Latvia 

Latvia country policy

Policy established 14 February 2011

• ILC, bank guarantee or central public guarantee (unconditional)
• The country ceiling is 1000 mln euro
• Early warning signal 350 mln euro
• - of which was used as at 2011-12-31 0 mln euro

Country class: 4

Latvia country facts

Atradius Dutch State Business Economic Research
Country Report last updated :  8 June 2010
Country :  LATVIA 

Political Situation

Rather Stable Despite Easily Changing COALITIONS  

Head of state
President Valdis Zatlers.

Form of government
Four-party coalition, headed by p.m. Valdis Dombrovskis.

Internal Economic Situation
The Deep Recession Is Bottoming Out

General situation
The small, open Latvian economy has experienced a very deep recession: during 2008-’10 real GDP will have fallen by 25%. A contraction of 18% in 2009 is followed by another drop of 2.3% in 2010 as the ongoing fall in domestic demand is exceeding the impact of recovering exports. The domestic market remains depressed due to the very high unemployment rate (20%), fallen real wages, collapsed real estate prices and repair of the private sector’s balance sheets (overdebted). Due to the recession a deflation of 3.4% is expected this year, compared to an inflation of 3.5% in 2009. Latvia is a financial hub with a prominent banking sector; >60% of the sector assets are foreign owned. Foreign parent banks (incl. a Swedish government guarantee) remain committed to their Latvian subsidiaries in view of the banks’ very high exposure in foreign currencies (>90%). In 2008 the government nationalised Parex, a big locally owned bank, awaiting a restructuring.  
 
External Economic Situation
Improved But Still Fragile

Main sources of foreign exchange
Wood products (40%), textiles, food, (financial) services.

Main foreign markets
EU (76%, esp. Lithuania 11%, Estonia 11%, Germany 10%, UK 10%, Sweden 8%); Russia (8%).

Main expenses of foreign exchange
Services (trade, transports, finance, etc.), capital goods.

   
Balance of payments 
The lat is pegged to the euro within a 30%-margin but CB aims to keep it within a +/-1%-band. Pressure on lat has somewhat subdued as concerns for an imminent devaluation have faded. Because of the large ST-deposits, very unfavourable ratio short term debt/reserves.