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
July, 2013

2. Real GDP growth in 2012 and Q1 2013 (% y-o-y)
2
Source: Eurostat.; *data is not available for Q1 2013 yet
-8
-6
-4
-2
0
2
4
6
Latvia
Lithuania
Estonia
Slovakia
Poland
Malta
Ireland
Bulgaria
Austria
Germany
Romania
Sweden
Luxembourg
UnitedKingdom
France
Belgium
Denmark
Finland
Netherlands
CzechRepublic
Spain
Hungary
Slovenia
Italy
Cyprus
Portugal
Greece
2012
Q1 2013
Latvia is the fastest growing EU country

3. Economic momentum is well sustained despite
slow-down in Europe, growth is expected to
remain robust
3
Real GDP growth (%)
Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast
-6.2
-4.0
3.1 2.8
3.6
5.7
6.6
5.7
6.9
5.0
5.2 5.1
3.6
5.6
4.1
-8
-6
-4
-2
0
2
4
6
8
Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
2012 2013
F

4. Favorable competitive position shapes export
trends: Latvia ranges among the export leaders
in Europe
98 95 93
82
78
57 55
51 50 50
46 43 43 43 43
40 36 36 33 33 32 31
27 26
22
9
-2
-20
0
20
40
60
80
100
120
Latvia
Lithuania
Estonia
Greece
Bulgaria
Slovakia
Romania
Cyprus
CzechRepublic
Malta
Poland
UnitedKingdom
Sweden
Portugal
Netherlands
Spain
Germany
Hungary
Italy
Slovenia
Austria
Belgium
France
Finland
Denmark
Ireland
Luxembourg
Merchandise export revenue growth (2012 over 2009, %)
Source: Eurostat
4

5. Growth has been supported by regained
competitiveness: 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
2013Q1
Labour productivity Real wage
5
Wage and productivity (2005 Q1 = 100, seasonally adjusted)
Source: Central Statistical Bureau, Bank of Latvia staff calculations

6. Latvia’s market share in world exports continues
to grow
80
100
120
140
160
180
200
220
240
260
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Merchandise export shares in world import (2002=100)
Source: WTO
6

7. 7
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
+64%
100
110
120
130
140
150
160
170
2010
Q1
Q2 Q3 Q4 2011
Q1
Q2 Q3 Q4 2012
Q1
Q2 Q3 Q4 2013
Q1

8. Structure of investments has been shifting
towards tradable sector
28.2 31.2
10.1
16.9
0
10
20
30
40
50
60
70
80
90
100
2008 2012
Industry Transport and storage Public administration Trade Others
Source: Central Statistical Bureau of Latvia
8
Non-financial investments by branches (% of total)

9. Unemployment rate has been going down
alongside with growing employment
opportunities
9.9
12.8
8
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
2013I
II
III
IV
V
Registered unemployment rate Job seekers rate
Unemployment rate (% of economically active population)
Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations
9

10. Strong competitive position and a shift from
non-tradable to tradable sector is expected to
keep current account in equilibrium
Source: Bank of Latvia; F – Bank of Latvia forecast
Current account balance (% of GDP)
-22.6 -22.4
-13.1
8.6
2.9
-2.2 -1.7 -1.8
-25
-20
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011 2012 2013F
Goods and services Income Current transfers Current account
10

11. Inflation on a declining trend; past increase
has been driven by the commodity prices
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
I
2010
III V VII IX XI I
2011
III V VII IX XI I
2012
III V VII IX XI I
2013
III V
Food Energy Inflation (yoy) Inflation excluding food and energy (yoy)
2012: 2.3%
Forecast:
2013: 0.7%
Impact of food and energy prices on total inflation (%-points)
and the annual inflation rate (%)

12. Banking sector has returned to profitability,
capital adequacy has strengthened to record-high
levels
Profitability indicators
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
-800
-600
-400
-200
0
200
400
Q12008
Q2
Q3
Q4
Q12009
Q2
Q3
Q4
Q12010
Q2
Q3
Q4
Q12011
Q2
Q3
Q4
Q12012
Q2
Q3
Q4
Q12013
%Mln. of lats
Accrued profit ROE (right-hand scale)
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
Q12013
CAR
Tier 1 ratio
Minimum capital adequacy requirement
Capital adequacy ratio (%)
Source: FCMC and Bank of Latvia
12

13. Decline in credit stock reflects ongoing
deleveraging; reappearance of a credit boom is
unlikely for many years to come
Credit to private sector (y-o-y, %)
Source: Bank of Latvia
13
-20
0
20
40
60
80
100
2004Q1
Q3
2005Q1
Q3
2006Q1
Q3
2007Q1
Q3
2008Q1
Q3
2009Q1
Q3
2010Q1
Q3
2011Q1
Q3
2012Q1
Q3
2013Q1
Q3
2014Q1
Q3
2015Q1
Q3
Annual growth of household credit stock
Annual growth of nonfinancial corporation credit stock
Annual growth of resident credit stock (without government)
Forecast

14. Money market rates have remained stable
at low levels for a lengthy period of time
0%
5%
10%
15%
20%
25%
30%
jan08
apr08
jūl08
okt08
jan09
apr09
jūl09
okt09
jan10
apr10
jūl10
okt10
jan11
apr11
jūl11
okt11
jan12
apr12
jūl12
okt12
jan13
apr13
jūl13
RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M
14
Money market rates (%)
Source: Bank of Latvia

15. 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
II
III
IV
V
VI
Net foreign assets Monetary base
15
The backing of the monetary base with
foreign reserves is over 150%
Source: Bank of Latvia
Net foreign assets and Monetary base (mln lats)

16. 16
Maastricht criterion* Reference value
Latvia’s respective
indicator
Inflation
(April 2013)
2.7% 1.3%
Budget deficit (% of
GDP, 2012)
-3% -1.2%
Public debt (% of GDP,
2012)
60% 40.7%
Long-term interest rate
(April 2013)
5.5% 3.8%
ERM II membership At least 2 years Since 2005
* Convergence Report 2013 on Latvia; EC, 5 June 2013
After fulfilling criteria, Latvia is set to
become the 18. euro area country in 2014

17. Latvia’s credit ratings have been upgraded and
have positive outlooks
Standard&Poor's Fitch Investment grade Moody's (rhs)
Latvia’s sovereign rating on long-term foreign currency debt
17
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
Source: Bloomberg

18. 18