Transcript Presentation

Republic of Latvia
Presentation
November/December 2015
A Performing Eurozone Economy
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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.
2
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
2. Latvia’s Economy Continues to Perform Strongly
9
3. Stable and Well Capitalised Banking Sector Prepared to Restore Credit Growth
19
4. Outstanding Track-record of Fiscal Consolidation and Structural Reforms
24
5. Government Debt and Funding Strategy
31
6. Credit Positioning of Latvia
36
7. Conclusion
38
8. Tender Offer
40
9. New EUR Issuance
43
Overview
Latvia Overview
- High income(1), advanced economy(2)
Key Facts on Latvia
•
•
•
•
•
•
•
•
•
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
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
Latvia’s historic strides to become a robust global economy
Becomes a
Member of
the UN
1991
1991
Sep
Sep
1991
1991
Latvia
Regains
Independence
5
Mar
Mar
2004
2004
Entry into EU
International Loan
Programme with
IMF/EC Closed
Successfully
Initial
Memorandum
delivered to
OECD
MayMay Dec DecDec 2011/
May MayMay May
Jan
Dec 2011/
2004
2008
Jan
2012
2012
2013
2014
2008
2004
Jan 2012
2012
2013
Admitted to
NATO
Approval of Loan
Programme with IMF,
EC and Bilateral
Lenders
All rating
agencies rate
Latvia investment
grade
S&P and Fitch
upgrades rating
to A-
May-Jun May-June
Jan-Jun
January
2014
2015
2014
2014
Latvia joins
Eurozone/
EMU
Moody`s
upgrades Latvia’s
rating to A3
Feb
February
2016
2015
2015
Latvia’s
Presidency of
EU Council
Target for
OECD
membership
Key Features of Latvia’s Sovereign Credit Profile
Sustained growth
reached through a
successful
economic
adjustment
● 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
● Latvia joined the Eurozone on 1 January 2014, adopting the Euro as its lawful currency
Eurozone member
since January 2014
● 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
Strong fiscal
position & rigorous
fiscal discipline
● 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
● At the end of 2014, general government debt amounted to 41% of GDP and was one of the lowest in the EU
Low government
indebtedness &
sound public debt
management
Stable and well
capitalised banking
sector
— 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
● 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
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
6
Latvia is Benefiting from Eurozone Membership Since January
2014




Strong economic rationale
● 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
Solid political foundation
● Fully integrated in the EU political, economic and financial system
Competitive economy with capacity to adjust
● 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
● 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)
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.
7
Rating Upgrades Reflect Latvia’s Successful Adjustment
Efforts
Rating agencies have recognised Latvia’s recovery from the crises, it’s continuing
institutional strength, bold reforms, flexible labour markets and falling indebtedness
Moody’s
S&P
Fitch
Germany
Aaa
AAA
AAA
A/A2
Belgium
Aa3
AA
AA
A-/A3
Czech Republic
A1
AA-
A+
Sovereign
Long-term Foreign Currency Rating development
BBB+/Baa1
BBB/Baa2
BBB-/Baa3
BB+/Ba1
A1
AA-
A+
Slovakia
A2
A+
A+
Fitch
Poland
A2
A-
A-
Moodys
Latvia
A3 (stable)
A- (stable)
A- (stable)
A3
A-
A-
Lithuania
Ba1
BB+
BB+
Jan-15
Hungary
Jan-14
BBB+
Jan-13
BBB+
Jan-12
Baa2
Jan-11
Spain
Jan-10
BBB+
Jan-09
A-
Jan-08
Baa3
Jan-07
Slovenia
Jan-06
BBB+
Jan-05
BBB-
Jan-04
Baa2
Jan-03
Italy
Jan-02
BB-/Ba3
Jan-01
A-
Jan-00
A+
Jan-99
Baa1
Jan-98
Ireland
Jan-97
BB/Ba2
Source: S&P, Fitch, Moody’s
•
8
Estonia
S&P
Source: S&P, Fitch, Moody’s
Over the last 2 years, Latvia benefitted from the rating upgrades to the upper medium grade category from all three major agencies
Credit highlights (Standard & Poor’s) (1)
Credit highlights (Fitch) (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.“
• “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.“
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
• “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.”
Latvia’s Economy Continues to
Perform Strongly
The Latvian Economy Remains Resilient
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
Gross Domestic Product (current prices, EUR billion) and Growth
(n.s.a., %)
Average GDP growth 2011-2014 (YoY, %)
GDP growth, YoY (%)
Contribution to real GDP growth (%)
20
In 2014 and first half of 2015 GDP growth was balanced
between household consumption and exports
Public
administration,
defence,
compulsory
social securit;
Education;
Human health
and social work
activities 15.3%
10
5
0
-5
2010
2011
Private consumption
2012
Public consumption
Source: Central Statistical Bureau of Latvia
10
2013
GFCF
2014
Exports
1H 2015
Imports (-)
Other sectors
21.3%
Agriculture,
Forestry and
Fishing 3.3%
Manufacturing
12.2%
Real estate
activities 12.4%
Construction
6.8%
Information and Transportation
communication
and storage
4.6%
10.1%
Source: Central Statistical Bureau of Latvia
Wholesale and
retail trade,
repair of motor
vehicles and
motorcycles
14.0%
Estonia
Latvia
Lithuania
Malta
Poland
Ireland
Luxembourg
Source: Eurostat
Composition of Gross Value Added by sectors in 2014 (%)
15
-10
Slovakia
2016F
2015F
2014
2013
2012
2011
GDP (EUR billion)
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
United Kingdom
-5
Romania
-4.0
Sweden
-3
-6.0
2010
0
-2.0
Germany
-3.8
-1
Hungary
5
0.0
EU-28 0.7%
Austria
10
1
Bulgaria
3.0
France
2.4
Belgium
2.4
Denmark
3.0
15
3
2.0
3.9
Czech Republic
4.0
5
4.0
Slovenia
20.2
7
6.0
Netherlands
17.9
24.9
Croatia
21.8
24.1
Finland
20
23.6
22.8
Italy
25
Spain
6.2
Latvia has been one of the fastest growing EU economies
over the last 4 years
Cyprus
8.0
Greece
30
Portugal
Economy is in the fifth year of stable growth
Leading Indicators Point to Strengthening Domestic Demand
and Sustained Economic Growth
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
Consumer confidence indicator (Balance, %)
Consumer confidence rises
Retail trade turnover, S.A. data (2010=100)
Source: Central Statistical Bureau of Latvia Note: Data on October 2015
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
Jan-13
May-13
Sep-12
Jan-12
May-12
90
Sep-11
-60
May-11
100
Jan-11
-50
Sep-10
110
May-10
-40
Jan-10
120
Sep-09
-30
Jan-09
130
May-09
-20
Sep-08
140
Jan-08
-10
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
150
May-08
Retail trade turnover is steadily increasing
0
Source: Central Statistical Bureau of Latvia Note: Data on September 2015
Economic sentiment indicators (Balance, %)
Real manufacturing output, S.A. data (2010=100)
Manufacturing output has surpassed pre-recession peak level
Renewed confidence following recession
120
130
110
120
100
90
110
80
100
70
90
European Union (28 countries)
Source: Eurostat; Note: Data on October 2015
11
Latvia
Source: Central Statistical Bureau of Latvia Note: Data on September 2015
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
80
Jan-08
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
60
Resilient and Well Diversified Exports Continue to Support the
Economy
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
Merchandise exports revenue growth (2014 over 2009,%)
Latvia remains among the leaders in terms of export growth in EU
Exports of goods and services
The economy has shifted towards tradable sector driven by
regained competitiveness
54
20
49
42
15
8.4
54
53
52
12.0
12.3
45
40
9.7
8.5
9.6
10.8
11.8
120
60
100
50
80
40
60
30
40
20
98.1
20
0
5
10
Exports of goods and services (EUR billion)
2014
2013
2012
2011
2010
2009
2008
2007
0
2006
0
Exports of goods and services (% of GDP)
Source: Central Statistical Bureau of Latvia
Source: Eurostat
Composition of merchandise exports by country (2014)
CIS (ex. Russia)
4.2%
Other 12,9%
-20
Lithuania
Latvia
Bulgaria
Estonia
Romania
Poland
Slovakia
Czech Republic
Greece
Portugal
Cyprus
United Kingdom
Spain
Slovenia
Netherlands
Germany
Hungary
Croatia
Italy
Austria
Belgium
Sweden
France
Denmark
Finland
Ireland
Malta
Luxembourg
10
9.5
53
Lithuania 18.7%
Composition of merchandise exports by sector (2014)
Textiles and
textile articles
4.0%
Other 14.2%
Live animals and
animal products
4.3%
Other EU 14,1%
Estonia 11.9%
Transport
vehicles 5.1%
Vegetable
products 5.4%
Denmark 3.8%
UK 5.0%
Sweden 5.4%
Poland 6.5%
Source: Eurostat
12
Russia 10.7%
Germany 6.9%
Products of the
chemical and
allied industries
6.8% Mineral products
8.3%
Source: Central Statistical Bureau of Latvia
Wood and
articles of wood
16.6%
Machinery and
mechanical
appliances;
electrical
equipment 16.8%
Prepared
foodstuffs 9.4%
Base metals and
articles of base
metals 9.1%
Flexible and Diversified Exports Help Limiting the Impact of
Russia’s Economic Downturn and Trade Sanctions
Sanctions affect only small part of Latvian exports
Merchandise exports to Russia and Ukraine (% of total exports)
Past experience show high degree of export flexibility
Drop in exports to Russia and other CIS countries has been
compensated by growth in core export markets in 2014
35
30
Weight adjusted merchandise exports index (2007 = 100)
200
5.5
25
+2.3%
6.2
150
3.9
20
15
10
+4.6%
25.3
22.8
5
10.6
11.4
11.6
10.7
1997
2011
2012
2013
2014
0.9
1.4
2.9
6.6
2.4
4.2
7.9
1999
2000
2005
0
1996
0.9
2.9
21.0
12.1
1995
1.0
1998
Russia
100
0.7
0.6
Ukraine
7.7
2015
Jan Sep
Source: Central Statistical Bureau of Latvia
Exports to Russia are diversified
Mechanic / Electr appliance
Metals
Textile
Wood
Plastics and articles thereof
Chemical manufacture
Source: Central Statistical Bureau of Latvia
13
Others
Transport vehicles
1995 2000 2005 2011 2012 2013 2014 2015
JanSep
-5.0%
0
2007
2008
2009
2010
Total
2011
EU-27
2012
2013
2014
CIS
Source: Central Statistical Bureau of Latvia export data
Merchandise exports to Russia by product category (%)
100
90
80
70
60
50
40
30
20
10
0
50
Agriculture and food
Beverages
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
Improved Competitiveness is a Major Export Growth Driver
Adjustment in labour costs and increased productivity have restored competitiveness
Export market shares (2002=100)
The Global Competitiveness Index 2014-2015 Rankings
Growing export market shares point to a favourable competitive
position
Latvia ranks as a top 4 CEE country, and consideration of
sustainability indicators lifts Latvia to top 3 in CEE
Bulgaria
240
200
Czech
Republic
Estonia
180
Hungary
160
Latvia
140
Lithuania
120
Poland
220
100
Romania
2014
2013
2012
2011
2010
2009
2008
2007
Slovak
Republic
Slovenia
Source: World Trade Organization
Unit Labour Cost (ULC) index (2005 = 100; seasonally and
working day adjusted)
Source: Eurostat
14
2005
2006
2007 2008
ULC nomin
2009 2010 2011
% change (3 years)
2012
2013
2014
2015Q2
2014Q4
2014Q2
2013Q4
2013Q2
2012Q4
2012Q2
2011Q4
2011Q2
2010Q4
2010Q2
2009Q4
2009Q2
2008Q4
2008Q2
2007Q4
2007Q2
Real Effective Exchange Rate remains in check after significant
adjustment
2006Q4
170
160
150
140
130
120
110
100
90
2006Q2
ULC is increasing slightly in the context of improving non-cost
competitiveness and broadly in line with developments in major
trading partners
2004
‒
Finland
Germany
Sweden
Denmark
Belgium
Ireland
Czech Republic
Estonia
Latvia
Lithuania
Spain
Slovenia
Portugal
Poland
Hungary
Italy
Bulgaria
Slovak Republic
Romania
Croatia
Real Effective Exchange Rate (REER) index (2005 = 100)
2005Q2
80
70
60
50
40
30
20
10
0
-10
-20
‒
4
3
Global Competitiveness Index Ranking
5
4
10
7
Sustainability-adjusted Global
13
10
Competitiveness Index Ranking
18
14
25
20
29
24
35
25
36
26
37
27
41
29
42
30
43
32
49
34
54
38
59
40
60
41
70
43
75
53
77
55
Source: Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2014–2015
2005Q4
2006
2005
2004
2003
2002
80
Finland
Germany
Sweden
Denmark
Belgium
Ireland
Estonia
Spain
Portugal
Czech Republic
Lithuania
Latvia
Poland
Italy
Bulgaria
Romania
Hungary
Slovenia
Slovak Republic
Croatia
REER (deflator: consumer price indices - 37 trading partners)
REER (deflator: unit labour costs in the total economy - 37 trading partners)
Source: Eurostat, Note: data on 2015/Q2
Labour Market Remains Highly Flexible
Unemployment rate continues to fall. Recent wage increases will foster domestic demand and
household consumption
Registered Unemployment and Jobseekers Rate (%)
Wages and productivity (historical average=100)
Unemployment rate continuous to decline together with increased
economic activity
Increase in wages has been accompanied by rise in productivity
140
22
Registered unemployment rate (%)
120
20
Job seekers rate (%)
100
18
80
16
60
14
40
20
12
0
2000 Q2
Q4
2001 Q2
Q4
2002 Q2
Q4
2003 Q2
Q4
2004 Q2
Q4
2005 Q2
Q4
2006 Q2
Q4
2007 Q2
Q4
2008 Q2
Q4
2009 Q2
Q4
2010 Q2
Q4
2011 Q2
Q4
2012 Q2
Q4
2013 Q2
Q4
2014 Q2
Q4
2015 Q2
10
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
8
Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations
Labour productivity per hour
Real hourly wage
Source: Central Statistical Bureau of Latvia
Employment rate (% of population aged 20-64)
Real productivity growth 2010-2014 (per worker, average YoY, %)
On track to reach 73% policy target by 2020
4
75
72.6
Latvia’s labour productivity has demonstrated one of the
strongest growth rates in recent years
3.3
3
70
2
EU-28 1.1%
65
62.6
0
15
Source: Eurostat data
Latvia
Lithuania
Poland
Estonia
Bulgaria
Slovakia
Romania
Spain
Ireland
Croatia
Slovenia
Sweden
Portugal
Germany
Czech Rep.
UK
Denmark
Finland
Cyprus
Belgium
Netherlands
Employment rate (% of population aged 20-64)
Source: Eurostat
Hungary
Italy
Austria
-1
Malta
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2013Q1
2012Q4
2012Q3
2012Q2
2012Q1
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
55
Greece
60
1
The Pre-crisis External Imbalances Have Been Unwound,
Resulting in a More Sustainable Balance of Payments Position
Resilience to external risks is increasing as net external debt is declining rapidly
Financing of the Current Account (% of GDP)
Current Account and its components (% of GDP)
Financial account flows reflect an orderly deleveraging of the
economy
Current Account balance has reached a more sustainable level
20
30
10
20
10
0
0
-10
-10
-20
-30
-20
-40
-50
-30
2007
2008
2009
2010
2011
Goods
Secondary income
2012
2013
Services
Current account
2014
2007
2015Q1 2015Q2
2008
Primary income
2010
Current account
2011
2012
2013
Capital account
2014
2015Q1 2015Q2
Financial account
Source: Bank of Latvia
Source: Bank of Latvia
Private sector debt (% of GDP, 2013)
External Debt (Gross: EUR billion, Net: % GDP)
Latvia has one of the lowest private sector debts in the Eurozone
Net external debt is progressively declining as a % of GDP
58.1%
35
2009
60%
400
350
30
25
50%
300
40%
250
29.2%
20
200
30%
15
20%
10
5
10%
0
0%
91
100
50
Source: Bank of Latvia
Source: Eurostat
Luxembourg
Cyprus
Ireland
Netherlands
Portugal
Spain
Belgium
Finland
Malta
France
Greece
Austria
Italy
Estonia
Germany
Slovenia
Latvia
2013
2014 2015Q1 2015Q2
MFIs (excl. Central Bank)
Other sectors
Net Exernal Debt % of GDP (right axis)
Slovakia
2012
Lithuania
0
2007
2008
2009
2010
2011
Direct investment: Intercompany Lending
General Government
Central Bank
16
Eurozone = 163
150
Growth Supported by FDI and Healthy Investments Shifts
Towards Tradable Sector
FDI is well diversified by source and sectors
Non-financial investments (constant prices, structure in %)
FDI Stock (EUR billion and % of GDP)
Structure of investments has shifted towards tradable sector
FDI has recovered after slowdown during recession
11.6
12
12.5
12.8
8.1
8.1
65%
8.2
8
50%
6
43%
45%
46%
75%
50%
52%
52%
55%
47%
45%
33%
35%
0
25%
2009
2010
2011
2012
Stock of FDI (EUR billion)
2013
2014
2015Q1 2015Q2
Sotck of FDI (% of GDP)
Industry
28
30
80
17
23
19
Significant FDI inflows were in financial and insurance activities,
real estate and manufacturing
Financial and insurance activities
Construction and real estate activities
21.0
27.0
50
10
40
11
14
17
18
30
20
9
4
6
6
7
6
5
4
7
5
5
10
20
14
17
17
2010
2012
2014
Transportation and
storage
Trade
Real estate and
construction activities
Information and
communication
Other
0
Cumulative FDI geographic diversification in 2Q 2015 (%)
EU countries have been dominant sources of FDI
Luxembourg 2.9
UK 2.9
Lithuania 3.6
Denmark 3.6
Other 29.9
Manufacturing
Estonia 4.5
Wholesale and retail trade, auto repair
2.7
3.6
3.1
3.9
Electricity, air conditioning and utilities
supply
Transportation and storage
16.4
10.6
11.7
Germany 5.4
Sweden 19.6
Norway 5.6
Agriculture, forestry and fishing
Russia 6.8
Information and communication
Cyprus 7.1 Netherlands 8.0
Other
17
20
Source: Central Statistical Bureau of Latvia
FDI distribution by sector 2Q 2015 (%)
Source: Bank of Latvia
27
Public administration
and defence
2008
Source: Bank of Latvia
31
70
60
2
2008
100
90
10.3
9.4
10
4
12.1
Source: Bank of Latvia
Inflation Driven by External Factors Remains Low
Currently low level of inflation reflects oil price effects and subdued food prices
Inflation (CPI)
12-month average HICP in October 2015 (YoY, %)
5
1.2
4
0.8
-0.4
October-0.2%
-0.8
0
-1.2
-1
-1.6
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
-2
Energy (contribution, pp)
Food (contribution, pp)
Inflation (y-o-y, %)
Inflation excl. energy and food (y-o-y, %)
Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations
Malta
Austria
Sweden
Belgium
Portugal
Czech Republic
Latvia
Denmark
Netherlands
Germany (until 1990…
France
Italy
Estonia
Ireland
Finland
Luxembourg
Hungary
Romania
Croatia
Slovakia
Lithuania
Slovenia
Spain
Poland
Bulgaria
Greece
Cyprus
1
Source: Eurostat
Inflation (HICP, YoY, %)
Recent developments and outlook
Inflation pressures are contained over the medium-term
● 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.
15
10
5
October-0.1%
0
-5
Jan/99
Aug/99
Mar/00
Oct/00
May/01
Dec/01
Jul/02
Feb/03
Sep/03
Apr/04
Nov/04
Jun/05
Jan/06
Aug/06
Mar/07
Oct/07
May/08
Dec/08
Jul/09
Feb/10
Sep/10
Apr/11
Nov/11
Jun/12
Jan/13
Aug/13
Mar/14
Oct/14
May/15
-10
Source: Eurostat
18
EU-28 0.0%
0
2
20
0.3
0.4
3
● 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.
A Stable and Well Capitalised
Banking Sector Prepared to
Restore Credit Growth
Stable and Well Capitalised Banking Sector (1/2)
Latvia’s largest banks successfully passed the comprehensive assessment conducted by the European
Central Bank (ECB) in 2014
Key highlights
● 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 nonresident 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.
Source: (1) - Financial and Capital Markets Commission; (2) – Bank of Latvia
Assets and Profits of the Banking system
35.0
400
29.8
300
250
200
150
100
31.6
30.8
29.2
28.8
1,000
500
25.0
311
85
174
20.0
246
419
0
-254
15.0
-500
-513
10.0
-1,000
-1,100
5.0
0.0
-1,500
2008
2009
2010
2011
2012
Total Assets (EUR billion)
2013
2014
2015 IX*
Profit (EUR million, rhs)
Source: Financial and Capital Market Commission
Loans to residents (annual change, %) and contribution to the
change (pp)
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
70
60
50
40
30
20
10
0
-10
-20
350
-3.4
I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
50
0
2011
2012
Mortgage loans (EUR million)
Source: Financial and Capital Market Commission
20
31.3
30.8
30.0
New Loans granted to households 2011-2014 (EUR million)
Rising new household loans point to a credit recovery
33.1
2013
2014
Other loans to households (EUR million)
Government
Financial institutions
Households
Total
Non-financial corporations
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)
Stable and Well Capitalised Banking Sector (2/2)
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
Key highlights
Capital ownership of the Banking system (3Q 2015)
● 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
Foreign
owned
banks
86%
Nordic
Banks 62%
Domestically
owned
banks
14%
Source: Financial and Capital Market Commission
Source: (1) - Financial and Capital Markets Commission; (2) - Association of Commercial Banks of Latvia
Capital Adequacy (%)
Composition of FCMC liquidity ratio (EUR billion)
Latvia’s banking sector capitalisation is well above regulatory
requirements(1)
22
20
18
16
14
12
10
8
6
4
2
0
20.7 20.8 20.6 20.9 20.7 21.3 21.6
18.9
18.2 18.5 18.8
18.1
17.2 17.7 17.6
17.0 17.4
14.2 14.2
15.2 14.6 15.2 15.1
17.0 17.3
16.3 16.6
14.0 14.0
11.1 11.2
12
18
18.1 17.9 18.1 18.0 18.4 18.4
75
12
70
8
65
60
0
11.5 12.0 12.0
%
16
4
14.9 14.9 15.2 15.2
Other liabilities with residual
maturity up to 30 days
Deposits with residual
maturity up to 30 days
Liabilities to MFIs with
residual maturity up to 30
days
Liquid securities
55
-4
50
-8
45
-12
Total capital ratio (%)
CET1 ratio (%)
CET ratio (%)
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
21
Liquidity remains at high level
-16
40
-20
35
-24
Claims on MFIs with
residual maturity up to 30
days
Claims on the BoL with
residual maturity up to 30
days
Vault cash
30
123412341234123412341234123412341234123
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Financial and Capital Market Commission
FCMC liquidity ratio (rhs)
Quality of Loan Portfolio Improves Steadily
Still decreasing loan portfolio reflects deleveraging of the real sector
Non-financial Corporations (EUR million)
%
2,500
25
2,000
Households (EUR million)
Loan loss
provisions
20
1,500
15
1,000
10
5.3
500
Loans over 90
days past due
Share of loan
loss provisions in
outstanding
loans (rhs)
5
0
0
1Q
2008
1Q
2009
1Q
2010
1Q
2011
1Q*
2012
1Q
2013
1Q
2014
1Q
2015
Share of loans
over 90 days
past due in
outstanding
loans (rhs)
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
20
1,500
15
500
5
0
0
1Q
2008
Securities
25
Loans
20
Claims to MFI
15
Vault cash and
claims to BoL
10
20
22
1Q
2011
1Q*
2012
1Q
2013
1Q
2014
1Q
2015
200%
30
25
Source: Bank of Latviia
1Q
2010
Share of loans
over 90 days past
due in outstanding
loans (rhs)
Loan-to-deposit ratio has fallen below 70% on a back of growing
deposits base and shrinking loan portfolio
Other assets
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009
2010
2011
2012
2013
2014
2015
1Q
2009
Share of loan loss
provisions in
outstanding loans
(rhs)
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
30
0
10
Loans over 90
days past due
35
35
5
8.6
1,000
Loan loss
provisions
Liabilities of Banks (EUR billion)
A contraction of the banks’ loan portfolio, which replicates
deleveraging of the real sector, has stabilized in 2014
10
25
2,000
Assets of Banks (EUR billion)
15
%
2,500
150%
100%
50%
5
0
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009
2010
2011
2012
2013
2014
2015
Liabilities to parent MFI
Liabilities to other MFI
Deposits
Provisions
Equity
Other liabilities
Loan-to deposit ratio
Source: Bank of Latvia
0%
Banks Engaged in Non-resident Deposits (NRD) Business are
Subject to Much Stricter Capital and Liquidity Requirements
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
Total banking sector non-resident deposits to assets and GDP
(%)
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
Growth rates of resident and non-resident deposits (%)
Growth rate of non-resident deposits has stabilized, and has been
in line with a growth rate of resident deposits in recent years
55
30
25
20
15
10
5
0
-5
-10
-15
50.5
47.6
50
49.0
43.9
45
40
35
33.5 34.1
37.1
35.7 36.6
29.1 29.8 30.2
30
25
I
IV
2011
VII
X
I
IV
2012
VII
X
I
IV
2013
VII
X
I
IV
2014
VII
X
I
IV
2015
VII
20.4
21.9
23.8
25.0
40.9
40.7 39.8
39.6 39.6 39.7
31.7 31.5 32.1 31.6
33.5 34.1
35.6
37.2
39.1 38.1
26.9
20
1Q 2Q
2011
Anual growth rate of non-resident deposits (corrected for exchange rate fluctuation)
Anual growth rate of resident deposits
Source: Bank of Latvia
Latvia, Financial and Capital Market Commission; ¹ - as of 31 December 2014
38.8 38.9 39.3
3Q
4Q
1Q 2Q
2012
3Q
4Q
1Q 2Q
2013
NRD to Assets
3Q
4Q
1Q 2Q
2014
NRD to GDP
3Q
4Q
1Q 2Q
2015
Source: Bank of Latvia
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
FCMC liquidity ratio (%)
Additional liquidity requirements for non-resident servicing banks
provide significant liquidity buffers to counter potential liquidity
outflows
Total lending to residents
100
Residents servicing
banks*
13.3
80
78.3
67.0
60
44
53.5
40
Total resident deposits
9,5
56
20
Banks focused on
NRD business**
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
23
0
1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q4Q1Q 2Q3Q
2008
2009
2010
2011
2012
2013
2014
2015
Total banking sector
Resident servicing banks*
Non-resident servicing banks**
Minimum requirement for 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
;
Outstanding Track-record of
Fiscal Consolidation and
Structural Reforms
Latvia is Committed to Policy Implementation and Reforms
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)
25
Further Key Policy Goals
Fiscal Discipline

Correction of budgetary imbalance
achieved through fiscal consolidation
Continue implementation of fiscal discipline framework and
conduct fiscal policy in sustainable manner

Fiscal targets constantly exceeded,
public finance on sound foundations
Efficient use of EU funds to stimulate economic growth and
promote competitiveness

Bank supervision improved

Investor and consumer confidence
restored
Absorption of EU funds
Structural Reforms
Ensure long-term stability and sustainability of financial and social
systems
Public Sector Efficiency
Enhance management of state-owned assets, improve tax
compliance and reduce informal economy
Latvia is Determined to Ensure Fiscal Sustainability
Conduct policies in a fiscally responsible way equally renewing quality and amount of public
services and addressing potential risks
Budget Balance – 2014 (% of GDP)
General Government nominal balance (% GDP)
-3.5
Prudent fiscal management with one of the lowest deficits in EU
-3.3
2
Draft Medium-term Budgetary
Framework Law 2016 – 2018
(* - assessment; ** - target)
-1,5
EU-28 -3%
-4
-2
2016** 2017** 2018**
Source: Ministry of Finance
Recent results and fiscal forecast
● 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.
Ministry of Finance
Denmark
Estonia
Lithuania
Germany
Latvia
Romania
Sweden
Malta
Austria
Hungary
Italy
Poland
Greece
Luxembourg
2015*
Czech Republic
2014
Netherlands
2011
Slovakia
0
Ireland
-10
France
-0.5
Croatia
2013
-8
-0.8
Slovenia
2012
-1
United Kingdom
-0.7
Spain
-1
-0.8
Cyprus
-1
-6
Bulgaria
-1.5
-1.4
Portugal
-1.5
26 Source:
0
-2
Belgium
-2.5
Finland
-3
Source: Eurostat
General target of fiscal policy in Latvia
Specific targets 2016 – 2018
Course of actions
Ensure
responsible
and
sustainable
fiscal
policy,
respecting fiscal discipline
Legal framework (FDL) and
institutions (Fiscal council) have
been created. Alterations are not
foreseen. Implementation is
crucial
Facilitate improvements
quality of life of citizens;
in
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
Long Term Sustainability of Public Finances
Recent measures taken by Latvia address sustainability of the age-related expenditure in
the long term
● 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.
Source: The State Social Insurance Agency
2.5
8.3%
6.1%
6.6%
2.0
0.5
2.7%
7.5%
5.0%
1.2
1.2
2.5%
0.3
0.0%
2009
2010
2nd tier pension net assets (EUR billion)
2011
2012
2013
2014
2nd tier pension net assets (% of GDP)
Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia
27
-3.0
-1.6
Age-related spending, in percentage points of GDP, 2013
Latvia’s age-related spending is one the lowest in the EU
30.0
EU-28 24.6%
20.0
16.7
15.0
10.0
1.0
0.0
2008
1.0
-1.0
25.0
0.7
2007
EU-28 1.8%
10.0%
1.7
1.5
1.5%
3.0
Romania
Lithuania
Latvia
Estonia
Bulgaria
Slovakia
Luxemburg
Czech Republic
Ireland
Cyprus
Hungary
Poland
Croatia
United Kingdom
Malta
Germany
Spain
Netherlands
Slovenia
EU28
Sweden
Portugal
Belgium
Austria
Italy
Greece
Denmark
Finland
France
6.5%
1.0
5.0
7.2%
5.3%
1.5
7.0
Source: European Commission Ageing Report, May 2015
The 2nd Tier Pension Net Assets under Management
(EUR billion and as % of GDP)
2nd tier pension scheme will gradually take over part of the
pension obligations from the public, e.g. 1st tier, pension scheme
2.0
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
Croatia
Latvia
Greece
France
Denmark
Cyprus
Italy
Bulgaria
Estonia
Sweden
Spain
Hungary
Portugal
Poland
EU28
Romania
Lithuania
United Kingdom
Ireland
Czech Republic
Austria
Finland
Slovakia
Netherlands
Germany
Belgium
Luxemburg
Malta
Slovenia
Latvia’s Pension System and recent reforms
Source: European Commission Ageing Report, May 2015
Practical Actions and Strong Commitments are in Place to
Continue Structural Reforms Aiming to Improve Public Finances
Structural reforms to ensure efficient use of budgetary and public resources is contributing to
fiscal sustainability
Financial System
Public Administration

Banking system recapitalised, role of regulator strengthened, deposit guarantee laws
streamlined

Making public administration more efficient, unified public wage grid to keep wages under
control, optimization of public services
Improving tax compliance and combating shadow economy
Reforming management of state-owned enterprises
● The Tax Policy Strategy aims to increase the overall tax burden to 1/3
of GDP(1) mainly through increasing the tax compliance.
● 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.
● 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.
Source: Ministry of Finance, Ministry of Economy; (1) - The overall tax burden is estimated at 28% of GDP in
2014;
28
Source: Ministry of Economy, Ministry of Finance; OECD Review of the corporate governance of state-owned
enterprises Latvia
Government Policy Measures Building Foundation for the
Sustained Growth
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
Business Environment
 Education and healthcare system reforms aimed to increase efficiency
 Addressing labour market issues through education and employment policies
 Improving judicial system by strenghtening role of Judicial Council, strenghtening
competence of courts and law enforcement authorities and reorganising the position of
insolvency administrators
Legal Environment
Labour Market
 SME access to financing, export oriented programmes, reduction of administrative burden
Source: National Reform Programme 2015; European Commission, Country Report Latvia 2015
Allocation of EU funds for 2014-2020 by priority axes
3%
4%
4%
26%
7%
9%
13%
11%
11%
12%
Promoting sustainable transport and removing
bottlenecks in key network infrastructures
Protecting the environment and promoting
resource efficiency
Investing in education, skills and lifelong
learning
Supporting the shift towards a low-carbon
economy in all sectors
Strengthening research, technological
development and 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 labour
mobility
Other areas
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
Source: Ministry of Finance
Source: Ministry of Finance
29
Structural Reforms and High Institutional Strength Facilitate
Favorable Business Environment and Encourage Investments
World Bank ‘Ease of Doing Business’ Ranking
World Bank Worldwide Governance Rankings
Strong Governance supports the Economy and Business
Latvia is consistently ranked as a top 2 CEE country
Denmark
Norway
United Kingdom
Finland
Sweden
Ireland
Germany
Estonia
Austria
Latvia
Lithuania
Portugal
Netherlands
France
Poland
Spain
Slovak Republic
Bulgaria
Belgium
Czech Republic
Romania
Slovenia
Hungary
Italy
4
6
Voice and Accountability
8
9
11
21
Government Effectiveness
23
24
25
23
32
33
42
80
75
73
75
64
63
48
76
51
54
Latvia
56
31 32
29 30 30
26
25 25 25
17
15 15 16
22 22
21 21 21
19 19 20 20
13 13
Malta
France
Belgium
Italy
Portugal
Spain
Germany
Luxembourg
Austria
Greece
Netherlands
Sweden
Source: Eurostat, Taxation trends in the European Union 2014
Denmark
Slovakia
Estonia
United Kingdom
Finland
Hungary
Poland
Croatia
Slovenia
Czech Republic
Romania
10
Lithuania
Regional Average
Income Group Average
Source: World Bank, 2013 Rankings
38
Latvia
66
Control of Corruption
44
76
76
69
Rule of Law
37
38
34 35
Ireland
75
68
Regulatory Quality
27
Latvia has one of the lowest corporate Income tax rates in the EU
Cyprus
70
17
Implicit tax rate on capital (2012), %
Adjusted Top Statutory Tax Rate on Corporate Income (2014), %
Bulgaria
66
65
63
Political Stability and
Absence of Violence
13
14
Source: World Bank, Doing Business 2015
30
61
Light taxation of capital provides stimulus to business investments
Estonia
Lithuania
Latvia
Ireland
Netherlands
Slovakia
Czech Republic
Poland
Slovenia
Hungary
Germany
Austria
Spain
Cyprus
Portugal
Finland
Sweden
Belgium
United Kingdom
Italy
France
8.1
9.8
9.9
13.0
13.7
16.7
18.0
19.0
19.6
21.4
22.2
Source: Eurostat, Taxation trends in the European Union 2014
25.0
25.3
26.0
29.5
29.9
30.6
35.5
35.7
37.0
46.9
Government Debt and Funding
Strategy
Public Debt Remains at Moderate Levels
Latvia remains committed to keeping government debt at moderate levels
General Government Debt
Key Characteristics of Latvia’s Government Debt
(EUR million; Year End, % of GDP, ESA methodology)
● 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 prefunding 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
50%
46%
15,000
43%
45%
41%
41%
38%
40%
36%
38%
35%
35%
10,000
30%
25%
20%
15%
8,418
8,700
9,079
8,876
2010
2011
2012
2013
9,861
9,137
2014
2015 (f)
10,126
9,965
2016 (f)
2017 (f)
5,000
10%
5%
0%
0
Source: Eurostat, The Treasury; Forecasts: 2015 – 2017 General Government Debt as % of GDP are the
Treasury forecasts
General Government Debt – 2014 (% GDP)
Interest costs (% GDP)
3.00
2.50
2.00
1.50
1.00
2011
2012
Latvia
2013
Lithuania
2014
EU-28
Source: European Economic Forecast, Autumn 2015, European Commission
2015(F)
Eurozone
2016(F)
Estonia
Luxembourg
Bulgaria
Romania
Latvia
Lithuania
Czech Republic
Sweden
Denmark
Poland
Slovakia
Finland
Netherlands
Malta
Germany
Hungary
Slovenia
Austria
Croatia
United Kingdom
France
Spain
Belgium
Ireland
Cyprus
Portugal
Italy
Greece
200 Conservative
Conservativedebt
debtposition
position
180
160
140
120
100 EU-28 86.8%
80
60
41%
40
20
0
3.50
Source: Eurostat
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
32
Central Government Debt Profile
International Loan Programme has been largely refinanced in international capital markets,
while government debt redemptions remain moderate in the short-term
Debt Redemption Profile (30 September 2015, EUR million)
1,800
Domestic debt redemption
1,600
Other external debt
liabilities
World Bank loan
(Program)
EC loan (Program)
1,400
1,200
1,000
Eurobonds
800
Debt structure by instruments (EUR million)
100%
Other
90%
80%
60%
Loans from financial
institutions (incl.IMF
and EC loans)
50%
Eurobonds
70%
40%
600
30%
400
20%
Domestic T-bonds
10%
200
Domestic T-bills
Debt redemptions and borrowings (EUR billion)
2Q15
Sep-15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
0.4
0.4
1
0.6
0.3
-0.7
-1
2.0
1.7
-0.4
0.4
-0.4
-1.2
2011
Eurobond issues
Eurobond redemption
Repayment of IFI's loans
2012
-0.4
-0.4
Eurobonds
63%
-1.0
2013
Domestic
securities
14%
Total
domestic
debt
18%
Other
domestic
debt
3%
2014
Domestic securities issues
Domestic securities redemption
Net borrowings
Source: The Treasury; Note: Total borrowing requirement 2016-2018 is estimated at EUR 3.5 billion.
Foreign
loans from
financial
institutions
(incl. EC)
20%
Total foreign
debt
82%
-2
33
2Q12
1Q12
Composition of Central Government Debt (as of September 2015)
Debt redemption for 2015 was largely pre-funded in 2014
2
0
4Q11
Source: The Treasury, as of the end of September 2015
Source: The Treasury
3
3Q11
0
2Q11
1Q11
0%
Source: The Treasury
Conservative Borrowing Strategy, Based on Pre-funding
Latvia has prudent debt management strategy
Outstanding Benchmark issues
Medium-term Borrowing Strategy
● Goal:
In 2014 Latvia has successfully extended its EUR curve with 7 and 10
— To ensure continuous borrowing opportunities in the international and year benchmark issues
domestic financial markets on optimal terms and conditions
●
Curr
Principles:
— Flexibility (towards timing, maturities and currencies)
EUR
— 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
Source: The Treasury
USD
Issue Date
Maturity Date
Issue Size
Cpn (%)
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
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
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
1% 1%
Germany/Austria
Fund Manager
6%
CEE
Switzerland
46%
UK
17%
Other
Source: The Treasury
34
Banks/Private
banks
Central banks
Asia/ME
18%
Insurance/Pension
funds
18%
47%
27%
Parameters
Strategy
30 Sep 2015
31 Dec 2014
Not less than at the
end of preceding year
EUR 1,189
million(1)
EUR 1,047
million
— 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%
3.65 - 5.15
4.54
4.16
100% EUR with a
deviation of +/- 5%
100%
100%
Domestic debt securities
at the end of year
Maturity profile (%)
3%
16%
Debt portfolio management
Hedge funds
Macaulay duration (years)
Net debt(3) currency
composition
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
Domestic Market Continues to Perform Strongly
Demand is steady and average yields remain low
Achievements in the domestic market
Domestic securities outstanding by original maturity
(as of 30 September 2015)
11 years bonds
2%
Savings bonds
<1%
12 months
T-bills 7%
10 years bonds
21%
November
Jan-Feb
Mar-Apr
May
2014
June
July
6-m*
3-y
5-y
12-m
5-y
3-y
5-y
3-y
3-y
6-m*
3-y
3-y
3-y
5-y
6-m*
9
8
7
6
5
4
3
2
1
5-y
45
40
35
30
25
20
15
10
5
0
12-m
● 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 Tbond 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 T-Bill and T-Bond Competitive Multi-Price Auctions
Sept-Oct Nov
2015
Amount sold, million EUR (LHS)
Bid-cover Ratio (RHS)
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.
Weighted Average Yields on Domestic securities auctions (%)
Low yields reflect continued investor confidence
2.4
1.9
1.4
3 years bonds
27%
0.863
0.9
0.201
0.045
0.02
2015/07
2015/11
0.4
Source: The Treasury
35
6 months*
12 months
3 years
2015/09
2015/05
2015/03
2015/01
2014/11
2014/09
2014/07
2014/05
2014/03
2014/01
2013/11
2013/09
2013/07
2013/05
2013/03
5 years bonds
42%
2013/01
-0.1
5 years
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.
Credit Positioning of Latvia
Latvia’s Strong Credit Fundamentals vs. its Peer Group Inside
and Outside of the Eurozone
Credit Ratings
and outlook
(M/S&P/F)
Latvia
Lithuania
Poland
Slovakia
Czech
Republic
Belgium
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)
105.1 106.7 106.7
Debt/GDP(1)
 2013
 2014
 2015(F)
39.1
Deficit/GDP(1)
 2013
 2014
 2015(F)
-0.9
GDP growth(1)
 2013
 2014
 2015(F)
GDP per capita(2)
(EU-28=100)
 2012
 2013
 2014
CA/GDP(1)
 2013
 2014
 2015(F)
40.6
38.3
-1.5
-1.5
38.8
40.7
-0.7
42.9
54
55.9
2.4
2.4
53.5
52.7
-2.8
-2.6
-2.8
-2.7
-3.3
3.3
3
-1.9
-1.9
-3.1
-2.7
60
64
69
73
74
66
67
68
1.3
-2.1
-2
-1.8
74
75
0.7
-0.8
-0.9
-1.1
-0.5
-3
87.8
-2.5
76
82
82
-1.1
-2
1.9
120
119
1
0.8
119
84
0
-0.8
1.4
1.3
0.2
3.9
1.4
-3.3
2
0
64
88.6
3.2
1.4
1.3
41
-2.9
2.5
1.7
42.7
87.3
4.3
3.5
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-toGDP ratio in the EU-28 than the consolidated general government debt ratio published by Eurostat.
37
45.2
-1.3
-4
3.5
54.6
-1.1
-2.6
3
50.4
EU-28(3)
-2.5
1.8
1.5
1.6
2.2
Conclusion
Latvia Investment Highlights
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
Strong and Sustainable
Economic Growth
(3,9% average in the last 4 years)(1),
Decreasing Unemployment and
Increasing FDI
Latvia’s Economy remains
Competitive and is supported
by the Tradable sector
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
Long Term Growth is reinforced by
Predictable Public Policies as the
Government has established a Track
Record of Successful Structural
Reforms
Well Capitalised Banking Sector is in
Position to Restore Credit Growth
and to Promote Economic
Development
Strong Governance Indicators
and Institutional Strengths increased
by joining the Eurozone
Source: (1) - Central Statistical Bureau of Latvia
39
Sustainable Debt Levels
accompanied by Prudent Fiscal
Management
Latvia is benefiting from Eurozone
Membership since 1 January 2014
Thank You
40