Republic of Latvia

Resilient, flexible and well

diversified economy

December 2017

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2

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For convenience, an exchange rate of EUR/LVL 0.702804 is used this presentation; it is the exchange rate Latvia used to adopt the euro as a legal tender on 1 January 2014.

Presentation Outline

1. Overview 4

3. Latvia’s Economy: Flexibility and Resilience 16

2. Fiscal Policy 8

5. Government Debt and Funding Strategy 34

4. A Highly Profitable, Stable and Well Capitalised Banking Sector 28

6. Conclusion 40

3

Overview

Latvia: Key Facts and Milestones

5

Key Facts about Latvia

Latvia: Milestones on the Road to Political Stability and Performance

• Territory: 64,573 (4) sq. km

• Capital: Riga (population 0.64 million(4))

• Population (1/1/2017): 1,95 million(4)

• GDP per capita (2016): EUR 12.691 (4)

• Nominal GDP (2016): EUR 24.87 billion(4)

• Currency: Euro

• Borders: Estonia, Russia, Belarus, Lithuania

• Main economic sectors:

— Services (71%(4) GDP in 2016): logistics, IT, financial services, trade

— Manufacturing (13%(4) of GDP in 2016): wood, metal, electronics, pharma, food

Becomes a

Member of

the UN

Sep

1991

Mar

2004

May

2004

Entry into EU

Admitted to

NATO

1991

Latvia

Regains

Independence

Dec 2011/

Jan 2012

January

2014

Latvia joins

Eurozone/

EMU

Latvia’s

Presidency of

EU Council

OECD

membership

High income(1), advanced economy(2), part of Northern Europe (3)

Source: (1) - World Bank classification; (2) - IMF classification;

(3) UN classification; (4) - Central Statistical Bureau of Latvia

July

2016 Dec

2008

Approval of Loan

Programme with

IMF, EC and

Bilateral Lenders

International Loan

Programme with

IMF/EC Closed

Successfully

1991 Sep 1991 Mar 2004 May 2004 Dec 2008 Dec 2011/

Jan 2012 Jan 2014

Jan-Jun

2015 July 2016

Latvia Belongs to the Core of Europe

EU Members

OECD Members

Eurozone Members

NATO Members

Latvia

France

Estonia

Germany

Luxembourg

Spain

Slovenia

Slovakia

Italy

Belgium

Portugal

Greece

Netherlands

Malta

Cyprus

Austria

Ireland

Finland

Lithuania

Poland

Czech Republic

Bulgaria

Romania

Croatia

United Kingdom Denmark

Hungary

Sweden

6

Sovereign Moody’s S&P Fitch

Belgium Aa3 AA AA-

Czech Republic A1 AA- A+

Estonia A1 AA- A+

Slovakia A2 A+ A+

Poland A2 BBB+ A-

Latvia A3 (stable) A- (positive) A- (stable)

Lithuania A3 A- A-

Ireland A2 A+ A+

Italy Baa2 BBB BBB

Slovenia Baa1 A+ A-

Spain Baa2 BBB+ BBB+ 2011 2012 2013 2014 2015 2016 2017

S&P

Fitch

Moodys

Investment grade

Credit rating challenges

● The country's weaker external finances, lower per capita income,

and smaller, more open economy than the 'A' median constrain the

ratings

● Social expenditures and defence spending could be higher than

anticipated

● External financing risks and geo-political tensions with Russia

continue to constrain the ratings

Latvia`s credit rating has stable position

7

Rating agencies acknowledged Latvia’s low general government debt, fiscal deficit and

institutional strength

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

Source: S&P Global (22 September 2017), Fitch (28 April 2017). Note: (1) Selected quotes. Full report can be obtained from respective rating agency

Key strengths of the Latvian sovereign credit rating

● Latvia's economic growth unexpectedly outperformed our base case

and continued at a faster pace than currently anticipated, without

raising worries about overheating.

● Eurozone membership enhances Latvia’s creditworthiness by

underpinning economic policy coherence and credibility, improving

fiscal and external financing flexibility, reducing foreign-currency risks

on balance sheets and giving Latvian banks access to European

Central Bank liquidity facilities.

● Being member of the OECD

● Stable and improving banking sector

Source: S&P, Fitch, Moody’s Note: Data on January 15, 2018

Fiscal Policy

Latvia is Determined to Ensure Fiscal Sustainability

9

Conduct policies in a fiscally responsible way equally renewing quality and amount of public

services and addressing potential risks

2018 BUDGET: EXPENDITURE MEASURES (EUR, million)

Source: Ministry of Finance

Prudent fiscal management with balanced budget

Budget Balance – 2016 (% of GDP)

Source: Eurostat

EU-28 -1.7%

Source: Ministry of Finance. Note- * incl. 0,4% of GDP – a one-off capital transfer to settle government’s liabilities

towards the EBRD

General Government nominal balance (% of GDP)

EXPENDITURE REVIEW RESULTS (EUR, million)

2018

2019

2020

336,3

367,5

400,8

• Healthcare services

• Strengthening national security

• Demographic measures, support to foster

families and guardians, strengthening social

programs

• Road maintenance and construction

• Remuneration of higher education teachers,

additional funding for fundamental and applied

research

• Eastern border and strengthening internal

security

• Support to cultural projects and media,

implementation of integration measures

• Combating shadow economy, modernizing tax

information services

52,5 47,6

28,6 25,4

0

10

20

30

40

50

60

70

80

90

2018 2019

Reallocating resources to common government priorities

Internal resources for own sectoral priorities

0,0

- 5,0

- 4,0

- 3,0

- 2,0

- 1,0

0,0

1,0

2,0

Spa

in

Fra

nce

Ro

ma

nia

Un

ited

Kin

gdo

m

Belg

ium

Ita

ly

Pola

nd

Port

ug

al

Fin

lan

d

Hu

ng

ary

Slo

venia

Slo

vakia

Austr

ia

De

nm

ark

Cro

atia

Irela

nd

Bulg

ari

a

La

tvia

Esto

nia

Lithu

ania

Cyp

rus

Ne

the

rla

nds

Cze

ch R

ep

ub

lic

Gre

ece

Ge

rman

y

Sw

eden

Malta

Lu

xe

mb

ou

rg

Source: Ministry of Finance

-3,3

-1,0 -1,0

-1,6 -1,3

0,0

-0,9 -1,0

-0,9

-0,4

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

2011 2012 2013 2014* 2015 2016 2017** 2018** 2019** 2020**

** - target,

incl. potential impact of new tax

reform

Medium Term

budget

2018 – 2020

Long Term Sustainability of Public Finances

10

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, to 5% in 2015, and 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

EU-28 1.4%

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

Age-related spending (in % of GDP, 2013)

Latvia’s age-related spending is one the lowest in the EU

The 2nd Tier Pension Net Assets under Management

(EUR billion and as % of GDP)

1,2 1,5

1,7

2,0

2,3

2,8

6,2% 6,7%

7,4%

8,5% 9,6%

11,0%

-0,5%

2,0%

4,5%

7,0%

9,5%

12,0%

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2011 2012 2013 2014 2015 2016

2nd tier pension net assets (EUR billion) 2nd tier pension net assets (% of GDP)

–1.7

-3,0

-1,0

1,0

3,0

5,0

7,0

Cro

atia

Gre

ece

Latv

ia

Fra

nce

Denm

ark

Cyp

rus

Italy

Sp

ain

Bu

lga

ria

Po

rtuga

l

Esto

nia

Sw

eden

Hungary

Po

lan

d

EU

28

Irela

nd

Rom

ania

Lith

uania

United K

ingdom

Fin

lan

d

Au

str

ia

Cze

ch R

epublic

Neth

erla

nds

Slo

vakia

Germ

any

Be

lgiu

m

Luxem

burg

Ma

lta

Slo

venia

16.2

10

15

20

25

30

Rom

ania

Latv

ia

Lith

uania

Esto

nia

Slo

vakia

Bu

lga

ria

Cze

ch R

epublic

Luxem

burg

Hungary

Cyp

rus

Po

lan

d

Cro

atia

Irela

nd

United K

ingdom

Ma

lta

Germ

any

Slo

venia

Sp

ain

Neth

erla

nds

Sw

eden

Po

rtuga

l

Be

lgiu

m

Au

str

ia

Italy

Gre

ece

Denm

ark

Fra

nce

Fin

lan

d

EU-28 25,6%

Government Policy Measures:

Building Foundation for Sustained Growth

Structural reforms in education, employment and judicial environment help improving labour

market and business conditions

Education, Research and

Innovations Increasing the quality of education and research, fostering investments in R&D and innovations

Addressing labour market issues through education and employment policies; decreasing tax

burden on labour; activating social benefit recipients; improving accessibility, quality and

efficiency of healthcare

Source: National Reform Programme 2016; European Commission, Country Report Latvia 2016; EU Council’s recommendations 2016; OECD Economic Survey on Latvia 2015

Healthcare reform Education reform – more effective distribution of expenditure

(in % of GDP, 2015)

Public Administration and

Judiciary

Increasing efficiency of public administration, strengthening the conflict of interest prevention

regime, improving tax compliance; improving the insolvency regime and accountability of

insolvency administrators

Labour Market, Social

Policy and Healthcare

Business Environment SME access to financing, export oriented programmes, reduction of administrative burden

• Aimed to improve governance, clearer principles of resource

allocation and more efficient use of funds;

• Implementation of Public Health Guidelines 2014 - 2020 to

encourage the health care system availability, quality and cost-

effectiveness;

• Healthcare long term funding reform.

Stability and Growth Pact deficit derogation for 2017 was granted

to the following measures in healthcare:

• Reducing waiting line;

• Detection of cancer and improving access to treatment;

• Reform of reimbursable drugs for patients of the Chronic hepatitis C.

6,0

0

1

2

3

4

5

6

7

Rom

an

ia

Irela

nd

Bu

lga

ria

Ita

ly

Sp

ain

Ge

rma

ny

Slo

va

kia

Gre

ece

Cro

atia

Czech

Re

pu

blic

Au

str

ia

Unite

d K

ingd

om

Lu

xem

bo

urg

Hun

gary

Po

lan

d

Lith

ua

nia

Neth

erl

an

ds

Fra

nce

Malta

Slo

ve

nia

Cypru

s

La

tvia

Po

rtug

al

Esto

nia

Fin

lan

d

Be

lgiu

m

Sw

ed

en

Den

ma

rk

• Funding for education is adequate, but the network of education system

and number of pupils per teacher are not optimal.

• Teacher remuneration reform starting from September, 2016: (i) fixed

minimum salary for teacher; (ii) school network rearrangement; (iii)

increase in funding for teachers' salaries.

EU-28 - 4,9%

Source: Eurostat

Expenditure for the education exceeds the EU average.

11

Government Policy Measures:

Building Foundation for Sustained Growth

Efficient and well targeted absorption and use of EU funds will promote competitiveness

and stimulate economic growth as well as support necessary structural reforms

Allocation of EU funds for 2014-2020 by priority axes

Source: Ministry of Finance Source: Ministry of Finance

EU cohesion policy accompanies structural reforms

● According to the recent statistical data, the GDP per capita in Latvia is approximately 64% from the EU average, and Latvia could qualify for the similar

amount of EU funds as in current Multiannual financial framework also for the next programming period.

● But at the same time due to recent developments in the EU the amount of Cohesion policy funds compared to the current MFF could be reduced by

the following aspects:

• Brexit;

• New challenges and unforeseen events that push for rearrangement of the EU priorities (more funds for migration, external and internal

security, climate change);

• Changes in statistical data (population, unemployment) in Latvia and other EU member states;

• Possible changes in the EU budget structure and its own resources system.

● Even if Latvia’s contribution to the EU budget would rise because of certain of these aspects, we expect that Latvia would continue to be a net receiver

from the EU funds also after 2020.

● Government is providing support (via intermediary - JSC Development Finance Institution Altum) and offers financing – such as loans, guarantees,

equity capital or grants – mainly to SMEs, start-ups, mid-caps and micro-enterprises, but also to individuals and companies active in the agricultural

sector.

EU funds after 2020 and government’s support

12

26%

14%

12% 11%

11%

9%

7%

4% 4% 2%

Promoting sustainable transport and removingbottlenecks in key network infrastructures

Protecting the environment and promoting resourceefficiency

Investing in education, skills and lifelong learning

Supporting the shift towards a low-carbon economyin all sectors

Strengthening research, technological developmentand innovation

Promoting social inclusion and combating poverty

Enhancing the competitiveness of small and medium-sized enterprises

Enhancing access to, and use and quality of,information and communication technologies

Promoting employment and supporting labourmobility

Technical assistance

● 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 and Cohesion Fund.

● EUR 4.4 billion EU funds are available for targeted and smart

investments in Latvia within 2014 - 2020 programming period. During

2007 - 2013 period Latvia has successfully and fully used EUR 4.5

billion of Cohesion Policy EU 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

New tax reform approved by the parliament

Non-taxable minimum – EUR 250

(differenced depending on income level from EUR 0 per month to EUR 250 per month (2020))

Allowance for dependents – EUR 250 per month (2020)

Minimum salary from EUR 380 to EUR 430

Social contribution increase by 1% directed to health care

Reform of Solidarity tax

PIT rate smoothing

Progressive Personal Income Tax

(decrease from 23% to 20% for year’s salary up to EUR 20 000; 23% - year’s salary EUR 20 000 – 55 000; 31,4% - year’s salary above EUR 55 000)

Corporate Income Tax:

0% for reinvested profit; 20% - distributed profit

13

Increase in competitiveness and exportability, reduce of inequality and ensure revenue 1/3 of

GDP

Main changes Strategy framework

● Predictability and a long-term vision

● Regional competitiveness, at least in the Baltic region

● Tax motivation for improvement

● A similar tax burden on similar types of revenue

● Lending and capitalization improvement

● Reducing the cost of tax administration

Principles

● Tax structures and rates review

● Improving tax administration

● The fight against the shadow economy

Source: Ministry of Finance

Positive impact on economy

● Raise of disposable income of employees inducing private consumption;

● More competitive entrepreneurs on regional and global scene as well as

stimulation of own investment;

● Better capitalized businesses, more opportunities to raise additional funds

for development;

● Increased prospects to raise production capacity of goods and services,

more effective and efficient production process;

● More equality between different income groups and types of income;

● Higher tax revenue resulting from increased economic activity and less tax

avoidance.

Strong Governance supports the Economy and Business

Source: World Bank, 2016 Rankings

Latvia is consistently ranked as a top 3 CEE country

Source: World Bank, Doing Business 2017

74

60

79

84

80

67

66

60

69

70

66

64

87

73

88

88

88

85

Voice and Accountability

Political Stability and Absence of Violence

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Latvia Regional Average Income Group Average (OECD)

10 13 13

15 15 16 17 19 19 20 20 20 20 21

22 22 22 25 25 25

29 29 30 30 31 34 34 35

Bu

lga

ria

Irela

nd

Cyp

rus

Latv

ia

Lith

uania

Rom

ania

Slo

venia

Cze

ch R

ep.

Po

lan

d

Cro

atia

Fin

lan

d

Esto

nia

U.K

.

Hungary

Slo

vakia

Sw

eden

Denm

ark

Neth

erla

nds

Au

str

ia

Sp

ain

Gre

ece

Luxem

bourg

Po

rtuga

l

Germ

any

Italy

Be

lgiu

m

Fra

nce

Ma

lta

Latvia has one of the lowest corporate Income tax rates in the EU

Source: Eurostat, Taxation trends in the European Union 2016

3 7

8 10

12 13

16 17

19 20

22 27

28 29

30 31

32 37

39 45

46 48

50 52

DenmarkU.K.

NorwaySwedenEstoniaFinland

LithuaniaIreland

LatviaGermany

AustriaPoland

SpainPortugal

Czech Rep.France

NetherlandsSloveniaSlovakia

RomaniaItaly

HungaryBulgariaBelgium

5 7 10 12

20 24 29 31 34 39 41 42 43 48 49 54 59 60

68 74

GermanySwedenFinland

DenmarkBelgiumIrelandEstonia

Czech Rep.Spain

PolandLithuaniaPortugal

ItalySloveniaBulgaria

LatviaSlovakiaHungaryRomania

Croatia

1 3 4 6 8

11 14 16 18 19 20

23 25 27 28

31 35

39 44

59

SwedenFinlandDenmarkSloveniaIrelandEstoniaGermanySlovakiaLithuaniaCroatiaLatviaCzech Rep.PolandPortugalBelgiumRomaniaHungarySpainItalyBulgaria

‒ Global Competitiveness Index Ranking*

‒ Global Sustainable Competitiveness

Index Ranking**

Source: *Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2017–2018, **The Global

Sustainable Competitiveness Index 2016

Structural Reforms and High Institutional Strength Facilitate

Favorable Business Environment and Encourage Investments

World Bank Worldwide Governance Rankings

Adjusted Top Statutory Tax Rate on Corporate Income (2015, %) The Global Competitiveness Index Rankings

World Bank ‘Ease of Doing Business’ Ranking

14

A strong and long-lasting commitment

to fiscal discipline, making it one

of the most virtuous EU countries

Conservative debt position

Source: Eurostat

Conservative debt position

EU-28 83.5%

Source: Eurostat Source: Eurostat

Latvia has been one of the fastest growing EU

economies

A top growth performer in the EU

with strong catching-up potential

and resilient, well capitalized banking sector

40%

0

50

100

150

200

Esto

nia

Luxem

bo…

Bu

lga

ria

Cze

ch R

ep.

Rom

ania

Denm

ark

Latv

ia

Lith

uania

Sw

eden

Slo

vakia

Po

lan

d

Ma

lta

Neth

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nds

Fin

lan

d

Germ

any

Hungary

Irela

nd

Slo

venia

Cro

atia

Au

str

ia

Fra

nce

Sp

ain

Be

lgiu

m

Cyp

rus

Po

rtuga

l

Italy

Gre

ece

4.8%

-1

0

1

2

3

4

5

6

Lith

uania

Latv

ia

Rom

ania

Bu

lga

ria

Slo

vakia

Esto

nia

Po

lan

d

Irela

nd

Cze

ch R

epublic

Ma

lta

Hungary

Cro

atia

Slo

venia

Sw

eden

Luxem

bourg

Germ

any

United K

ingdom

Au

str

ia

Be

lgiu

m

Neth

erla

nds

Fin

lan

d

Sp

ain

Fra

nce

Denm

ark

Po

rtuga

l

Cyp

rus

Gre

ece

Italy

EU-28 1.1%

The Key Strengths of Latvia in 4 Charts

EU-28 -1.7%

General Government Debt (2016, % GDP)

Budget Balance (2016, % of GDP)

Capital Adequacy (%)

Real GDP per Capita Growth Rate (2001-2016 on average, %)

15

Prudent fiscal management with balanced budget

0,0

-5,0

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

Spa

in

Fra

nce

Ro

ma

nia

Un

ited

Kin

gdo

m

Belg

ium

Ita

ly

Pola

nd

Port

ug

al

Fin

lan

d

Hu

ng

ary

Slo

venia

Slo

vakia

Austr

ia

De

nm

ark

Cro

atia

Irela

nd

Bulg

ari

a

La

tvia

Esto

nia

Lithu

ania

Cyp

rus

Ne

the

rla

nds

Cze

ch R

ep

ub

lic

Gre

ece

Ge

rman

y

Sw

eden

Malta

Lu

xe

mb

ou

rg

21,3

0

2

4

6

8

10

12

14

16

18

20

22

24

26

2011 2012 2013 2014* 2015 2016 2017Total capital ratio (%) CET1 ratio (%) Minimum requirement for total capital ratio (8%)

Source: Financial and Capital Markets Commission

* As of Q1 2014 capital adequacy is calculated according to the CRDIV/CRR requirements and is not directly comparable with the

data until Q1 2014 due to differences in methodology. Tier 1 ratio matches CET 1 ratio. The regulatory minimum capital

adequacy requirement is 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer.

Latvia’s Economy:

Flexibility and Resilience

Latvia is in the top 5 fastest growing countries in the EU with a 3.3% average in the last 6 years

Robust growth coupled with low inflation and balanced external accounts

Low net external debt enhances resilience to external risks

Source: Bank of Latvia

Source: Central Statistical Bureau of Latvia Source: Bank of Latvia

9

10

11

12

13

2011 2012 2013 2014 2015 2016

0

10

20

30

40

50

60

1Q2010

3Q2010

1Q2011

3Q2011

1Q2012

3Q2012

1Q2013

3Q2013

1Q2014

3Q2014

1Q2015

3Q2015

1Q2016

3Q2016

1Q2017

3Q2017

The Latvian Economy is Growing Sustainably

Selected Elements of Balance of Payments of Latvia (% of GDP)

Gross Domestic Product per Capita (EUR thousands) Net External Debt (% of GDP)

17

Contribution to Real GDP Growth (pp.)

-6

-4

-2

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016

Private consumption Public consumption GFC Net exports

Source: Central Statistical Bureau of Latvia

-6

-4

-2

0

2

4

6

8

2011 2012 2013 2014 2015 2016 1Q 2017 2Q 2017 3Q 2017

Current account FDI in Latvia

Implicit Tax Rate on Capital (2016, %)

Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia

Source: Eurostat

Light taxation of capital provides stimulus to business investments

Diversification reduces vulnerability to external demand shocks

0

10

20

30

40

50

60

70

80

90

100

2000 2016

Others

Optical, medical, musical inst.

Transport vehicles

Machinery, electricical

Base metals

Building materials

Textiles

Paper

Wood

Plastics

Chemical

Mineral products

Food and drinks

Agricultural

0

10

20

30

40

50

60

70

80

90

100

2000 2016

Others

USA

Turkey

France

Finland

Norway

Netherland

Denmark

Poland

UK

Sweden

Russia

Germany

Estonia

Lithuania

Diversified Economic Structure and Business Friendly

Environment Among Main Driving Forces of Balanced Growth

Structure of Merchandise Exports (%) Structure of Merchandise Exports (%)

18

12,5%

13,0%

13,9%

9,1% 4,8%

5,2%

15,9%

3,2%

22,4%

Manufacturing

Real estate activities

Wholesale and retail trade, repair of motor vehicles andmotorcyclesTransportation and storage

Information and communication

Construction

Public administration, defence, compulsory social securit;Education; Human health and social work activitiesAgriculture, Forestry and Fishing

Other sectors

Composition of Gross Value Added by Sectors (2016, %)

9,0 13,1 13,6 14,1 14,3 14,7

15,5 15,7

16,5 16,7

17,5 18,9 19,3 19,4 19,6 20,0

21,5 22,5

23,1 23,6

25,5 26,6

27,6 28,2 28,3

30,3 32,2

38,4

BulgariaCyprus

LithuaniaIrelandLatvia

RomaniaSloveniaEstoniaCroatia

Czech Rep.PolandFinland

HungarySwedenSlovakia

DenmarkU.K.

NetherlandsAustria

ItalyLuxembo…Portugal

GreeceGermanyBelgium

SpainMalta

France

Source: ZEW (2016)

Source: European Trade Union Institute Source: Eurostat

Source: Eurostat Source: European Trade Union Institute

Latvia has strong labour market fundamentals

Robust growth of participation and real productivity

62

64

66

68

70

72

74

76

78

Latvia Euro area (19)

1,9%

EU-28: 0.6%

-2

-1

0

1

2

3

4

5

6

7

Irela

nd

Rom

ania

Bu

lga

ria

Latv

ia

Ma

lta

Slo

vakia

Lith

uania

Luxem

bourg

Esto

nia

Sw

eden

Cze

ch R

ep.

Neth

erla

nds

Sp

ain

Denm

ark

Slo

venia

UK

Fra

nce

Be

lgiu

m

Germ

any

Po

rtuga

l

Cro

atia

Cyp

rus

Au

str

ia

Hungary

Fin

lan

d

Italy

Gre

ece

Highly Flexible and Resilient Labour Market Supports

Competitiveness and Domestic Demand

Collective bargaining coverage (% of workforce) Participation Rate (age 15-64; %)

Trade union density (% of workforce) Real Productivity Growth per worker (2012-2016 average y-o-y, %)

19

20%

0%

20%

40%

60%

80%

100%

Au

str

ia

Be

lgiu

m

Slo

venia

Po

rtuga

l

Fra

nce

Fin

lan

d

Sw

eden

Neth

erla

nds

Gre

ece

Sp

ain

Denm

ark

Italy

Cyp

rus

Germ

any

Luxem

bourg

Ma

lta

Cze

ch R

ep.

Irela

nd

Po

lan

d

Slo

vakia

UK

Rom

ania

Bu

lga

ria

Esto

nia

Hungary

Latv

ia

Lith

uania

16%

0%

20%

40%

60%

80%

100%

Denm

ark

Sw

eden

Fin

lan

d

Cyp

rus

Ma

lta

Be

lgiu

m

Luxem

bourg

Slo

venia

Au

str

ia

Irela

nd

Italy

Gre

ece

Rom

ania

Slo

vakia

UK

Cze

ch R

ep.

Germ

any

Neth

erla

nds

Bu

lga

ria

Hungary

Latv

ia

Po

lan

d

Sp

ain

Po

rtuga

l

Lith

uania

Esto

nia

Fra

nce

Source: World Trade Organization;

Source: Eurostat

Favourable position in both price and non-price competitiveness

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015

Germany Latvia

1

2

3

4

5

6

115

120

125

130

135

140

145

150

155

160

REER (deflator: consumer price indices - 37 trading partners)

REER (deflator: nominal unit wage cost, manufacturing - 37 trading partners)

Profit margin in manufacturing, rhs

Source: Eurostat

Improved Competitiveness and Climbing up the Value Added

Ladder are Major Export Growth Drivers

Export Market Shares (2002=100) Real Effective Exchange Rate (REER) index (2005 = 100)

and profit margin (%)

High – Tech Exports (% of total exports)

20

Goods Exports Growth (2016 over 2009,%)

98 %

-20

0

20

40

60

80

100

120

Bu

lga

ria

Latv

ia

Rom

ania

Lith

uania

Cyp

rus

Po

lan

d

Esto

nia

Cze

ch R

ep.

Slo

vakia

Cro

atia

Sp

ain

Po

rtuga

l

Slo

venia

Hungary

Germ

any

U.K

.

Gre

ece

Neth

erla

nds

Italy

Au

str

ia

Irela

nd

Be

lgiu

m

Sw

eden

Ma

lta

Fra

nce

Denm

ark

Fin

lan

d

Luxem

bourg

90

110

130

150

170

190

210

230

Bulgaria

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovak Republic

Slovenia

Source: Eurostat; Data: 4Q/2016

Source: Central Statistical Bureau of Latvia Note: * - operative data

Source: European Commission, Autumn projections, 2017

Real GDP growth, % Composite PMI

Real GDP (y-o-y, %)

21

Average GDP growth projection for euro area countries,

2017-2018

Growth Expected to Strenghten over Medium Term

6,4

4,0

2,6 2,1

2,7

2,0

3,7 3,4

3,8 3,9 4,2 3,5

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015 2016 2017 F 2018 F

Actual data MoF IMF EC

Source: Central Statistical Bureau of Latvia, EC, IMF, MoF of Latvia; F - forecast

1,6

2,8 3,3

2,4 2,5

1,9 1,9 1,5

2,1

2,9

3,6

2,6 2,4 2,6

0,5

2,8

4,0 4,0

6,2

-1

0

1

2

3

4

5

6

7

Q-o-q Y-o-y

3,85%

0

1

2

3

4

5

6

Euro area – 2,15%

Source: Markit

46

48

50

52

54

56

58

EU World Neutral 50 points

External sector benefiting from global recovery

Improving consumer sentiment leading to more robust domestic demand

Source: Central Statistical Bureau of Latvia

Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia

Conjunctional Indicators Confirm Growth Momentum

Is Picking Up

Retail trade turnover and tourism value added (y-o-y growth, %)

Industry output growth (y-o-y growth, %) Cargo handled in ports and by railway (y-o-y growth, %)

22

Construction growth, y-o-y, % and confidence indicator

(long-term average=100)

Source: Central Statistical Bureau of Latvia

-15

-10

-5

0

5

10

15

20

2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1

Manufacturing Energetics

0

2

4

6

8

10

12

2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1

Retail trade Tourism

75

80

85

90

95

100

105

110

-25

-20

-15

-10

-5

0

5

10

2015Q1

Q2 Q3 Q4 2016Q1

Q2 Q3 Q4 2017Q1

Q2

Output Confidence (rhs)

-25

-20

-15

-10

-5

0

5

10

15

2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1

Ports Rail

Acceleration of economic activity broadly based across sectors

Source: Eurostat

Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia

Both Goods and Services Exports Starting 2017 On a Strong

Growth Path

Group's contributions to the annual growth of merchandise export (pp)

Annual growth of merchandise export (y-o-y, %) Annual growth of nominal merchandise export (y-o-y, %)

23

Source: Bank of Latvia

2,3 1,1

-0,1

9,6

-4

-2

0

2

4

6

8

10

12

2014 2015 2016 10 months 2017

Export unit price

Real exports

Nominal exports

17,1

-23,8

0,5

2,0

1,1

-2,2

-5,2

3,4

-2,1

-0,05

10,6

36,6

8,4

4,2

9,6

-25 -15 -5 5 15 25 35 45

Others (19.2%)

Russia (8.9%)

Other EU (43.2%)

Baltic countries (28.7%)

Total exportsJan-Okt 2017

2016

2015

-6

-4

-2

0

2

4

6

8

10

12

2014 2015 2016 2017 Q1 2017 Q2 2017 Q3

Other services

Other business services

Telecommunications, computerand information services

Financial services

Construction

Travel

Transport services

TOTAL

-3

-1

1

3

5

7

9

11

13

15

2014 2015 2016 9 months2017

Others

Machinery and transport

Manufactured goods

Chemical

Mineral fuels

Crude materals, exc. fuels

Food, beverages

Total export growth (y/y %)

Export of services (y-o-y growth in nominal terms, %) and contributions of

services groups (pp)

Diversified and flexible structure of the economy allows benefiting early from the global

cyclical upswing

Source: Bank of Latvia

Source: Bank of Latvia Source: Bank of Latvia Lending data on Sept.-Nov.2017 are corrected to exclude one-off effects due to structural

changes in the banking sector.

Lending recovery is firming, especially to NFCs

Changes in loan demand (BLS data)

Interest rates on long-term loans to non-financial enterprises (%) Annual growth rate of domestic loans (%)

24

Loans to domestic non-financial enterprises and households

(annual change, millions of euro)

Source: Bank of Latvia; F - forecast

0.3

-10

-8

-6

-4

-2

0

2

4

6

I2013

IV VII X I2014

IV VII X I2015

IV VII X I2016

IV VII X I2017

IV VII X

Government Financial institutions

Households Non-financial enterprises

Non-financial enterprises and households

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

Loans for housepurchase

Consumer credit andother lending tohouseholds

Loans to SMEs

Loans to largeenterprises

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

Small and medium loans (up to 1 million euro) Large loans (over 1 million euro)

Extraordinary loose monetary policy starting to work through the economy

-600

-500

-400

-300

-200

-100

0

100

200

300

2015

2016

2017 F

2018 F

2019 F

Non-financial enterprises Structural one-offHouseholds TotalTotal excluding structural one-off

Source: Central Statistical Bureau, State Employment Agency and Eurostat data Source: Central Statistical Bureau of Latvia data; Bank of Latvia staff calculations

Source: Central Statistical Bureau of Latvia data Source: Central Statistical Bureau of Latvia data

Unemployment close to natural rate since 2013

Wage growth supports domestic demand

0

1

2

3

4

5

6

7

8

9

10

2012 2013 2014 2015 1Q2016

2Q2016

3Q2016

4Q2016

1Q2017

2Q2017

3Q2017

Gross nominal wages

Real net wages

6

9

12

15

18

1Q2011

3Q2011

1Q2012

3Q2012

1Q2013

3Q2013

1Q2014

3Q2014

1Q2015

3Q2015

1Q2016

3Q2016

1Q2017

3Q2017

Registered unemployment rate Job seekers rate

Favourable Labour Market Developments Contribute to

Strenghtening of Domestic Demand

Registered and headline unemployment rate

(% of econ.act. population)

Unemployment: headline and natural rates

(seasonally adjusted; % of econ.act. population)

Participation and employment rates (age 15-64; %) Average Net Monthly Wage for Full-time Job (y-o-y; %)

25

55

60

65

70

75

80

1Q2011

3Q2011

1Q2012

3Q2012

1Q2013

3Q2013

1Q2014

3Q2014

1Q2015

3Q2015

1Q2016

3Q2016

1Q2017

3Q2017

Participation rate Employment rate

0

5

10

15

20

2005 Q

1

Q3

2006 Q

1

Q3

2007 Q

1

Q3

2008 Q

1

Q3

2009 Q

1

Q3

2010 Q

1

Q3

2011 Q

1

Q3

2012 Q

1

Q3

2013 Q

1

Q3

2014 Q

1

Q3

2015 Q

1

Q3

2016 Q

1

Q3

2017 Q

1

Q3

Headline unemployment Natural unemployment

Source: Central Statistical Bureau of Latvia data, Bank of Latvia calculations

Source: Central Statistical Bureau of Latvia data

Source: Eurostat data

Both headline and core inflation moderate and stable during the recent months

-2,0

0,0

2,0

4,0

6,0

2011 2012 2013 2014 2015 2016

Total inflation Goods inflation Services inflation

Inflation is Just Below 3%

Inflation (HICP)

Inflation in Latvia (HICP, y-o-y, %)

12-month Average HICP (November 2017, y-o-y, %)

26

Average HICP projection for euro area 2017-2018 (%)

Source: European Commission, Autumn projection, 2017

-2

-1

0

1

2

3

4

Jan

-12

Ma

r-12

Ma

y-1

2Jul-1

2S

ep-1

2N

ov-1

2Jan

-13

Ma

r-13

Ma

y-1

3Jul-1

3S

ep-1

3N

ov-1

3Jan

-14

Ma

r-14

Ma

y-1

4Jul-1

4S

ep-1

4N

ov-1

4Jan

-15

Ma

r-15

Ma

y-1

5Jul-1

5S

ep-1

5N

ov-1

5Jan

-16

Ma

r-16

Ma

y-1

6Jul-1

6S

ep-1

6N

ov-1

6Jan

-17

Ma

r-17

Ma

y-1

7Jul-1

7S

ep-1

7N

ov-1

7

Energy (contribution, pp)

Food, alcohol, tobacco (contribution, pp)

Inflation (y-o-y, %)

Inflation excl. energy, food, alcohol, tobacco (y-o-y, %)

2,9

0

1

2

3

4

Lith

uania

Esto

nia

Latv

ia

United…

Cze

ch R

ep.

Hungary

Be

lgiu

m

Au

str

ia

Sp

ain

Luxem

bourg

Sw

eden

Germ

any

Po

lan

d

Po

rtuga

l

Slo

venia

Cro

atia

Italy

Neth

erla

nds

Ma

lta

Slo

vakia

Gre

ece

Fra

nce

Bu

lga

ria

Denm

ark

Rom

ania

Fin

lan

d

Cyp

rus

Irela

nd

EU-28 1.7%

2,85

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Euro area – 1,45%

Merchandise Exports to Russia and Ukraine (% of total exports)

Source: Central Statistical Bureau of Latvia

Impact of Russia’s Sanctions and Weaker Rouble Contained

Source: Central Statistical Bureau of Latvia

Several sectors affected, but adverse impact is marginal

Latvia's export position to UK remains favourable

• Total exports to Russia that are affected by sanctions do not exceed

0.2% of GDP.

• The drop in exports to the CIS, in particularly to Russia, compensated

by growth in exports to the EU countries and other markets.

• However, some indirect impact from increased uncertainty and a drag

on consumer confidence has materialized in somewhat slower

economic growth.

Brexit: The Direct Exposure of Latvia via Trade Links

Exports and export market share to UK (2011=100)

Impact of Russian Sanctions and Exposure to Brexit Risks

is Manageable

27

10,6 11,4 11,6 10,7

8,1 7,6

0,9 1 0,9

0,7

0,7 0,9

0

2

4

6

8

10

12

14

2011 2012 2013 2014 2015 2016

Russia Ukraine

2016 EUR million % of total exports

Goods exports 579.4 5.6

Services exports

(according to payment country) 351.8 7.7

Overall 931.2 6.2

100

120

140

160

180

200

220

240

2011 2012 2013 2014 2015 2016

goods export to UK goods market share in UK

wood products export to UK

A Highly Profitable, Stable and

Well Capitalised Banking Sector

Foreign banks have shown commitment to their local subsidiaries and branches in

Latvia, reducing contingent liability risk to the Government

• The Latvian banking sector is dominated by subsidiaries and branches

of banks from the European Economic Area, mostly Nordic countries(1)

(54% of the banking sector capital, 51% of assets, 81% of domestic

loans and 80% of domestic deposits).

• Capitalisation and liquidity ratios are well above minimum

requirements. The banking sector’s capital is mostly made of CET1

capital (in 3Q 2017 CET1 ratio was 21.3% (EU average 1Q 2017 –

14.1% (2)), in 3Q 2017 FCMC liquidity ratio amounted to 59% and LCR

was 260%).

• As of November 2014 the three largest banks are directly supervised

by the ECB. Since January 2016 four banks fall under the remit of the

Single Resolution Mechanism.

Source: (1) - Financial and Capital Markets Commission (2) – EBA risk dashboard Source: Financial and Capital Market Commission

Source: Financial and Capital Markets Commission

Note: Data on 2Q2017

* As of Q1 2014 capital adequacy is calculated according to the CRDIV/CRR requirements and is not directly

comparable with the data until Q1 2014 due to differences in methodology.

Tier 1 ratio matches CET 1 ratio.

The regulatory minimum capital adequacy requirement is 8%. Since 28 May 2014 the FCMC also applies a

2.5% capital conservation buffer.

Source: Financial and Capital Market Commission

Note: Data on 3Q2017

Foreign owned banks

81%

Domestically owned banks

19%

Nordic Banks 54%

Other foreign owned

banks 27%

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015 2016 2017

FCMC liquidity ratio (all liquid assets/all short-term liabilities)

Minumum requirement

Sound, Well Capitalised and Liquid Banking Sector

Key Highlights Capital Ownership of the Banking System (3Q 2017, %)

FCMC Liquidity Ratio (%)

21,3

0

2

4

6

8

10

12

14

16

18

20

22

24

26

2011 2012 2013 2014* 2015 2016 2017

Total capital ratio (%) CET1 ratio (%) Minimum requirement for total capital ratio (8%)

Capital Adequacy (%)

29

Source: European Central Bank, Note: Data on October 2017

Source: FCMC

Domestic lending recovers, loan portfolio quality is above EU average and continues to improve

• After prolonged period of deleveraging lending growth turned positive

in April 2016.

• Loans to domestic households and NFCs stand at 46% of GDP, down

from almost 100% at the outset of the crisis.

• Loan-to-deposit ratio has fallen substantially leading to more balanced

and sustainable domestic funding for loans.

• The quality of loan portfolio is above EU average and continues

improving further. The coverage ratio of overdue loans remains high.

• The ECB bank lending survey indicates gradual increase in demand

for loans in Latvia.

• Expansionary monetary policy of the ECB is a supportive factor for

lending.

Source: European Central Bank

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 2016 2017

Share of loan loss provisions in outstanding loans

Share of loans over 90 days past due in outstanding loans

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Estonia Latvia Lithuania Eurozone

2011 September 2017 September

-15%

-10%

-5%

0%

5%

2012 2013 2014 2015 2016 2017

Lending growth in Latvia

Excluding structural one-off*

Lending growth in Eurozone combined

*One-off effect due to structural changes in the banking sector is excluded.

Bank Lending Recovers and Supports Growth

Loans to Domestic clients Excluding Government (y-o-y, %)

Total Loan Portfolio Quality (%)

Key Highlights

Domestic Loan-to-Deposit Ratio (%)

30

9%

12%

Source: Bank of Latvia

Source: Bank of Latvia; Note: * Banks which grant more than 50% of loans domestically and receive more than

50% of deposits from domestic clients ** Other banks

;

The FCMC requires banks mainly servicing foreign clients to hold an additional capital

buffer up to 9.5% of risk-weighted assets and up to twice the minimum liquidity

requirement

Source: Bank of Latvia; Note: * Credit institutions which grant more than 50% of loans domestically and receive

more than 50% of deposits from domestic clients ** Other banks

Total domestic lending

Total domestic deposits

• Servicing foreign clients has been part of Latvia’s banking sector

since the early 1990s. However, the banks actively engaged in FC

(foreign client) business have little domestic operations.

• FC deposit growth was relatively stable until end-2015, but then

reversed in 2016 with continuously deteriorating CIS economies

and enhanced enforcement of tougher AML/CFT requirements.

• Additional liquidity and capital requirements for banks servicing

FCs hold significant liquidity and capital buffers to counter potential

liquidity outflows and to withstand potential shocks.

78,3

45,3

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Banks servicing FCs**

Domestically active banks*

Minimum requirement for liquidity ratio (all liquid assets/all short-term liabilities)

62%

38%

Domesticallyactive banks*

BanksservicingFCs**

- 30%

- 20%

- 10%

0%

10%

20%

30%

2012 2013 2014 2015 2016 2017

Anual growth rate of foreign client deposits (adjusted for exchange rate)

Anual growth rate of domestic non-financial private sector deposits

Banks servicing Foreign Clients Have a Negligible Role in the

Domestic Financial Market and the Economy

Growth Rates of Domestic and Foreign Client Deposits (%)

FCMC Liquidity Ratio (%)

Key Highlights

Banking Assets including Foreign Branches

(end of November 2017, %)

31

* One-off adjusted data

Source: Bank of Latvia, Note

Banking sector profitability is supported by stable interest spread and economic growth

• In the first eleven months of 2017 profit of domestically active banks was in line with the previous year; whereas, the profit of banks servicing FCs

levelled off due to decline in business and increased administrative expenses, which were largely caused by implementing enhanced AML/CFT

requirements.

• ROE and ROA of the Latvian credit institutions are relatively high, and still exceeds the EU average. In the first eleven months of 2017 ROE was

8.3%(1) (EU average – 7.0%(2)) and ROA – 1.1%.

• Domestically active banks' returns are more stable and less dispersed than returns of banks servicing FCs.

• With record-low loan and deposit rates, interest rate spread on outstanding amounts remains stable at around 3 pp.

Source: Bank of Latvia, Note: MFI interest rates on outstanding loans to domestic households and NFCs, and

outstanding deposits from domestic households and NFCs

Banking Sector Profitability Remains Healthy

ROE Dispersion (%)

Key Highlights

Interest Spread on Outstanding Loan Amounts (%)

32

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2015 2016* 2017XI

2015 2016* 2017XI

Domestically active banks Banks servicing foreigners

Interquartile range Min-max range Weighted average Median

0%

1%

2%

3%

4%

5%

6%

7%

8%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Interest rate on deposits Interest rate on loans

Parent and related banks have high credit ratings, good profits, and on average they

outperform their European peers on stock exchanges (compared to Eurostoxx Bank index)

• Financial performance and capitalization level of the parent banks is strong.

• Nordic banking groups' profitability is higher than the average in Europe.

• Banks continue to invest in IT related projects to increase their operational efficiency and lower administrative expenses.

• Nordea group has started reorganization process of transforming its subsidiaries in Norway, Denmark and Finland into branches to increase operational

efficiency and to simplify its group structure.

• In October 2017 Nordea group and DNB group merged Nordea and DNB entities in the Baltics into one financial institution Luminor that will be

incorporated in Estonia with branches in Latvia and Lithuania.

Source: Reuters Source: Nordic banking groups' public quarterly financial reports, Note: data on September 2017

Swedbank SEB Nordea DNB

Assets (EUR bn) 254.9 304.0 615.3 294.0

CET1 ratio (%) 23.9 19.2 19.2 16.3

ROE (%) 15.0 12.1 10.5 11.2

S&P Global long term rating

AA- A+ AA- A+

Moody`s long term rating

Aa3 Aa3 Aa3 Aa2

Parent Banks are Stable, Financially Sound and Profitable

Key Highlights

Banking Groups' Equity Prices (01.01.2016 = 100, local currency) Nordic Banking Groups' Consolidated Financial Information

33

40

60

80

100

120

140

160

2012 2013 2014 2015 2016 2017

Nordea DNB SEB Swedbank Eurostoxx Banks

Government Debt and Funding

Strategy

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 40%

of GDP at the end of 2016

• 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

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: 2017 – 2018 General Government Debt as % of GDP are the

Treasury forecasts

Conservative debt position

Source: Eurostat

Conservative debt position

EU-28 83.5%

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2011 2012 2013 2014 2015 2016 2017(F) 2018(F) 2019(F)

Latvia Lithuania EU-28 Eurozone

Source: European Economic Forecast, Autumn 2017, European Commission

Public Debt Remains at Moderate Levels

Key Characteristics of Latvia’s Government Debt

Interest Costs (% of GDP)

General Government Debt Year End

(EUR million and % of GDP, ESA methodology)

General Government Debt (2016, % of GDP)

35

8 708 9 086 8 893 9 660 8 899 10 038 10 327 10 591

43% 42% 39%

41%

37% 40% 39% 37%

0

5 000

10 000

15 000

20 000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2011 2012 2013 2014 2015 2016 2017 (f) 2018 (f)

40%

0

50

100

150

200

Esto

nia

Luxem

bo…

Bu

lga

ria

Cze

ch R

ep.

Rom

ania

Denm

ark

Latv

ia

Lith

uania

Sw

eden

Slo

vakia

Po

lan

d

Ma

lta

Neth

erla

nds

Fin

lan

d

Germ

any

Hungary

Irela

nd

Slo

venia

Cro

atia

Au

str

ia

Fra

nce

Sp

ain

Be

lgiu

m

Cyp

rus

Po

rtuga

l

Italy

Gre

ece

Source: The Treasury; (1) - Fixed rate debt with a maturity in excess of one year; (2)-Central government debt at the end of

the period less the amount of loans and receivables, where impairment loss of guarantees are not taken in account

(including Treasury’s cash accounts, investments in deposits and fixed income securities, loans, receivables (including

receivables of derivative financial instruments which are not classified as risky from credit risk perspective)), and increased

by provisions of guarantees as well as liabilities of derivative financial instruments which are not classified as risky from

credit risk perspective.(3) – In line with Central Government Debt Strategy point 2.3.2 deviation from the limits of the

Macaulay Duration ir permissible if the deviation does not cause additional financial risks.

In 2017 Latvia extended EUR curve up to 30 years

Source: The Treasury

An exchange rate of USD/EUR 0.847 on 29 September 2017

• International:

— Regular benchmark bond issuances in international markets

— Loan agreement signed with European Investment bank

— Liability management option

• Domestic:

— Regular government debt securities auctions

— Retail instruments (Savings Bonds and other)

Latvia is conducting a prudent and efficient debt management strategy

Source: The Treasury

In 2014 first international bond issuance after joining the Eurozone

Source: Data as of 11th January 2018, Bloomberg

Conservative Borrowing Based on Pre-funding

Borrowing Instruments

Debt Portfolio Management

Secondary Market (mid yield to maturity, %)

Government Debt Securities Issues (EUR million)

Parameters Strategy 30 June 2017 30 September 2017

Maturity profile (%)

— up to 1 year ≤ 25% 11.4% 11.6%

— up to 3 year ≤ 50% 31.2% 30.9%

Share of fixed rate(1) ≥ 60% 92.0% 91.8%

Macaulay duration

(years)(3) 4.70 – 6.25 6.31 6.09

Net debt(2) currency

composition

100% EUR with a

deviation of +/- 5% 100.20% 100.15%

36

Outstanding Bonds in the International Markets

(nominal amount, million)

0 200 400 600 800 1000

2018

2020

2021

2024

2025

2026

2036

2047

2020

2021

LATVIA 1,375% 16/05/2036

LATVIA 0,375% 07/10/2026

LATVIA 1,375% 23/09/2025

LATVIA 2,875% 30/04/2024

LATVIA 2,625% 21/01/2021

LATVIA 0,500% 15/12/2020

LATVIA 5,500% 05/03/2018

LATVIA 2.250% 15/02/2047

LATVIA 2,750% 12/01/2020

LATVIA 5,250% 16/06/2021

USD

EUR

0

500

1 000

1 500

2 000

2 500

3 000

2011 2012 2013 2014 2015 2016 2017 Q3

External borrowing Domestic borrowing

-0,58

-0,21 0,20 0,46 0,59

1,44 1,75

2,29 2,36

-0,6

-0,1

0,4

0,9

1,4

1,9

2,4

0 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Mid

YTM

, %

LATVIA EUR Eurobond LATVIA USD Eurobond

0,5%

41%

43%

14% 2%

Savings bonds

3 years bonds

5 years bonds

10 years bonds

11 years bonds

37

Source: The Treasury

Achievements in the Domestic Market

• Primary dealer system in Latvia is operating since 11 February 2013

• The outstanding amount of domestic debt securities constituted EUR

1.121 billion as of September 2017

• The Treasury maintains regular domestic debt securities auctions

mainly by medium term T-bonds. Long term segment to be covered by

international bond issues.

— On 28th January 2016, the Treasury introduced a new short-term

borrowing instrument by issuing T-bills with maturity of 21-day.

— Historically for the first time Latvia achieved negative yields:

for T-bills in April 2015 (-0,012%, 6m benchmark)

for T-bonds in September 2016 (-0,04%, 3y benchmark)

— Net issuance in 2016 is negative (EUR -55,48 million)

• In 2014 Savings Bonds were introduced to target retail investors

— EUR 5 million were outstanding as of the end of September 2017

Domestic Securities Outstanding by Original Maturity

(September 2017, %)

Demand is steady and average yields remain low

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. ** Since 2016 3m T-Bills benchmarks are tap issues of original

12m T-Bills in maturity brackets from 2 to 4.5 months.

Low yields reflect continued investor confidence

Source: The Treasury

Domestic Market Continues to Perform Strongly

1

2

3

4

5

6

7

8

9

0

5

10

15

20

25

30

3-y

5-y

3-y

3-y

3-y

3-y

5-y

5-y

5-y

5-y

5-y

Aug Sep Oct Dec Jan Mar May Nov Dec Jan

2016 2017 2018

Amount sold, million EUR (LHS) Bid-offer Ratio (RHS)

-0,302

-0,121 -0,055

0,045

-0,025

0,362

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

21days 3months* 6months* 12months 3years 5years

38

International Loan Programme has been largely refinanced in international capital

markets, while government debt redemptions remain moderate

Source: The Treasury Source: The Treasury

Source: The Treasury; Note: *In the primary market

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

Eurobonds

Loans from financialinstitutions (incl.IMFand EC loans)

Domestic T-bonds

Domestic T-bills

Other

Source: The Treasury; Note: *In the primary market

Central Government Debt Profile

Debt structure by Instruments (%)

Distribution of Investors of Latvia’s Eurobonds by Geography*

Debt Redemption Profile (EUR million)

Distribution of Investors of Latvia’s Eurobonds by Type*

24 13 1 10

16 9

49

27 54

59 56

31

1

8

2

7 8

15

9

20

31

12

12

5

8

5

7

7

2

10

1 1

4

5

7 11 8 4 8

21

2 2 3 1 1 1 1 1 1

0%

20%

40%

60%

80%

100%

2016 May, 20year

2016 Sep, 10year

2017 Feb, 10year TAP (2026)

2017 Feb, 30year

2017 June, 10year TAP (2026)

2017 June, 20year TAP (2036)

Asia and other countries Latvia Other EuropeFrance BeNeLux ScandinaviaSwitzerland Germany, Austria Uk, Ireland

Europe

100% Europe

99%

Europe

99% Europe

99%

Europe

100% Europe

99%

2 10

34

8 10 26 31

88 53

68 73

62 65

11 20 12 5

2 4 5 7 4

0%

20%

40%

60%

80%

100%

2016 May, 20year

2016 Sep, 10year

2017 Feb, 10year TAP (2026)

2017 Feb, 30years

2017 June, 10year TAP (2026)

2017 June, 20year TAP (2036)

Other International InstitutionsFund Managers / Pension & Insurance Funds Banks/Central BanksHedge Fund Managers

0

200

400

600

800

1 000

1 200

1 400

1 600

2017oct -dec

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 -2035

2036 2037 -2046

2047 >=2048

Domestic debt redemption Other external debt liabilities World Bank loan (Program)

EC loan (Program) Eurobonds

39

External borrowing instruments will represent the most significant share of the overall

borrowing volume

• 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

Borrowing Instruments Available Medium Term Borrowing Strategy

• Benchmark issuances in global capital markets

• Continuing issuances in domestic market

• Niche capital market instruments (JPY, CHF, etc.)

• Private placements (reverse enquiries)

• Loans from international financial institutions (EIB,

CEB, etc.)

Debt Redemptions

Budget Execution

Budget Net Lending

and Other Flows

PRE-FUNDING

STRATEGY

FOR

REFINANCING

DEBT

Medium Term Funding Requirement and Borrowing Strategy

2017-2020

Central Government financing estimation

(2018-2020, EUR million)

as on 31-December-2017 2018 2019 2020 TOTAL

(Jan 2018-

Dec 2020)

Central government budget financial balance, net

lending and other flows at the Treasury's accounts -676 -510 -461 -1 647

Outstanding central government debt redemption

(as on 31 December-2017) -875 -983 -1 270 -3 127

of which domestic debt repayment -365 -383 -114 -862

external debt repayment -510 -600 -1 156 -2 265

TOTAL -1 551 -1 493 -1 731 -4 774

Gross borrowing in corresponding period 870 1 890 2 120 4 880

of which syndicated international issuance (nominal value,

indicative) 500 1 500 2 000

GENERAL

FINANCING

REQUIREMENT

Conclusion

41

Flexible and Resilient Economy Decreasing Unemployment

Solid Export Growth Balance of Payments improvement

Sustainable Current Account Balance

Well Capitalised Banking Sector

Credit Growth is being restored

Economic Development promoted

Resilient towards external shocks

Proven track record in overcoming

economic crisis in the past

Belongs to the Core of Europe

EZ membership

The member of all the important

international organizations

Predictable public policies and outstanding track record

of successful structural reforms

Long term growth reinforced

Sustainable Debt Levels and Prudent Fiscal

Management Investor attractiveness

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,

a robust domestic demand, and a flexible business sector able to adjust to external shocks

Credit rating gains Investors confidence boosted due to

reforms and sound macroeconomic

fundamentals

Latvia Investment Highlights

Thank You