 90 days past due in outstanding loans (rhs)
%
1Q2008
2Q2008
3Q
4Q
1Q2009
2Q2009
3Q
4Q
1Q2010
2Q2010
3Q
4Q
1Q2011
2Q2011
3Q
4Q
1Q*2012
2Q*2012
3Q
4Q
1Q2013
2Q2013
3Q
4Q
1Q2014
2Q2014
3Q
4Q
1Q2015
2Q
3Q
0
500
1,000
1,500
2,000
2,500
0
5
10
15
20
25
8.6
Loan loss pro-visions
Loans over 90 days past due
Share of loan loss provisions in out-standing loans (rhs)
Share of loans over 90 days past due in outstanding loans (rhs)
%
I2009
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2010
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2011
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2012
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2013
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2014
IIIII
IVVV
IVII
VIII
IXXX
IXII
I2015
IIIII
IVVV
IVII
VIII
IX
0
5
10
15
20
25
30
35
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Liabilities to parent MFI Liabilities to other MFI DepositsProvisions Equity Other liabilitiesLoan-to deposit ratio
I2009
IIIII
IVVVIVII
VIII
IXXXIXII
I2010
IIIII
IVVVIVII
VIII
IXXXIXII
I2011
IIIII
IVVVIVII
VIII
IXXXIXII
I2012
IIIII
IVVVIVII
VIII
IXXXIXII
I2013
IIIII
IVVVIVII
VIII
IXXXIXII
I2014
IIIII
IVVVIVII
VIII
IXXXIXII
I2015
IIIII
IVVVIVII
VIII
IX
0
5
10
15
20
25
30
35
Other assets
Securities
Loans
Claims to MFI
Vault cash and claims to BoL
Banks Engaged in Non-resident Deposits (NRD) Business are Subject to Much Stricter Capital and Liquidity Requirements
Total banking sector non-resident deposits to assets and GDP (%)
Source: Bank of Latvia
FCMC liquidity ratio (%)
Source: Bank of Latvia; Note: * Banks which grant more than 50% of loans to residents and receive more than 50% of deposits from residents ** Other banks
;
Additional liquidity requirements for non-resident servicing banks provide significant liquidity buffers to counter potential liquidity outflows
The FCMC requires NRD focused banks to hold an additional capital buffer ranging from 0.4 to 9.5 percent of risk-weighted assets since mid-2011
Relative amount of NRD has grown since the 2nd half of 2014 and till 1Q of 2015, mainly due to strengthening of USD against EUR
Source: Bank of Latvia, Financial and Capital Market Commission; ¹ - as of 31 December 2014
Growth rates of resident and non-resident deposits (%)
Source: Bank of Latvia
Growth rate of non-resident deposits has stabilized, and has been in line with a growth rate of resident deposits in recent years
23
Banks assets (with foreign branches) at the end of September 2015 (%)
Banks which are focused on actively engaging in NRD business have little domestic operations
Source: Bank of Latvia; Note: * Credit institutions which grant more than 50% of loans to residents and receive more than 50% of deposits from residents ** Other banks
Total lending to residents
Total resident deposits
9,5
I 2011
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2012
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2013
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2014
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2015
II III
IV
V VI
VII
VIII
IX
-15-10-505
101520253035
Anual growth rate of non-resident deposits (corrected for exchange rate fluctuation)Anual growth rate of resident deposits
1Q2011
2Q 3Q 4Q 1Q2012
2Q 3Q 4Q 1Q2013
2Q 3Q 4Q 1Q2014
2Q 3Q 4Q 1Q2015
2Q
20
25
30
35
40
45
50
55
20.421.9
23.8 25.026.9
29.1 29.8 30.231.7 31.5 32.1 31.6
33.5 34.135.6
37.239.1 38.1
33.5 34.135.7 36.6 37.1
38.8 38.9 39.340.7 39.8 39.6 39.6 39.7 40.9
43.9
47.650.5
49.0
NRD to Assets NRD to GDP
56
44
Residents servicing banks*
Banks focused on NRD business**
13.3
1Q2008
2Q3Q4Q1Q2009
2Q3Q4Q1Q2010
2Q3Q4Q1Q2011
2Q3Q4Q1Q2012
2Q3Q4Q1Q2013
2Q3Q4Q1Q2014
2Q3Q4Q1Q2015
2Q3Q
0
20
40
60
80
100
67.0
53.5
78.3
Total banking sector Resident servicing banks*Non-resident servicing banks** Minimum requirement for liquidity ratio
Outstanding Track-record of Fiscal Consolidation and Structural Reforms
Latvia is Committed to Policy Implementation and Reforms
25
Latvia’s macroeconomic adjustment programme achieved its goals, but further reforms remain as permanent component of the Government’s policy
Successful implementation of adjustment programme (2008-2011)
Correction of budgetary imbalance achieved through fiscal consolidation
Fiscal targets constantly exceeded, public finance on sound foundations
Investor and consumer confidence restored
Further Key Policy Goals
Fiscal DisciplineContinue implementation of fiscal discipline framework and
conduct fiscal policy in sustainable manner
Absorption of EU fundsEfficient use of EU funds to stimulate economic growth and
promote competitiveness
Structural ReformsEnsure long-term stability and sustainability of financial and social
systems
Public Sector EfficiencyEnhance management of state-owned assets, improve tax
compliance and reduce informal economy
Bank supervision improved
0
2
4
6
8
10
12
Latvia is Determined to Ensure Fiscal Sustainability
26
Conduct policies in a fiscally responsible way equally renewing quality and amount of public services and addressing potential risks
Recent results and fiscal forecast
Source: Ministry of Finance
● In 2015 the deficit is planned to be at 1.4% of GDP which is in line with EU fiscal discipline rules;
● Draft Medium-term Budgetary Framework Law 2016 – 2018 was elaborated by implementing substantial net deficit-reducing measures:
─ A number of revenue-increasing measures (2016 – 0,8%, 2017 – 1,2%, 2018 – 1,6% of GDP), which include cancellation of planned Personal income tax cut and introduction of Solidarity tax
─ Revision of State budget base expenditure for 2016 with horizontal expenditure reduction of 3%
─ Additional financing for priority sectors – external and internal security, healthcare and education.
● Aforementioned measures ensure that Draft Medium-term Budgetary Framework Law is not only in compliance with national and EU fiscal discipline rules, but also addresses (I) deterioration in regional security situation, (II) income inequality, shadow economy and provision of financing for other government priority sectors.
General target of fiscal policy in Latvia
0
2
4
6
8
10
12
Budget Balance – 2014 (% of GDP)
Prudent fiscal management with one of the lowest deficits in EU
Source: Eurostat
EU-28 -3%
Source: Ministry of Finance
General Government nominal balance (% GDP)
Draft Medium-term Budgetary Framework Law 2016 – 2018(* - assessment; ** - target)
Ensure responsible and sustainable fiscal policy, respecting fiscal discipline
Specific targets 2016 – 2018 Course of actions
Legal framework (FDL) and institutions (Fiscal council) have been created. Alterations are not foreseen. Implementation is crucial
Facilitate improvements in quality of life of citizens;
Foster favourable environment for economic development
Provide adequate capacity for internal/ external security given geopolitical risks
Tax policy measures;
Rational distribution of public resources towards medium term budget priorities
Increase of defence expenditure on faster pace
2011 2012 2013 2014 2015* 2016** 2017** 2018**
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
-3.3
-0.8 -0.7
-1.5 -1.4
-1 -1-0.8
Cyp
rus
Por
tuga
l
Spa
in
Bul
garia
Uni
ted
Kin
gdom
Cro
atia
Slo
veni
a
Irel
and
Fran
ce
Gre
ece
Pol
and
Finl
and
Bel
gium
Ital
y
Slo
vaki
a
Aus
tria
Hun
gary
Net
herla
nds
Mal
ta
Cze
ch R
epub
lic
Sw
eden
Latv
ia
Rom
ania
Lith
uani
a
Ger
man
y
Est
onia
Luxe
mbo
urg
Den
mar
k
-10
-8
-6
-4
-2
0
2
-1,5
0
2
4
6
8
10
12
Long Term Sustainability of Public Finances
27
Recent measures taken by Latvia address sustainability of the age-related expenditure in the long term
Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia
Source: The State Social Insurance Agency
● Since 2001 Latvia maintains a reformed pension system consisting of three tiers, whereby state compulsory unfunded pension scheme (the 1st tier) is complemented with a state funded pension scheme (the 2nd tier) and private voluntary pension scheme (the 3rd tier)
● In 2012 a number of progressive measures were introduced to address long term sustainability of the pension system:— starting with 2014 retirement age is gradually increased by 3 months each
year until it reaches 65 years in 2025;— minimum contribution period to secure full pension was increased from 10 to
15 years starting from 2014 and up to 20 years starting from 2025;— contributions to the funded, e.g. 2nd tier, pension scheme increased from 2%
to 4% in 2013, and to 5% in 2015, and are planned to rise further to 6% in 2016.
Latvia’s Pension System and recent reforms Age-related spending, projected change in percentage points of GDP, 2013-2060
Latvia is well positioned to withstand fiscal challenges arising from the aging population
Source: European Commission Ageing Report, May 2015
Croat
ia
Gre
ece
Denm
ark
Italy
Eston
iaSpa
in
Portu
gal
EU28
Lithu
ania
Irelan
d
Austri
a
Slovak
ia
Ger
man
y
Luxe
mbu
rg
Sloven
ia
-3.0
-1.0
1.0
3.0
5.0
7.0
-1.6
EU-28 1.8%
2nd tier pension scheme will gradually take over part of the pension obligations from the public, e.g. 1st tier, pension scheme
Source: European Commission Ageing Report, May 2015
0
2
4
6
8
10
12
Age-related spending, in percentage points of GDP, 2013
Latvia’s age-related spending is one the lowest in the EU
10.0
15.0
20.0
25.0
30.0
16.7
EU-28 24.6%
The 2nd Tier Pension Net Assets under Management (EUR billion and as % of GDP)
2007 2008 2009 2010 2011 2012 2013 20140.0
0.5
1.0
1.5
2.0
2.5
0.0%
2.5%
5.0%
7.5%
10.0%
0.3
0.7
1.01.2 1.2
1.51.7
2.0
1.5%
2.7%
5.3%
6.5% 6.1%6.6%
7.2%
8.3%
2nd tier pension net assets (EUR billion) 2nd tier pension net assets (% of GDP)
Practical Actions and Strong Commitments are in Place to Continue Structural Reforms Aiming to Improve Public Finances
28
Structural reforms to ensure efficient use of budgetary and public resources is contributing to fiscal sustainability
Financial System Banking system recapitalised, role of regulator strengthened, deposit guarantee laws
streamlined
Public Administration Making public administration more efficient, unified public wage grid to keep wages under
control, optimization of public services
Reforming management of state-owned enterprises
Source: Ministry of Economy, Ministry of Finance; OECD Review of the corporate governance of state-owned enterprises Latvia
Improving tax compliance and combating shadow economy
Source: Ministry of Finance, Ministry of Economy; (1) - The overall tax burden is estimated at 28% of GDP in 2014;
● The Tax Policy Strategy aims to increase the overall tax burden to 1/3 of GDP(1) mainly through increasing the tax compliance.
● Recently introduced measures include
— Since 2015 under certain criteria in order to avoid tax fraud and tax avoidance, company board members may become personally responsible for tax debts of their companies;
— Improvements of the exchange of information between Financial Investigation Unit and Tax administration to improve business environment and fair tax collection is on the political agenda.
● January 2015 increase in the national minimum wage from EUR 320 to EUR 360 shall have a positive effect on tax collection because it reduces the prevalence of envelope, e.g. underreported, wages.
● Moreover, changes to the public procurement law to be introduced in 2015 will require the main contractors and sub-contractors to have no tax debts and to have wage levels comparable to an industry’s average.
● In 2014 Latvia established a conceptual model (based on OECD guidelines) and adopted a legislation to reform the management of state-owned enterprises.
● The aim of the reform is to increase the efficiency and corporate governance of capital companies owned by the public sector— Latvian state fully owned 66 enterprises and had a decisive influence
in 5 companies at the end of 2014;
— an aggregate value of the state participation in the capital of the state-owned enterprises amounted to 18.2% of GDP.
● The reform envisages appointment of institution responsible for monitoring financial performance and implementation of corporate governance principles to increase the accountability, transparency, and return on capital (e.g., dividends) of state-owned companies— dividend income from state-owned enterprises amounted to 1.6% of
general government budget revenues in 2014 and the budget planned for 2015 totals 1.4% of general government budget revenues.
Government Policy Measures Building Foundation for the Sustained Growth
29
Structural reforms in education, employment and judicial environment help improving labour market and business conditions, while efficient use of EU funds will promote competitiveness
and stimulate economic growth
Education & Social Sector Education and healthcare system reforms aimed to increase efficiency
Business Environment Addressing labour market issues through education and employment policies
Source: National Reform Programme 2015; European Commission, Country Report Latvia 2015
Allocation of EU funds for 2014-2020 by priority axes
26%
13%
12%11%
11%
10%
7%
4%3%
4%
Promoting sustainable transport and removing bottlenecks in key network infrastructuresProtecting the environment and promoting resource efficiencyInvesting in education, skills and lifelong learn-ingSupporting the shift towards a low-carbon economy in all sectorsStrengthening research, technological de-velopment and innovationPromoting social inclusion and combating povertyEnhancing the competitiveness of small and medium-sized enterprisesEnhancing access to, and use and quality of, information and communication technologiesPromoting employment and supporting labour mobilityOther areas
Source: Ministry of FinanceSource: Ministry of Finance
EU cohesion policy accompanies structural reforms
● Latvian economy and the goals envisaged by the National Development Plan are strongly supported by implementation of EU cohesion policy and effective utilization of EU structural funds
● EUR 4.4 billion were allocated to Latvia in EU structural assistance for the 2014 - 2020 programming period. During 2007 - 2013 programming period Latvia has absorbed EUR 4.5 billion of structural funds
● The funds were allocated and will be utilised across major nine priority areas with an aim to enhance competitiveness of Latvia’s economy, and to build foundation for the sustained growth
Legal Environment
Improving judicial system by strenghtening role of Judicial Council, strenghtening competence of courts and law enforcement authorities and reorganising the position of insolvency administrators
Labour Market SME access to financing, export oriented programmes, reduction of administrative burden
Structural Reforms and High Institutional Strength Facilitate Favorable Business Environment and Encourage Investments
30
World Bank Worldwide Governance Rankings
Strong Governance supports the Economy and Business
Source: World Bank, 2013 Rankings
Latvia is consistently ranked as a top 2 CEE country
Source: World Bank, Doing Business 2015
Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
70
65
76
80
73
64
66
63
68
69
66
63
61
75
76
75
75
76
Income Group Average Regional Average Latvia
Denmark
United Kingdom
Sweden
Germany
Austria
Lithuania
Netherlands
Poland
Slovak Republic
Belgium
Romania
Hungary
46
89
1113
1417
2123
2425
2723
3233
3738
4244
4851
5456
Adjusted Top Statutory Tax Rate on Corporate Income (2014), %
Bulgaria
Cypru
s
Lithuania
Slove
nia
Poland
Finla
nd
Estonia
Slova
kia
Denmark
Austria
Luxem
bourg
Germ
any
Portugal
Malta
1013 13
15 15 16 1719 19 20 20 21 21 21 22 22
25 25 25 26
29 30 3031 32
34 35
38Latvia has one of the lowest corporate Income tax rates in the EU
Source: Eurostat, Taxation trends in the European Union 2014
Implicit tax rate on capital (2012), %
Source: Eurostat, Taxation trends in the European Union 2014
EstoniaLithuania
LatviaIreland
NetherlandsSlovakia
Czech RepublicPoland
SloveniaHungary
GermanyAustria
SpainCyprus
PortugalFinland
SwedenBelgium
United KingdomItaly
France
8.19.89.9
13.013.7
16.718.0
19.019.6
21.422.2
25.025.3
26.029.529.9
30.635.535.7
37.046.9
Light taxation of capital provides stimulus to business investments
World Bank ‘Ease of Doing Business’ Ranking
Government Debt and Funding Strategy
Public Debt Remains at Moderate Levels
32
Latvia remains committed to keeping government debt at moderate levels
● Fiscal consolidation and reduction of the deficit along with economic growth has helped stabilise levels of government debt
● General government debt is amongst the lowest in the EU at 41% of GDP at the end 2014— General government debt increased slightly in 2014 due to pre-
funding for 2015, but has fallen sharply with a repayment of EUR 1.2 billion to European Commission in January 2015
— Latvia enjoys one of the lowest debt servicing costs across the region, significantly lower than the EU and Eurozone averages
● Since March 2014 Latvia participates in the European Stability Mechanism, which provides additional financial stability to its members
Key Characteristics of Latvia’s Government Debt
Interest costs (% GDP)
NB: General government debt includes that of central government, local government and social security funds. The debt ratio is calculated in accordance with European System of Accounts (ESA) standards, a methodology which differs from that used to calculate the cash flow based budget deficit numbers
Source: Eurostat, The Treasury; Forecasts: 2015 – 2017 General Government Debt as % of GDP are the Treasury forecasts
General Government Debt (EUR million; Year End, % of GDP, ESA methodology)
General Government Debt – 2014 (% GDP)
Conservative debt position
Source: Eurostat
Eston
ia
Bulgar
ia
Latv
ia
Czech
Rep
ublic
Denm
ark
Slovak
ia
Nethe
rland
s
Ger
man
y
Sloven
ia
Croat
ia
Franc
e
Belgium
Cypru
sIta
ly
0
50
100
150
200
41%
Conservative debt position
EU-28 86.8%
2010 2011 2012 2013 2014 2015 (f) 2016 (f) 2017 (f)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
5,000
10,000
15,000
8,418 8,700 9,079 8,8769,861 9,137
10,126 9,965
46%43%
41%38%
41%
36%38%
35%
2011 2012 2013 2014 2015(F) 2016(F)1.00
1.50
2.00
2.50
3.00
3.50
Latvia Lithuania EU-28 Eurozone
Source: European Economic Forecast, Autumn 2015, European Commission
Central Government Debt Profile
33
International Loan Programme has been largely refinanced in international capital markets, while government debt redemptions remain moderate in the short-term
Source: The Treasury, as of the end of September 2015Source: The Treasury
Debt Redemption Profile (30 September 2015, EUR million)
Source: The Treasury; Note: Total borrowing requirement 2016-2018 is estimated at EUR 3.5 billion.
Debt redemptions and borrowings (EUR billion)
Debt structure by instruments (EUR million)
Total foreign debt82%
Total domes-tic debt
18%
Eurobonds63%
Foreign loans from financial
institutions (incl. EC)
20%
Domestic securities
14%
Other domes-tic debt
4%
Source: The Treasury
Composition of Central Government Debt (as of September 2015)
2011 2012 2013 2014
-2
-1
0
1
2
3
0.3
1.7 2.00.6
0.4
0.4
0.4
-0.7 -0.4 -0.4-0.4
-1.2-1.0
-0.4
Eurobond issues Domestic securities issuesEurobond redemption Domestic securities redemptionRepayment of IFI's loans Net borrowings
Debt redemption for 2015 was largely pre-funded in 2014
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
Sep-1
5
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Other
Loans from financial institutions (incl.IMF and EC loans)
Eurobonds
Domestic T-bonds
Domestic T-bills
Oct - Dec 2017 2019 2021 2023 2025 2027 >=2029
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800Domestic debt redemption
Other external debt liabili-ties
World Bank loan (Program)
EC loan (Program)
Eurobonds
Conservative Borrowing Strategy, Based on Pre-funding
34
Source: The Treasury; (1) - This parameter is measured annually as of the end of year - outstanding amount of domestic debt securities as of 31 December 2013 was EUR 967 million; (2) - Fixed rate debt with a maturity in excess of one year; (3)- central government debt at the end of the period less the liquid assets that are not classified as risky, and increased by guarantees classified as risky, and derivative financial instrument liabilities not classified as risky
● Goal:
— To ensure continuous borrowing opportunities in the international and domestic financial markets on optimal terms and conditions
● Principles:
— Flexibility (towards timing, maturities and currencies)
— Achieve balance between risks and costs
— Consistency and transparency to markets
● Tasks:
— Foster development of the domestic financial market in order to promote its gradual integration into the single financial market of the euro area
— Broaden the investor base with borrowings in the international financial markets, maintain regular communication with the investor community
Medium-term Borrowing Strategy
Source: The Treasury
Parameters Strategy 30 Sep 2015 31 Dec 2014
Domestic debt securities at the end of year
Not less than at the end of preceding year
EUR 1,189 million(1)
EUR 1,047 million
Maturity profile (%)
— up to 1 year ≤ 25% 10,1% 21%
— up to 3 year ≤ 50% 30,6% 36%
Share of fixed rate(2) ≥ 60% 93,2% 82%
Macaulay duration (years)
3.65 - 5.15 4.54 4.16
Net debt(3) currency composition
100% EUR with a deviation of +/- 5%
100% 100%
Debt portfolio management
Source: The Treasury
Outstanding Benchmark issues
Curr Issue Date Maturity Date Issue Size Cpn (%)
EUR
05/03/2008 05/03/2018 EUR 400m 5.500
21/01/2014 21/01/2021 EUR 1,000m 2.625
30/04/2014 30/04/2024 EUR 1,000m 2.875
USD
22/02/2012 22/02/2017 USD 1,000m 5.25
12/12/2012 12/01/2020 USD 1,250m 2.75
16/06/2011 16/06/2021 USD 500m 5.25
In 2014 Latvia has successfully extended its EUR curve with 7 and 10 year benchmark issues
Source: The Treasury
Broadening of investor base (allocation of Latvia’s 2024s)
● In both of its 2014 EUR benchmark offerings Latvia achieved a broad distribution in terms of investor centres as well as investor types, with a high share of allocations going to the real money institutional investors
47%
18%
17%
16%
1% 1%
Germany/Austria
CEE
Switzerland
UK
Asia/ME
Other
46%
27%
18%
6%
3%
Fund Manager
Insurance/Pension funds
Banks/Private banks
Central banks
Hedge funds
Latvia has prudent debt management strategy
35Source: The Treasury
Achievements in the domestic market
● Primary dealer system in Latvia is operating since 11 February 2013● The outstanding amount of domestic T-bonds and T-bills constituted
EUR 1.2 billion as of September 2015● The Treasury maintains regular domestic debt securities auctions by
offering T-bills and T-bonds— In 2014 a new long-5-year T-bond programme was opened, and
in January 2015 a new 3-year and in June 2015 a new 5-year T-bond programmes were opened
— In 2014 a positive net issuance amounted to EUR 80 millions— For the first time in history Latvia achieved a negative yield
(-0.012%) on its 6 months T-bills benchmark auction in April 2015 ● In 2014 Savings Bonds were introduced to target retail investors
— EUR 5 million were outstanding as of the end of September 2015
Domestic securities outstanding by original maturity (as of 30 September 2015)
Domestic Market Continues to Perform Strongly
Demand is steady and average yields remain low
20
13
/01
20
13
/03
20
13
/05
20
13
/07
20
13
/09
20
13
/11
20
14
/01
20
14
/03
20
14
/05
20
14
/07
20
14
/09
20
14
/11
20
15
/01
20
15
/03
20
15
/05
20
15
/07
20
15
/09
20
15
/11
-0.1
0.4
0.9
1.4
1.9
2.4
0.020.045
0.201
0.863
6 months* 12 months 3 years 5 years
Source: The Treasury Bid-to-Cover ratio: Bid Amount to State Treasury offered amount* - Note: Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9
months.
Domestic T-Bill and T-Bond Competitive Multi-Price Auctions
Weighted Average Yields on Domestic securities auctions (%)
Source: The Treasury; * Note - Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9 months.
Low yields reflect continued investor confidence
Savings bonds <1%12 months T-bills 7%
3 years bonds 27%
5 years bonds 42%
10 years bonds 21%
11 years bonds 2%
12
-m 5-y
5-y
6-m
*
3-y
3-y
3-y
6-m
*
3-y
3-y
5-y
3-y
5-y
12
-m 5-y
3-y
6-m
*
November Jan-Feb Mar-Apr May
June July Sept-Oct
Nov
2014 2015
05
1015202530354045
123456789
Amount sold, million EUR (LHS) Bid-cover Ratio (RHS)
Credit Positioning of Latvia
Latvia’s Strong Credit Fundamentals vs. its Peer Group Inside and Outside of the Eurozone
37
Latvia Lithuania Poland Slovakia Czech Republic
Belgium EU-28(3)
Credit Ratings and outlook (M/S&P/F)
A3/A-/A-(st/st/st)
A3/A-/A-(st/st/st)
A2/A-/A-(st/pos/st)
A2/A+/A+(st/st/st)
A1/AA-/A+(st/st/st)
Aa3/AA/AA(st/st/neg)
Debt/GDP(1)
2013 2014 2015(F)
Deficit/GDP(1)
2013 2014 2015(F)
GDP growth(1)
2013 2014 2015(F)
GDP per capita(2) (EU-28=100) 2012 2013 2014
CA/GDP(1)
2013 2014 2015(F)
39.1 38.854 54.6 45.2
105.187.3
40.6 40.755.9 53.5 42.7
106.788.6
38.3 42.9 50.4 52.7 41
106.787.8
-0.9
-2.6
-4
-2.6
-1.3
-2.9-3.3
-1.5-0.7
-3.3-2.8
-1.9
-3.1 -3
-1.5 -1.1
-2.8 -2.7-1.9
-2.7 -2.5
33.5
1.3 1.4
-0.5 0 0.2
2.43 3.3
2.52
1.3 1.42.4
1.7
3.5 3.2
4.3
1.31.9
60 69 66 74 82
120
64 73 67 75 82
119
64 74 68 76 84
119
-2.1
1.4
-0.9
0.7
-1.1
1 1.5
-2
3.9
-1.1 -0.8-2
0.81.6
-1.8-0.8 -0.5
0
-2.5
1.8 2.2
Source: (1) - European Commission, Autum Forecast 2015(2) - Eurostat(3) - European Commission in the forecast years 2015-16 publishes aggregates for general government debt on a non-consolidated basis (i.e. not corrected for intergovernmental loans). To ensure consistency in the time series, historical data are also published on the same basis. For 2014, this implies 1.8 percentage points higher debt-to- GDP ratio in the EU-28 than the consolidated general government debt ratio published by Eurostat.
Conclusion
39
Strong and Sustainable Economic Growth
(3,9% average in the last 4 years)(1), Decreasing Unemployment and
Increasing FDI
Resilient Export Growth has improved the Balance of Payments
and led to a Sustainable Current Account Balance, while rapidly
Declining External Debt reduced vulnerability to external risks
Well Capitalised Banking Sector is in Position to Restore Credit Growth
and to Promote Economic Development
Latvia’s Economy remains Competitive and is supported
by the Tradable sector
Strong Governance Indicators and Institutional Strengths increased
by joining the Eurozone
Long Term Growth is reinforced by Predictable Public Policies as the
Government has established a Track Record of Successful Structural
Reforms
Sustainable Debt Levels accompanied by Prudent Fiscal
Management
Latvia recovered from the economic recession and managed to build-up an outstanding fiscal position, together with a sustained growth, based on an increased competitiveness and
strengthening domestic demand
Latvia is benefiting from Eurozone Membership since 1 January 2014
Source: (1) - Central Statistical Bureau of Latvia
Latvia Investment Highlights
40
Thank You