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Latvian Economy in 2010

(according to the outlook of the Association of Latvian Commercial Banks)

In 2010, the changes in Latvian economic structure became more obvious, it became more balanced. In the first eleven months of the year, exports of goods rose by 28%, compared with the corresponding period of 2009, and it reached its highest point by the end of the year. The development of the export of services was much weaker — in 2010 they practically were at the level of 2009. Due to the export growth, the share of manufacturing industry has also increased from 8.9% at the beginning of 2009 to 12.6% in Q3 last year.

Despite the rapid improvement of economic indicators, there is somehow a lack of clear long-term vision and structure in the currently pursued economic policy. The government continues to implement the agreement reached with the international creditors and to reduce the budget deficit.

After the decline that lasted almost three years, in Q3 of 2010 investments increased compared with the previous quarter, and there is the hope for renewal of stable growth of investments and imports in the year 2011. This year, exports will continue to be the driving force of the economy although it will be slower.

The recovery of the labour market, though anticipated, was stronger than predicted. The percentage of unemployed people reached its peak in Q1 of 2010 (20.4%) and in Q3 it fell to 18%. The gap between the productivity and wage levels has narrowed.

Following quite short period of deflation, the inflation has started, and in December 2010 the consumer price index was already 2.5% above the previous year’s level. The fastest growth of prices was in the sphere of essential goods, the factor that substantially aggravated the income inequality and thus disrupted economic growth. The ALCB forecasts that annual average consumer price inflation in 2011 will reach 2.9%.

Banking Sector

The year 2010 started with unprecedented losses for the whole Latvian banking sector. There was large number of non-performing loans, and the market was waiting for the decisions of the government concerning the joint-stock bank Parex banka. At the end of the year, overall situation in the banking sector has somehow improved. Concerning Parex bank, it was decided by the state that bank’s assets will be transferred to a newly established bank, Citadele banka, and Parex banka will be for non-performing loans only. Citadele bank is focused on the development of new products and lending, and Parex banka is involved mainly in debt recovery, and currently the banks are independent from each other. However, their common goal is to recover about LVL 800 million invested by the state in Parex banka.

After huge losses of Latvian banking sector in 2008 and 2009, as well as in the first part of 2010, by the end of the year Latvian banks have returned to profitability. Latvian banks were suffering huge losses in 2008 and 2009, as well as in the first part of 2010.

The amount of deposits in Latvian banks has reached a record level, probably due to economic downturn. The total amount of deposits in Latvian banking sector reached LVL 10.6 billion.

Banks have been gradually resuming lending, which was virtually frozen in 2009 and in the first half of 2010. Now loans are issued only to worthy business ideas and the involvement of business owners and to households with foreseeable and regular income.

Among other achievements in the banking sector of Latvia, there is the adoption of New Insolvency Law, which was changed to make the insolvency process more transparent and less expensive for legal entities and private persons.

International rating agency Standard & Poor’s increased Latvia’s credit rating from ‘BB’ to ‘BB+’, with stable outlook.

Due to the global financial crisis, Latvia, as well as other countries, had to introduce new restrictions and limitations in order to exercise greater control over banks. All banks working in Latvia must be financially stable.