Presentation by Ilmārs Rimšēvičs, Governor of the Bank of Latvia at the Bank of Latvia conference "Global Challenges and Local Opportunities: Achievements and Prospects in the Baltic States". Riga, 12 October 2011.

1. Global Challenges and Local
Opportunities: Achievements and
Prospects in the Baltic States
Ilmārs Rimšēvičs
Governor, Bank of Latvia
Riga, 12 October 2011

2. The small economies of the European Union
that have introduced the euro
suffered less during the crisis
GDP growth (average per group of countries; %)
10 8.9 8.3
6.7
5 4.4
5.2
2.3
0 0.9
0.5
-4.4
-5
-10 Cyprus, Malta, Slovakia and Slovenia
Baltic States and Bulgaria -13.1
-15
2006 2007 2008 2009 2010

3. At this stage Estonia is seven steps ahead of us in terms
of soundness, measured by credit rating
S&P ratings of sovereign long-term liabilities
AA AA
AA- AA-
A+ A+
A A
A- A-
BBB+ BBB+
BBB BBB
BBB- BBB-
BB+ BB+
BB BB
BB- BB-
B+ B+
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg.
Estonia Latvia Investment-grade rating

4. Estonia has also received a considerably larger inflow of
foreign direct investment
Accumulated foreign direct investment per capita (EUR)
12000.0
10000.0 In Latvia
In Estonia 9685.0
8000.0 8780.9
6000.0
4000.0
4041.8
2000.0 3578.4
0.0
2008 Q4 2011 Q2
Sources: Latvijas Banka, Eesti Pank, Eurostat.

5. Better unemployment rates in Estonia also reflect it
Registered unemployment (% of economically active population)
20
15
11.8
10
7.4
5
2010 I IV VII X 2011 I IV VII
Latvia Estonia
Sources: State Employment Agency , Estonia's State Employment Agency.

6. Higher labour productivity results in better
remuneration in Estonia: average monthly gross wages
and salaries in Estonia = 821 EUR, in Latvia = 664 EUR
Average monthly gross wages and salaries (EUR; seasonally adjusted data)
900
800
700
600
500
400
300
Q3
Q3
Q3
Q3
Q3
Q3
2011 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
Estonia Latvia
Sources: Central Statistical Bureau of the Republic of Latvia, Statistikaamet.

7. Average old-age pensions are 42 EUR lower in Latvia
(305 EUR and 263 EUR respectively )
Average old age pension, EUR
340
300
260
220
180
140
Q3
Q3
Q3
Q3
2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
Estonia Latvia
Sources: State Social Insurance Agency, Statistikaamet.

8. Global economic outlook starts aggravating considerably
Industrial confidence indicator in Europe Industrial PMI
(50 = neutral)
20 65
10 60
0 55
-10 50
45
-20
40
-30
35
-40
I'06
II
III
VI
XI
VII
XII
VIII
IV
IX
V
X
I'11
VI
30
2008'I
2009'I
2010'I
VII
VII
VII
VII
IV
X
IV
X
IV
X
2011'I
IV
EU industrial confidence
Euro area industrial confidence
Germany Euro area UK US
Latvia's industrial confidence

9. Growth forecasts for global economies are downsized
GDP growth, %
6
4
2
Euro area 0.1
Germany 0.6
0
France 0.2
Italy -0.4
-2
Spain -0.4
-4
-6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*2012*
* GS Global ECS Research.

10. Planning the state budget with a deficit during the years of
rapid growth led to a deep fiscal crisis during the years of
economic downslide
Consolidated general government budget surplus/deficit, % of GDP (EAS 95)
2.0
0.0
-2.0
-4.0
-4.2
-4.6
-6.0
-8.0
-7.7
-10.0
-9.7
Planned Actual (2011 – base forecast)
-12.0
2004 2005 2006 2007 2008 2009 2010 2011 2012

11. Latvia at the crossroads

12. Failing to introduce the euro and improve credit ratings
may cost almost a billion lats from the budget in the
next 10 years
Additional annual interest payment in case we fail to introduce the euro and continue to
borrow and refinance the debt in the financial market (in millions of lats)
In 10 years it will cost us almost one billion lats more
160
140 132 136
121
120 107 111
103
100
78
80
60 50
40 33
17
20
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

13. 13