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
September,
September 2012

2. Macroeconomic Overview
2

3. Strong economic growth in Latvia is supported by
sound fundamentals
so nd f ndamentals
Real GDP growth in the 1st half of 2012 (% y-o-y)
y o y)
6
4
2
0
-2
-4
-6
-8
UK*
BG
CY
ES
LT
PL
EE
SE
DE
AT
IE
BE
MT
NL
CZ
IT
LV
FI
SK
RO
FR
DK
HU
SI
GR
LU*
PT*
L
U
3
Source: Eurostat; * Q1 2012 data

4. Economic growth was led initially by exports,
broadened to investment and private consumtion
Real GDP growth (y-o-y, %) and contribution to the growth (percentage points)
(y-o-y
21
18
15
12
9 6.6 6.9
5.7 5.7 5.0
6 3.1 2.8 3.6
3
0
-4.0
-3 -6.2
6
-6
-9
-12
-15
-18
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Private consumption Public consumption GFCF Changes in inventories
Exports Imports GDP, % yoy
4
Source: Central Statistical Bureau of Latvia

5. GDP growth is broad based across sectors
g
Real GDP growth (y-o-y, %) and sector contribution to the growth (percentage
g (y y, ) g (p g
points)
8 6.6 6.9
5.7 5.7
6 50
5.0
3.6
4 3.1 2.8
2
0
-2
-4
-6
-4.0
-8 -6.2
-10
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

6. Economic growth remains strong;
GDP forecast for 2012 stands at 3 5 4 0%
3.5-4.0%
Real GDP growth (%)
8
6.6 6.9
5.7 5.7
6 5.0
3.5 – 4.0%
4 3.1 3.6
2.8
2
0
-2
-4
4 -4.0
-6
-6.2
-8
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 2012 F
Source: Central Statistical Bureau; F – Bank of Latvia forecast

7. Growth has been supported by regained
competitiveness: wage-productivity g p has been
p g p y gap
closed
Wage and productivity (2005 Q1 = 100, seasonally adjusted)
100
150
130
110
90
70
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
Q3
3
2000 Q1
1
2001 Q1
1
2002 Q1
1
2003 Q1
1
2004 Q1
1
2005 Q1
1
2006 Q1
1
2007 Q1
1
2008 Q1
1
2009 Q1
1
2010 Q1
1
2012 Q1
1
2011 Q1
1
Labour productivity
p y Real wage
g
2012 Q2: labour productivity forecast
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations

8. Export growth remains robust
Export growth of goods and services (y-o-y; %, in nominal terms )
%
25
20
15
11.7%
10
5
0
-5
-10
-15
15
-20
2006 2007 2008 2009 2010 2011 2012 H1
Source: Central Statistical Bureau of Latvia

9. Current account stays close to balance
y
Current account main positions (% of GDP)
p ( )
15
10 8.6
5 2.9
0 -2.4 -3.1 -2.7
-5
-10
-13.1
-15
-20
2008 2009 2010 2011 Q1 2012 Q2
Goods and Services Income Current Transfers Current Account
Source: Bank of Latvia

10. Inflation stays on a declining trend; annual
average inflation forecast for this year: 2 4%
2.4%
Impact of food and energy prices on total inflation (pp) and the y o y inflation rate (%)
y-o-y
7
5.0
5
3
1.7
17
1
-1
-3
-5
I 2010 III V VII IX XI I 2011 III V VII IX XI I 2012 III V VII
Food Energy Inflation (y-o-y) Inflation excluding food and energy (y-o-y)
Source: CSB, BoL calculations

11. Unemployment rate continued to decline
p y
Unemployment rate (% of economically active population)
25
Methodology change
gy g
(population census) impact:
20 Registered unemployment
rate: + 1.6 pp as from April 16.1%
2012
15 Unemployment rate: + 0.7
pp as from Q1 2011 11.3%
11.3
10
5
0
V
X
V
X
V
X
V
X
V
II
III
VII
XII
II
III
VII
XII
II
III
VII
XII
II
III
VII
XII
II
III
VII
IV
IX
IV
IX
IV
IX
IV
IX
IV
2008 I
VI
VIII
XI
2009 I
VI
VIII
XI
2010 I
VI
VIII
XI
2011 I
VI
VIII
XI
2012 I
VI
VIII
Registered unemployment rate Unemployment rate (Labour Force Survey)
11
Source: Central Statistical Bureau of Latvia; State Employment Agency

12. Financial sector issues
12

13. The average level of deposits in 2012 is almost
unchanged y-o-y - depositors’ confidence is
g y y p
rather stable
Domestic deposits (mln lats)
5800
5600
5400
5200
5000
4800
IV
V
IX
X
IV
V
IX
X
IV
V
IX
X
IV
V
IX
X
IV
V
008
009
010
011
012
II
III
VI
VII
VIII
XI
XII
II
III
VI
VII
VIII
XI
XII
II
III
VI
VII
VIII
XI
XII
II
III
VI
VII
VIII
XI
XII
II
III
VI
VII
V
X
V
X
V
X
V
X
V
I 20
I 20
I 20
I 20
I 20
* In October 2010, decline of deposits reflects large one-off effect from restructuring of funding within financial group
Source: Bank of Latvia

14. Decline in credit stock reflects an ongoing
deleveraging
Credit to private sector (y o y %)
(y-o-y,
100
80
60
40
20
0
-20
I 2004
IV
X
I 2005
IV
X
I 2006
IV
X
I 2007
IV
X
I 2008
I 2009
IV
X
I 2010
IV
X
IV
X
IV
X
I 2012
IV
VII
VII
VII
VII
VII
VII
VII
VII
I 2011
VII
Annual growth of h
A l th f household credit stock
h ld dit t k
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 around 200%
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
08
09
I 2010
I 2012
II
II
II
II
II
II
II
II
II
II
11
IVV
V
VI
II
II
IXX
X
XI
II
IVV
V
VI
II
II
IXX
X
XI
II
IVV
V
VI
II
II
IXX
X
XI
II
IVV
V
VI
II
II
IXX
X
XI
II
IVV
V
VI
II
II
I
II
I
II
I
II
I
II
I
II
V
VI
VII
X
XI
V
VI
VII
X
XI
V
VI
VII
X
XI
V
VI
VII
X
XI
V
VI
VII
I 201
I 200
I 200
Net foreign assets Monetary base
Source: Bank of Latvia

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

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

18. Non-performing loans are adequately
provisioned; asset quality recovering gradually
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
Q2
Q3
Q4
Q2
2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
2
Q1 2
2
2
2
2
2
2
Source: Bank of Latvia, Financial and Capital Market Commission

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