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. Recent Macroeconomic Developments
in Latvia
March, 2014

2. Economic growth is expected to remain
robust
Real GDP growth (%)
8
8
7.1
7
7
6
6
4.9
5
4.6
5.3
4.6
4.3
4.5
3.8
4
3.5
3
1.7
1.6
1.2
1
4
4.0
4.0
3
2.2
2
5.2
5
2
1.2
0.7
0.7
1
0
0
2012 I
II
III
IV
q-o-q (s.a.)
Source: CSB; F – Latvijas Banka forecast
2013 I
y-o-y
II
III
IV flash
0
2011 2012 2013 2014
F
F

3. In 2013, real GDP was driven by private
consumption growth; further role of export is
expected to return
Contribution to real GDP growth (pp) and real GDP growth (%)
20
15
10
7.1
4.9
4.6
4.6
3.8
4.3
4.5
Q2
Q3
Q4
2013 Q1
Q2
Q3
5
0
-5
-10
-15
2012 Q1
Private consumption
Public consumption
GFCF
Exports
Imports
GDP, % yoy
Source: CSB
2013F
2014F
Changes in inventories

4. 2006'I
III
V
VII
IX
XI
2007'I
III
V
VII
IX
XI
2008'I
III
V
VII
IX
XI
2009'I
III
V
VII
IX
XI
2010'I
III
V
VII
IX
XI
2011'I
III
V
VII
IX
XI
2012'I
III
V
VII
IX
XI
2013'I
III
V
VII
IX
XI
Manufacturing is gaining strength
Volume index of manufacturing (2010=100)
130
125
120
115
110
105
100
95
90
85
80
Source: CSB

5. Unemployment dropped by 3.1 pp to 11.9% in
2013
Registered unemployment and job seekers rate
(% of economically active population)
22
21.3
18.7
18
14
11.3
10
9.8
2008 I
III
V
VII
IX
XI
2009 I
III
V
VII
IX
XI
2010 I
III
V
VII
IX
XI
2011 I
III
V
VII
IX
XI
2012 I
III
V
VII
IX
XI
2013 I
III
V
VII
IX
XI
2014 I
6
Job seekers rate (real unemployment; CSB)
Registered unemployment (SEA)
Source: Registered unemployment: State Employment Agency (SEA) data; Latvijas Banka staff adjustment of historical (pre 2012 IV)
data in line with the results of 2011 Population Census.
Job seekers rate: Central Statistical Bureau of Latvia data (adjusted for the 2011 Population Census).

6. Wage growth is broadly in line with labour
productivity
Real wage and productivity index (historical average = 100)
130
120
110
100
90
80
70
Labour productivity per hour worked
Real hourly wage
Source: Central Statistical Bureau of Latvia data; Latvijas Banka calculations
Q3
2013 Q1
Q3
2012 Q1
Q3
2011 Q1
Q3
2010 Q1
Q3
2009 Q1
Q3
2008 Q1
Q3
2007 Q1
Q3
2006 Q1
Q3
2005 Q1
Q3
2004 Q1
Q3
2003 Q1
Q3
2002 Q1
Q3
2001 Q1
Q3
2000 Q1
60

7. Increase of Latvian export market share reflects
gains in competitiveness
Merchandise export shares in world import (2002=100)
260
Bulgaria
240
Czech Republic
220
Estonia
200
Hungary
180
Latvia
160
Lithuania
140
Poland
120
Romania
100
Slovak Republic
80
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: WTO, Latvijas Banka calculations
Slovenia

8. Export of machinery, wood and food products have
the largest contribution to export growth; one-off
effects determined export growth deceleration
Group's contributions to the y-o-y growth of merchandise export (pp)
and average nominal export growth (%)
20
15.7 %
Others
Transport vehicles
15
Machinery and electrical equipment
Base metals
10
1.5%
Building materials
Textiles
2.2
5
1.6
1.2
0
Paper
Wood
Plastics
Chemical
Mineral products
Food
-5
2012
Source: CSB Latvia, Latvijas Banka calculation
2013
Agricultural

9. Import deceleration largely reflected moderation
of investment activity
Merchandise import (I 2011 = 100)
250
230
Capital goods (13%)
210
190
Intermmediate goods
(50%)
170
150
130
Consumer goods
(27%)
110
90
70
Passenger cars and
motor fuel (3%)
Avots: Eurostat
XI
IX
VII
V
III
2013 I
XI
IX
VII
V
III
2012 I
XI
IX
VII
V
III
2011 I
50

10. Moderate current account deficit is seen
sustainable for Latvia
Current account main positions (% of GDP)
15
10
10
5
5
0
-5
-3.9
-3.9
-2.2
-0.4
0.8
-2.1
0.5
0
-3.0
-0.9
-10
-15
-2.5
2011
-5
-2.2
2012
-10
-20
2012Q1
Q2
Q3
Q4
Income
Current transfers
Services
Goods
Source: Latvijas Banka, LB GDP forecast
2013Q1
Q2
Q3
Q4E
-15
current account
2013E

11. In 2013 FDI inflow in Latvia was 2.7% of
forecasted GDP
FDI inflow in Latvia (% of GDP)
7
6.8
6
5.6
5.3
5.1
5
4.6
4.1
4
3.9
3.5
2.8
3
3.0
1.7
2
1.1
1
0
Source: Latvijas Banka
IV
III
II
2013 I
IV
III
II
2012 I
IV
III
II
2011 I
-1

12. External debt as a proportion of GDP has been
declining
Gross and net external debt (% of GDP)
170
65
165.7
60
160
59.1
55
150
Gross External Debt %
of GDP Left Axis)
50
133.8
140
45
130
40
120
34.5
35
30
110
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2007
2008
2009
2010
2011
2012
2013
Source: Latvijas Banka
Net External Debt % of
GDP (Right Axis)

13. With smaller impact of global prices and sustainable
wage–productivity growth the annual average
inflation in 2013 was record low
Impact of food and energy prices on total inflation (%-points)
and the annual inflation rate (%)
4
3
Annual average inflation (HCPI):
0.0% in 2013
1.7% in 2014 (Latvijas Banka forecast)
2
1
0
-1
-2
I
2012
Food
III
V
Energy
VII
IX
XI
Inflation (yoy)
I
III
V
VII
IX
XI
2013
Inflation excluding food and energy (yoy)
Source: Central Statistical Bureau of Latvia, Latvijas Banka staff calculations
I
2014