This presentation summarises recent macroeconomic developments in Latvia and outlines a medium-term outlook for real GDP and inflation. Presentation reviews ongoing economic recovery, labour market issues and includes analyses on core factors behind the path of inflation. The main focus of the presentation is on the issue of competitiveness of the Latvian economy pointing to the costs adjustment process and productivity gains, as well as presenting export performance, market shares and current account developments. Presentation also features slides on monetary and financial market developments.

1. Economic Developments in
Latvia
December, 2012

2. Macroeconomic Overview

3. The strong economic growth in Latvia is
supported by sound fundamentals
Real GDP growth in the 1st Half of 2012 (% y-o-y)
6
5
4
3
2
1
0
-1
-2
-3
-4
LV
LU
RO
BG
CY
LT
EE
DK
IE
BE
GB
HU
CZ
ES
IT
NL
SK
FI
FR
MT
SI
PL
SE
AT
PT
DE
Source: Eurostat

4. Economic growth remains strong; GDP growth
in 2012 overall is expected to be around 5%
Real GDP growth (%)
8
6.6 6.9
5.7 5.7
6 5.0 5.3*
4 3.1 3.6
2.8
2
0
-2
-4 -4.0
-6
-6.2
-8
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3
Source: Central Statistical Bureau; * Flash estimate

5. Economic growth was led initially by exports,
broadened to investment and private
consumption
Real GDP growth (y-o-y, %) and contribution to the growth (percentage points)
21
18
15
12
9 6.6 6.9
5.7 5.7 5.0 5.3*
6 3.1 2.8 3.6
3
0
-4.0
-3 -6.2
-6
-9
-12
-15
-18
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3
Private consumption Public consumption GFCF Changes in inventories
Exports Imports GDP, % yoy
Source: Central Statistical Bureau of Latvia; * - Flash estimate

6. GDP growth is broad based across sectors
Real GDP growth (y-o-y, %) and sector contribution to the growth (percentage
points)
8 6.6 6.9
5.7 5.7 5.3*
6 5.0
3.6
4 3.1 2.8
2
0
-2
-4
-6
-4.0
-8 -6.2
-10
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Agriculture Industry Construction
Trade Transportation and storage Private services
Public services Product taxes and subsidies GDP y/y, %
Source: Central Statistical Bureau of Latvia; * - Flash estimate

7. Growth has been supported by regained
competitiveness: wage-productivity gap has
been closed
Wage and productivity
(2005 Q1 = 100; seasonally adjusted)
160
150
140
130
120
110
100
90
Q3
Q3
Q3
Q3
Q3
Q3
Q3
Q3
Q1 2011
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2012
Labour productivity Real wage
Source: Central Statistical Bureau of Latvia; Bank of Latvia’ s calculations

8. Export growth remains robust
Export growth of goods and services (y-o-y; %, in nominal terms )
25
20
15
12.3%
10
5
0
-5
-10
-15
-20
2006 2007 2008 2009 2010 2011 2012 Q1-Q3
Source: Central Statistical Bureau of Latvia

9. Current account stays close to balance
Current account main positions (% of GDP)
15
10 8.6
5 2.9
0 -2.2 -1.9
-3.1 -2.7
-5
-10
-13.1
-15
-20
2008 2009 2010 2011 Q1 2012 Q2 Q3*
Goods and Services Income Current Transfers Current Account
Source: Bank of Latvia; * Bank of Latvia GDP forecast used

10. Inflation on a declining trend, bringing
compliance with the Maastricht inflation criteria
Impact of food and energy prices on total inflation (pp) and the y-o-y inflation rate (%)
7
5.0
5
3
1.6
1
-1
-3
-5
I III V VII IX XI I III V VII IX XI I III V VII IX
2010 2011 2012
Food Energy Inflation (y-o-y) Inflation excluding food and energy (y-o-y)
Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations

11. Unemployment rate continued to decline
Unemployment rate (% of economically active population)
25
20
15 13.5
10.7
10
5
0
V
X
V
X
V
X
V
X
II
VII
XII
II
VII
XII
II
VII
XII
II
VII
I 2011
IV
IX
IV
IX
IV
IX
IV
IX
III
III
III
III
VI
VIII
XI
VI
VIII
XI
VI
VIII
XI
VI
VIII
I 2009
I 2010
I 2012
Registered unemployment rate Unemployment rate (Labour Force Survey)
Source: Central Statistical Bureau of Latvia; State Employment Agency

12. Financial sector issues
12

13. In 2012, the average level of deposits is almost
the same as in previous year - depositors’
confidence is rather stable
Domestic deposits (mln lats)
6000
5800
5600
5400
5200
5000
4800
4600
4400
4200
4000
IV
IV
IV
IV
IV
I 2008
X
I 2009
X
I 2010
X
X
I 2012
X
VII
VII
VII
VII
VII
I 2011
Source: Bank of Latvia

14. Decline in credit stock reflects still ongoing
deleveraging
Credit to private sector (y-o-y, %)
100
80
60
40
20
0
-20
IV
IV
IV
IV
IV
IV
IV
I 2011
IV
IV
I 2004
X
I 2005
X
I 2006
X
I 2007
X
I 2008
X
I 2009
X
I 2010
X
X
I 2012
X
VII
VII
VII
VII
VII
VII
VII
VII
VII
Annual growth of household credit stock
Annual growth of nonfinancial corporation credit stock
Annual growth of resident credit stock (without government)
Source: Bank of Latvia

15. The backing of the monetary base with
foreign reserves is over 150%
Net foreign assets and Monetary base (mln lats)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
IV
X
IV
X
IV
X
IV
X
IV
X
VII
VII
VII
VII
VII
I 2008
I 2009
I 2010
I 2012
I 2011
Net foreign assets Monetary base
Source: Bank of Latvia

16. Capital adequacy ratios at historically
highest levels
Capital adequacy ratios (%)
20
18
16
14
12
10
8
6
4
2
0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2006 2007 2008 2009 2010 2011 2012
CAR Tier 1 ratio
Source: Financial and Capital Market Commission

17. Liquidity remains on a very high level
Liquidity ratio (defined by FCMC, %)
70
60
50
40
30
Q1 2011
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2012
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Source: Financial and Capital Market Commission

18. Non-performing loans are adequately
provisioned; asset quality gradually
recovers
Amount of loans over 90 days past due, provisions and their share in outstanding
%
loans mln lats
20
Share of provisions in outstanding
2,800
18 loans
16 Share of loans over 90 days past 2,400
due in outstanding loans
14 Provisions (right-hand scale) 2,000
12
Loans over 90 days past due (right- 1,600
10 hand scale)
8 1,200
6
800
4
400
2
0 0
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q2
Q3
Q4
Q1 2011
Q2
Q3
Q4
Q2
Q3
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2012
Source: Bank of Latvia, Financial and Capital Market Commission

19. Money market rates remained stable at low levels
for a long time
Lats money market interest rates (%, bps)
bps
30% 30
25% 25
20% 20
15% 15
10% 10
5% 5
0% 0
-5% -5
jan 08
okt 08
jan 09
okt 09
jan 10
okt 10
jan 11
okt 11
jan 12
okt 12
apr 08
apr 09
apr 10
apr 11
apr 12
jūl 08
jūl 09
jūl 10
jūl 11
jūl 12
RIGIBOR-EURIBOR 3M spread (rhs) O/N 3M 1Y
Source: Bank of Latvia