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 economic developments in
Latvia
February, 2013

2. Economic momentum is well sustained despite
slow-down in Europe, growth is expected to
remain robust
2
Real GDP growth (%)
Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast
8.9
10.1
11.2
9.6
-3.3
-17.7
-0.9
5.5
6.9
5.0 5.2 5.2
3.6 4.1
-20
-15
-10
-5
0
5
10
15
2004 2005 2006 2007 2008 2009 2010 2011 Q1
2012
Q2 Q3 2012 F 2013 F 2014 F

3. Export growth is evident both in real and
nominal terms
0
5
10
15
20
25
30
35
40
45
20101.cet
2.cet
3.cet
4.cet
20111.cet
2.cet
3.cet
4.cet
20121.cet
2.cet
3.cet
Export in real terms Export unit value
Export growth (y-o-y, %)
Source: Central Statistical Bureau of Latvia
3

4. Wage growth has been moderate, wage-
productivity gap remains closed
70
90
110
130
150
2000Q1
Q3
2001Q1
Q3
2002Q1
Q3
2003Q1
Q3
2004Q1
Q3
2005Q1
Q3
2006Q1
Q3
2007Q1
Q3
2008Q1
Q3
2009Q1
Q3
2010Q1
Q3
2011Q1
Q3
2012Q1
Q3
Labour productivity Real wage
4
Wage and productivity (2005 Q1 = 100, seasonally adjusted)
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations

5. 0.00
0.05
0.10
0.15
EU 27
Gains in competitiveness are reflected in increase
in market shares
Export market shares in EU 27 import
(mov. average %,
2011 Q1– 2012 Okt-Nov)
Source: Eurostat, Central Statistical Bureau of Latvia, WTO
5
90
110
130
150
170
190
210
230
250
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Jan-Nov2012
Bulgaria
Czech
Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak
Republic
Slovenia
Export market shares in world import
(2002=100)

6. 6
Domestic demand has also recovered: regained
competitiveness and corporate profitability have
pushed up productive investment
Gross fixed capital formation (1Q 2010 = 100)
Source: Central Statistical Bureau of Latvia
57%
0
10
20
30
40
50
60
70
I2010
II
III
IV
I2011
II
III
IV
I2012
II
III

7. 28.2 33.2
10.1
13.1
0
10
20
30
40
50
60
70
80
90
100
2008 2011
Industry Transport and storage Public administration Trade Others
Investment growth solid; structure shifting
towards tradables
Source: Central Statistical Bureau of Latvia
Non-financial investments by branches (% of total)
7

8. Unemployment rate going down with growing
employment opportunities
10.5
13.5
10
12
14
16
18
20
22
2010I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2011I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2012I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
Registered unemployment rate Job seekers rate
Unemployment rate (% of economically active population)
Source: Central Statistical Bureau; State Employment Agency
8
Methodology change
(impact of population
census factored in)

9. External sustainability has been regained:
current account remains close to balance
9
Source: Bank of Latvia; F – forecast
Current account (% of GDP)
-22.6 -22.4
-13.1
8.6
2.9
-2.2 -2.3 -2.3
-25
-20
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011 2012 F 2013 F
Goods and services Income Current transfers Current account

10. Internal balance has also been restored: inflation
is low and sustainable
1.6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
I
2010
II III IV V VI VIIVIIIIX X XI XII I
2011
II III IV V VI VIIVIIIIX X XI XII I
2012
II III IV V VI VIIVIIIIX X XI XII
Food Energy Inflation (yoy) Inflation excluding food and energy (yoy)
10
Impact of food and energy prices on total inflation (%-points)
and the annual inflation rate (%)
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
2012: 2.3%
Forecast:
2013: 2.0%
2014: 2.3%

11. Inflation forecast suggests that Maastricht reference value
for price stability will be reached with a significant
margin
Estimates of 12 month average inflation and the Maastricht criterion (%)
Sources: Eurostat, EC, Bank of Latvia estimates; * Greece assumed as an outlier
11
2.3
3.2
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
IV2011
V
VI
VII
VIII
IX
X
XI
XII
I2012
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2013
II
III
12m average inflation in Latvia Maastrich criterion*
forecast

12. The banking sector has regained profitability due to
substantial reduction in expenses for provisions and
an increase in net interest income
Profitability indicators
Source: Bank of Latvia
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
-800
-600
-400
-200
0
200
400
1Q
2008
2Q 3Q 4Q 1Q
2009
2Q 3Q 4Q 1Q
2010
2Q 3Q 4Q 1Q
2011
2Q 3Q 4Q 1Q
2012
2Q 3Q 4Q
%Mln. of lats
Accrued profit ROE (right-hand scale)
12

13. Banks have strengthened their capital adequacy
significantly; CAD and liquidity ratios are well
above the regulatory minimum requirements
0
2
4
6
8
10
12
14
16
18
20
Q12008
Q2
Q3
Q4
Q12009
Q2
Q3
Q4
Q12010
Q2
Q3
Q4
Q12011
Q2
Q3
Q4
Q12012
Q2
Q3
Q4
CAR
Tier 1 ratio
Minimum capital adequacy requirement
Capital adequacy ratio (%)
Source: FCMC
0
10
20
30
40
50
60
70
80
Q12007
Q2
Q3
Q4
Q12008
Q2
Q3
Q4
Q12009
Q2
Q3
Q4
Q12010
Q2
Q3
Q4
Q12011
Q2
Q3
Q4
Q12012
Q2
Q3
Q4
Minimum liquidity requirement
FCMC liquidity ratio
Liquidity ratio (%)
13

14. 14
Decline in credit stock reflects still ongoing
deleveraging
Credit to private sector (y-o-y, %)
Source: Bank of Latvia
-20
0
20
40
60
80
100
I2004
IV
VII
X
I2005
IV
VII
X
I2006
IV
VII
X
I2007
IV
VII
X
I2008
IV
VII
X
I2009
IV
VII
X
I2010
IV
VII
X
I2011
IV
VII
X
I2012
IV
VII
X
Annual growth of household credit stock
Annual growth of nonfinancial corporation credit stock
Annual growth of resident credit stock (without government)

15. Money market rates remained stable at low
levels for a long time
0%
5%
10%
15%
20%
25%
30%
Jan08
Mar08
May08
Jul08
Sep08
Nov08
Jan09
Mar09
May09
Jul09
Sep09
Nov09
Jan10
Mar10
May10
Jul10
Sep10
Nov10
Jan11
Mar11
May11
Jul11
Sep11
Nov11
Jan12
Mar12
May12
Jul12
Sep12
Nov12
Jan13
RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M
15
Money market rates (%)
Source: Bank of Latvia

16. 0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
I2008
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2009
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2010
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2011
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2012
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I2013
Net foreign assets Monetary base
16
The backing of the monetary base with
foreign reserves is over 150%
Source: Bank of Latvia
Net foreign assets and Monetary base (mln lats)

17. 17