Economic Developments in Latvia 20012002

1
Economic Developments in Latvia 2001-2002

• Ilmars Rimevics
• Governor of the Bank of Latvia

2
Year 2001 Witnessed Robust Growth in All Major
Sectors of the Economy
Annual Growth,
3
GDP Growth in 2001 Determined by Strong Domestic
Demand and High Investment Rate
Factors contributing to GDP growth, points
4
Latvia is the Fastest Growing Country in Central
and Eastern Europe
GDP Growth,
5
Rapid economic growth has been achieved in a low
inflation environment
Inflation Brought To Levels Comparable To
EU Annual CPI changes,
6
Productivity Growth Exceeds Real Wage Growth
Average annual growth,
7
Peg to SDR Basket Ensures Nominal Exchange Rate
Stability
8
SDR Peg Justified by Economic Fundamentals
SDR Basket and Currency Structure of Selected
Economic Sectors in Latvia, 2001
9
Low Inflation Supports Stable Real Exchange Rate
Real exchange rate of the lats against major
trading partners January 2001100 (upward
movement implies appreciation)
10
Real Appreciation Against Western Partners Stems
from Convergence Towards Equilibrium
Price Level in Latvia ( of EU average)
Source Eurostat
11
Despite Economic Slowdown in the EU, Export
Growth Remains Robust
Annual Exports Growth,
12
Widening of the Current Account Deficit in 2001
Was the Result of Strong Domestic Demand And
LaSCo Fleet Renewal
Current Account Deficit ( of GDP)
13
Current Account Deficit Represents Countrys High
Investment Needs
14
Current Account Deficit Largely Covered by FDI
and Long-term Capital Inflows
Current Account Deficit and Capital Inflows ( of
GDP)
15
Latvia Has Been Successful In Attracting FDI
Inflows
FDI stock in 2001, of GDP
(1.4 bln. LVL)
16
BoL Foreign Currency Reserves Cover Monetary Base
by 118 (March 2002)
1999
2000
2001
2002
17
Budget Deficit Narrowed in 2001
Fiscal balance ( of GDP)
18
Eurobond Emission Raised Governments External
Debt in 2001, But It Is Still Low
Government Debt ( of GDP)
19
Situation in Labour Market Improves
Official Unemployment Rate,
1998
1999
2000
2001
2002
20
Banking Sector Developed Successfully in 2001
Annual growth rates,
21

Banking System in Latvia Owned Largely by
European Investors
Banking Systems Equity Structure by Countries
() 2001
6.7 mln. LVL in Rietumu Banka
22
Credit Expansion Does Not Lead to Worsening of
Credit Portfolio
Non-performing loans ( of credit portfolio)
23
EU Accession and BoL Monetary Policy

• BoL Monetary Policy Framework Already Now Similar
  To That Adopted By The ECB
• Price stability main goal of the BoL monetary
  policy
• Institutional independence from the government
  decisions
• No direct government financing
• Personal independence of the members of the
  Governing Board
• Financial independence - all expenses of the Bank
  of Latvia are financed from the Bank's revenue

24
Latvia And The Euro

• No obstacles to changing currency peg to the euro
• Systems ready, sufficient foreign exchange
  reserves
• No immediate plans to do so
• SDR basket more appropriate for Latvian economy
• In Latvias future
• If Latvia joins the EU
• the lats will be pegged to the euro under the ERM
  II framework
• after all the Maastricht criteria are met, Latvia
  will introduce the euro
• If Latvia opts out of the EU membership
• BoL intends to maintain the fixed exchange rate
  regime
• peg will be changed to the euro only if it is
  supported by changes in currency structure of
  foreign trade, banking systems liabilities, etc.
  
• if the anchor currency is changed, it will be
  announced well in advance

25
Latvia is Approaching Economic Criteria Set for
EMU MembershipBaltic states and Maastricht
criteria in 2001
EMU 10 years (XII 2001), Lithuania 7 years
(XII, 2002), Latvia 5 years gov. bonds (IV,
2001) Central government budget balance
I-IX 2001
26
Latvia Winner of 2001 among 100 Emerging
Economies!(EIU)

• EIU has recognized Latvia as a winner of 2001
  among 100 emerging economies in both overall
  and economic policy risk categories, grounding
  Latvias success with its
• firm growth rate
• low inflation
• stable exchange rate
• strong export growth
• prudent fiscal policy
• ample CB reserves
• stable banking system
• and good progress in EU negotiations.

27
Bank of Latvia Forecasts for 2002