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Republic of Latvia
Resilient, flexible and well
diversified economy
December 2017
Disclaimer
2
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This presentation does not constitute or form part of, and should not be construed as, an offer or invitation to sell securities of Latvia, or the solicitation of an offer to subscribe for or
purchase securities of Latvia, and nothing contained herein shall form the basis of or be relied on in connection with any contract or commitment whatsoever. Any decision to purchase
any securities of Latvia should be made solely on the basis of the conditions of the securities and the information contained in the offering circular, information statement or equivalent
disclosure document prepared in connection with the offering of such securities. Prospective investors are required to make their own independent investigations and appraisals of the
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risks involved in any purchase or sale of any financial instrument or any other information contained herein. The information in this presentation has not been independently verified. No
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placed on such information. None of Latvia, their advisers, connected persons or any other person accepts any liability for any loss howsoever arising, directly or indirectly, from this
presentation or its contents. This presentation should not be construed as legal, tax, investment or other advice and any recipient is strongly advised to seek their own independent
advice in respect of any related investment, financial, legal, tax, accounting or regulatory considerations. There is no obligation to update, modify or amend this presentation or to
otherwise notify any recipient if any information, opinion, projection, forecast or estimate set forth herein changes or subsequently becomes inaccurate or in light of any new information
or future events.
This presentation contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by,
followed by or including the words “anticipates,” “estimates,” “expects,” “believes,” “intends,” “plans,” “aims,” “seeks,” “may,” “will,” “should” or similar expressions or the negative thereof.
Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Latvia's control that could cause Latvia’s actual results,
performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-
looking statements speak only as at the date of this presentation. Latvia expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking
statements contained herein to reflect any change in its expectations with regard thereto or any new information or change in events, conditions or circumstances on which any of such
statements are based.
For convenience, an exchange rate of EUR/LVL 0.702804 is used this presentation; it is the exchange rate Latvia used to adopt the euro as a legal tender on 1 January 2014.
Presentation Outline
1. Overview 4
3. Latvia’s Economy: Flexibility and Resilience 16
2. Fiscal Policy 8
5. Government Debt and Funding Strategy 34
4. A Highly Profitable, Stable and Well Capitalised Banking Sector 28
6. Conclusion 40
3
Overview
Latvia: Key Facts and Milestones
5
Key Facts about Latvia
Latvia: Milestones on the Road to Political Stability and Performance
• Territory: 64,573 (4) sq. km
• Capital: Riga (population 0.64 million(4))
• Population (1/1/2017): 1,95 million(4)
• GDP per capita (2016): EUR 12.691 (4)
• Nominal GDP (2016): EUR 24.87 billion(4)
• Currency: Euro
• Borders: Estonia, Russia, Belarus, Lithuania
• Main economic sectors:
— Services (71%(4) GDP in 2016): logistics, IT, financial services, trade
— Manufacturing (13%(4) of GDP in 2016): wood, metal, electronics, pharma, food
Becomes a
Member of
the UN
Sep
1991
Mar
2004
May
2004
Entry into EU
Admitted to
NATO
1991
Latvia
Regains
Independence
Dec 2011/
Jan 2012
January
2014
Latvia joins
Eurozone/
EMU
Latvia’s
Presidency of
EU Council
OECD
membership
High income(1), advanced economy(2), part of Northern Europe (3)
Source: (1) - World Bank classification; (2) - IMF classification;
(3) UN classification; (4) - Central Statistical Bureau of Latvia
July
2016 Dec
2008
Approval of Loan
Programme with
IMF, EC and
Bilateral Lenders
International Loan
Programme with
IMF/EC Closed
Successfully
1991 Sep 1991 Mar 2004 May 2004 Dec 2008 Dec 2011/
Jan 2012 Jan 2014
Jan-Jun
2015 July 2016
Latvia Belongs to the Core of Europe
EU Members
OECD Members
Eurozone Members
NATO Members
Latvia
France
Estonia
Germany
Luxembourg
Spain
Slovenia
Slovakia
Italy
Belgium
Portugal
Greece
Netherlands
Malta
Cyprus
Austria
Ireland
Finland
Lithuania
Poland
Czech Republic
Bulgaria
Romania
Croatia
United Kingdom Denmark
Hungary
Sweden
6
Sovereign Moody’s S&P Fitch
Belgium Aa3 AA AA-
Czech Republic A1 AA- A+
Estonia A1 AA- A+
Slovakia A2 A+ A+
Poland A2 BBB+ A-
Latvia A3 (stable) A- (positive) A- (stable)
Lithuania A3 A- A-
Ireland A2 A+ A+
Italy Baa2 BBB BBB
Slovenia Baa1 A+ A-
Spain Baa2 BBB+ BBB+ 2011 2012 2013 2014 2015 2016 2017
S&P
Fitch
Moodys
Investment grade
Credit rating challenges
● The country's weaker external finances, lower per capita income,
and smaller, more open economy than the 'A' median constrain the
ratings
● Social expenditures and defence spending could be higher than
anticipated
● External financing risks and geo-political tensions with Russia
continue to constrain the ratings
Latvia`s credit rating has stable position
7
Rating agencies acknowledged Latvia’s low general government debt, fiscal deficit and
institutional strength
Long-term Foreign Currency Rating development
A/A2
A-/A3
BBB+/Baa1
BBB/Baa2
BBB-/Baa3
BB+/Ba1
BB/Ba2
BB-/Ba3
Source: S&P, Fitch, Moody’s
Source: S&P Global (22 September 2017), Fitch (28 April 2017). Note: (1) Selected quotes. Full report can be obtained from respective rating agency
Key strengths of the Latvian sovereign credit rating
● Latvia's economic growth unexpectedly outperformed our base case
and continued at a faster pace than currently anticipated, without
raising worries about overheating.
● Eurozone membership enhances Latvia’s creditworthiness by
underpinning economic policy coherence and credibility, improving
fiscal and external financing flexibility, reducing foreign-currency risks
on balance sheets and giving Latvian banks access to European
Central Bank liquidity facilities.
● Being member of the OECD
● Stable and improving banking sector
Source: S&P, Fitch, Moody’s Note: Data on January 15, 2018
Fiscal Policy
Latvia is Determined to Ensure Fiscal Sustainability
9
Conduct policies in a fiscally responsible way equally renewing quality and amount of public
services and addressing potential risks
2018 BUDGET: EXPENDITURE MEASURES (EUR, million)
Source: Ministry of Finance
Prudent fiscal management with balanced budget
Budget Balance – 2016 (% of GDP)
Source: Eurostat
EU-28 -1.7%
Source: Ministry of Finance. Note- * incl. 0,4% of GDP – a one-off capital transfer to settle government’s liabilities
towards the EBRD
General Government nominal balance (% of GDP)
EXPENDITURE REVIEW RESULTS (EUR, million)
2018
2019
2020
336,3
367,5
400,8
• Healthcare services
• Strengthening national security
• Demographic measures, support to foster
families and guardians, strengthening social
programs
• Road maintenance and construction
• Remuneration of higher education teachers,
additional funding for fundamental and applied
research
• Eastern border and strengthening internal
security
• Support to cultural projects and media,
implementation of integration measures
• Combating shadow economy, modernizing tax
information services
52,5 47,6
28,6 25,4
0
10
20
30
40
50
60
70
80
90
2018 2019
Reallocating resources to common government priorities
Internal resources for own sectoral priorities
0,0
- 5,0
- 4,0
- 3,0
- 2,0
- 1,0
0,0
1,0
2,0
Spa
in
Fra
nce
Ro
ma
nia
Un
ited
Kin
gdo
m
Belg
ium
Ita
ly
Pola
nd
Port
ug
al
Fin
lan
d
Hu
ng
ary
Slo
venia
Slo
vakia
Austr
ia
De
nm
ark
Cro
atia
Irela
nd
Bulg
ari
a
La
tvia
Esto
nia
Lithu
ania
Cyp
rus
Ne
the
rla
nds
Cze
ch R
ep
ub
lic
Gre
ece
Ge
rman
y
Sw
eden
Malta
Lu
xe
mb
ou
rg
Source: Ministry of Finance
-3,3
-1,0 -1,0
-1,6 -1,3
0,0
-0,9 -1,0
-0,9
-0,4
-3,5
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
2011 2012 2013 2014* 2015 2016 2017** 2018** 2019** 2020**
** - target,
incl. potential impact of new tax
reform
Medium Term
budget
2018 – 2020
Long Term Sustainability of Public Finances
10
Recent measures taken by Latvia address sustainability of the age-related expenditure
in the long term
Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia
Source: The State Social Insurance Agency
● Since 2001 Latvia maintains a reformed pension system consisting of three
tiers, whereby state compulsory unfunded pension scheme (the 1st tier) is
complemented with a state funded pension scheme (the 2nd tier) and
private voluntary pension scheme (the 3rd tier)
● In 2012 a number of progressive measures were introduced to address
long term sustainability of the pension system:
— starting with 2014 retirement age is gradually increased by 3 months
each year until it reaches 65 years in 2025;
— minimum contribution period to secure full pension was increased from
10 to 15 years starting from 2014 and up to 20 years starting from 2025;
— contributions to the funded, e.g. 2nd tier, pension scheme increased
from 2% to 4% in 2013, to 5% in 2015, and to 6% in 2016.
Latvia’s Pension System and recent reforms Age-related spending, projected change
(in percentage points of GDP, 2013-2060)
Latvia is well positioned to withstand fiscal challenges arising
from the aging population
Source: European Commission Ageing Report, May 2015
EU-28 1.4%
2nd tier pension scheme will gradually take over part of the
pension obligations from the public, e.g. 1st tier, pension scheme
Source: European Commission Ageing Report, May 2015
Age-related spending (in % of GDP, 2013)
Latvia’s age-related spending is one the lowest in the EU
The 2nd Tier Pension Net Assets under Management
(EUR billion and as % of GDP)
1,2 1,5
1,7
2,0
2,3
2,8
6,2% 6,7%
7,4%
8,5% 9,6%
11,0%
-0,5%
2,0%
4,5%
7,0%
9,5%
12,0%
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2011 2012 2013 2014 2015 2016
2nd tier pension net assets (EUR billion) 2nd tier pension net assets (% of GDP)
–1.7
-3,0
-1,0
1,0
3,0
5,0
7,0
Cro
atia
Gre
ece
Latv
ia
Fra
nce
Denm
ark
Cyp
rus
Italy
Sp
ain
Bu
lga
ria
Po
rtuga
l
Esto
nia
Sw
eden
Hungary
Po
lan
d
EU
28
Irela
nd
Rom
ania
Lith
uania
United K
ingdom
Fin
lan
d
Au
str
ia
Cze
ch R
epublic
Neth
erla
nds
Slo
vakia
Germ
any
Be
lgiu
m
Luxem
burg
Ma
lta
Slo
venia
16.2
10
15
20
25
30
Rom
ania
Latv
ia
Lith
uania
Esto
nia
Slo
vakia
Bu
lga
ria
Cze
ch R
epublic
Luxem
burg
Hungary
Cyp
rus
Po
lan
d
Cro
atia
Irela
nd
United K
ingdom
Ma
lta
Germ
any
Slo
venia
Sp
ain
Neth
erla
nds
Sw
eden
Po
rtuga
l
Be
lgiu
m
Au
str
ia
Italy
Gre
ece
Denm
ark
Fra
nce
Fin
lan
d
EU-28 25,6%
Government Policy Measures:
Building Foundation for Sustained Growth
Structural reforms in education, employment and judicial environment help improving labour
market and business conditions
Education, Research and
Innovations Increasing the quality of education and research, fostering investments in R&D and innovations
Addressing labour market issues through education and employment policies; decreasing tax
burden on labour; activating social benefit recipients; improving accessibility, quality and
efficiency of healthcare
Source: National Reform Programme 2016; European Commission, Country Report Latvia 2016; EU Council’s recommendations 2016; OECD Economic Survey on Latvia 2015
Healthcare reform Education reform – more effective distribution of expenditure
(in % of GDP, 2015)
Public Administration and
Judiciary
Increasing efficiency of public administration, strengthening the conflict of interest prevention
regime, improving tax compliance; improving the insolvency regime and accountability of
insolvency administrators
Labour Market, Social
Policy and Healthcare
Business Environment SME access to financing, export oriented programmes, reduction of administrative burden
• Aimed to improve governance, clearer principles of resource
allocation and more efficient use of funds;
• Implementation of Public Health Guidelines 2014 - 2020 to
encourage the health care system availability, quality and cost-
effectiveness;
• Healthcare long term funding reform.
Stability and Growth Pact deficit derogation for 2017 was granted
to the following measures in healthcare:
• Reducing waiting line;
• Detection of cancer and improving access to treatment;
• Reform of reimbursable drugs for patients of the Chronic hepatitis C.
6,0
0
1
2
3
4
5
6
7
Rom
an
ia
Irela
nd
Bu
lga
ria
Ita
ly
Sp
ain
Ge
rma
ny
Slo
va
kia
Gre
ece
Cro
atia
Czech
Re
pu
blic
Au
str
ia
Unite
d K
ingd
om
Lu
xem
bo
urg
Hun
gary
Po
lan
d
Lith
ua
nia
Neth
erl
an
ds
Fra
nce
Malta
Slo
ve
nia
Cypru
s
La
tvia
Po
rtug
al
Esto
nia
Fin
lan
d
Be
lgiu
m
Sw
ed
en
Den
ma
rk
• Funding for education is adequate, but the network of education system
and number of pupils per teacher are not optimal.
• Teacher remuneration reform starting from September, 2016: (i) fixed
minimum salary for teacher; (ii) school network rearrangement; (iii)
increase in funding for teachers' salaries.
EU-28 - 4,9%
Source: Eurostat
Expenditure for the education exceeds the EU average.
11
Government Policy Measures:
Building Foundation for Sustained Growth
Efficient and well targeted absorption and use of EU funds will promote competitiveness
and stimulate economic growth as well as support necessary structural reforms
Allocation of EU funds for 2014-2020 by priority axes
Source: Ministry of Finance Source: Ministry of Finance
EU cohesion policy accompanies structural reforms
● According to the recent statistical data, the GDP per capita in Latvia is approximately 64% from the EU average, and Latvia could qualify for the similar
amount of EU funds as in current Multiannual financial framework also for the next programming period.
● But at the same time due to recent developments in the EU the amount of Cohesion policy funds compared to the current MFF could be reduced by
the following aspects:
• Brexit;
• New challenges and unforeseen events that push for rearrangement of the EU priorities (more funds for migration, external and internal
security, climate change);
• Changes in statistical data (population, unemployment) in Latvia and other EU member states;
• Possible changes in the EU budget structure and its own resources system.
● Even if Latvia’s contribution to the EU budget would rise because of certain of these aspects, we expect that Latvia would continue to be a net receiver
from the EU funds also after 2020.
● Government is providing support (via intermediary - JSC Development Finance Institution Altum) and offers financing – such as loans, guarantees,
equity capital or grants – mainly to SMEs, start-ups, mid-caps and micro-enterprises, but also to individuals and companies active in the agricultural
sector.
EU funds after 2020 and government’s support
12
26%
14%
12% 11%
11%
9%
7%
4% 4% 2%
Promoting sustainable transport and removingbottlenecks in key network infrastructures
Protecting the environment and promoting resourceefficiency
Investing in education, skills and lifelong learning
Supporting the shift towards a low-carbon economyin all sectors
Strengthening research, technological developmentand innovation
Promoting social inclusion and combating poverty
Enhancing the competitiveness of small and medium-sized enterprises
Enhancing access to, and use and quality of,information and communication technologies
Promoting employment and supporting labourmobility
Technical assistance
● Latvian economy and the goals envisaged by the National Development
Plan are strongly supported by implementation of EU cohesion policy
and effective utilization of EU structural funds and Cohesion Fund.
● EUR 4.4 billion EU funds are available for targeted and smart
investments in Latvia within 2014 - 2020 programming period. During
2007 - 2013 period Latvia has successfully and fully used EUR 4.5
billion of Cohesion Policy EU funds.
● The funds were allocated and will be utilised across major nine priority
areas with an aim to enhance competitiveness of Latvia’s economy, and
to build foundation for the sustained growth
New tax reform approved by the parliament
Non-taxable minimum – EUR 250
(differenced depending on income level from EUR 0 per month to EUR 250 per month (2020))
Allowance for dependents – EUR 250 per month (2020)
Minimum salary from EUR 380 to EUR 430
Social contribution increase by 1% directed to health care
Reform of Solidarity tax
PIT rate smoothing
Progressive Personal Income Tax
(decrease from 23% to 20% for year’s salary up to EUR 20 000; 23% - year’s salary EUR 20 000 – 55 000; 31,4% - year’s salary above EUR 55 000)
Corporate Income Tax:
0% for reinvested profit; 20% - distributed profit
13
Increase in competitiveness and exportability, reduce of inequality and ensure revenue 1/3 of
GDP
Main changes Strategy framework
● Predictability and a long-term vision
● Regional competitiveness, at least in the Baltic region
● Tax motivation for improvement
● A similar tax burden on similar types of revenue
● Lending and capitalization improvement
● Reducing the cost of tax administration
Principles
● Tax structures and rates review
● Improving tax administration
● The fight against the shadow economy
Source: Ministry of Finance
Positive impact on economy
● Raise of disposable income of employees inducing private consumption;
● More competitive entrepreneurs on regional and global scene as well as
stimulation of own investment;
● Better capitalized businesses, more opportunities to raise additional funds
for development;
● Increased prospects to raise production capacity of goods and services,
more effective and efficient production process;
● More equality between different income groups and types of income;
● Higher tax revenue resulting from increased economic activity and less tax
avoidance.
Strong Governance supports the Economy and Business
Source: World Bank, 2016 Rankings
Latvia is consistently ranked as a top 3 CEE country
Source: World Bank, Doing Business 2017
74
60
79
84
80
67
66
60
69
70
66
64
87
73
88
88
88
85
Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Latvia Regional Average Income Group Average (OECD)
10 13 13
15 15 16 17 19 19 20 20 20 20 21
22 22 22 25 25 25
29 29 30 30 31 34 34 35
Bu
lga
ria
Irela
nd
Cyp
rus
Latv
ia
Lith
uania
Rom
ania
Slo
venia
Cze
ch R
ep.
Po
lan
d
Cro
atia
Fin
lan
d
Esto
nia
U.K
.
Hungary
Slo
vakia
Sw
eden
Denm
ark
Neth
erla
nds
Au
str
ia
Sp
ain
Gre
ece
Luxem
bourg
Po
rtuga
l
Germ
any
Italy
Be
lgiu
m
Fra
nce
Ma
lta
Latvia has one of the lowest corporate Income tax rates in the EU
Source: Eurostat, Taxation trends in the European Union 2016
3 7
8 10
12 13
16 17
19 20
22 27
28 29
30 31
32 37
39 45
46 48
50 52
DenmarkU.K.
NorwaySwedenEstoniaFinland
LithuaniaIreland
LatviaGermany
AustriaPoland
SpainPortugal
Czech Rep.France
NetherlandsSloveniaSlovakia
RomaniaItaly
HungaryBulgariaBelgium
5 7 10 12
20 24 29 31 34 39 41 42 43 48 49 54 59 60
68 74
GermanySwedenFinland
DenmarkBelgiumIrelandEstonia
Czech Rep.Spain
PolandLithuaniaPortugal
ItalySloveniaBulgaria
LatviaSlovakiaHungaryRomania
Croatia
1 3 4 6 8
11 14 16 18 19 20
23 25 27 28
31 35
39 44
59
SwedenFinlandDenmarkSloveniaIrelandEstoniaGermanySlovakiaLithuaniaCroatiaLatviaCzech Rep.PolandPortugalBelgiumRomaniaHungarySpainItalyBulgaria
‒ Global Competitiveness Index Ranking*
‒ Global Sustainable Competitiveness
Index Ranking**
Source: *Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2017–2018, **The Global
Sustainable Competitiveness Index 2016
Structural Reforms and High Institutional Strength Facilitate
Favorable Business Environment and Encourage Investments
World Bank Worldwide Governance Rankings
Adjusted Top Statutory Tax Rate on Corporate Income (2015, %) The Global Competitiveness Index Rankings
World Bank ‘Ease of Doing Business’ Ranking
14
A strong and long-lasting commitment
to fiscal discipline, making it one
of the most virtuous EU countries
Conservative debt position
Source: Eurostat
Conservative debt position
EU-28 83.5%
Source: Eurostat Source: Eurostat
Latvia has been one of the fastest growing EU
economies
A top growth performer in the EU
with strong catching-up potential
and resilient, well capitalized banking sector
40%
0
50
100
150
200
Esto
nia
Luxem
bo…
Bu
lga
ria
Cze
ch R
ep.
Rom
ania
Denm
ark
Latv
ia
Lith
uania
Sw
eden
Slo
vakia
Po
lan
d
Ma
lta
Neth
erla
nds
Fin
lan
d
Germ
any
Hungary
Irela
nd
Slo
venia
Cro
atia
Au
str
ia
Fra
nce
Sp
ain
Be
lgiu
m
Cyp
rus
Po
rtuga
l
Italy
Gre
ece
4.8%
-1
0
1
2
3
4
5
6
Lith
uania
Latv
ia
Rom
ania
Bu
lga
ria
Slo
vakia
Esto
nia
Po
lan
d
Irela
nd
Cze
ch R
epublic
Ma
lta
Hungary
Cro
atia
Slo
venia
Sw
eden
Luxem
bourg
Germ
any
United K
ingdom
Au
str
ia
Be
lgiu
m
Neth
erla
nds
Fin
lan
d
Sp
ain
Fra
nce
Denm
ark
Po
rtuga
l
Cyp
rus
Gre
ece
Italy
EU-28 1.1%
The Key Strengths of Latvia in 4 Charts
EU-28 -1.7%
General Government Debt (2016, % GDP)
Budget Balance (2016, % of GDP)
Capital Adequacy (%)
Real GDP per Capita Growth Rate (2001-2016 on average, %)
15
Prudent fiscal management with balanced budget
0,0
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
Spa
in
Fra
nce
Ro
ma
nia
Un
ited
Kin
gdo
m
Belg
ium
Ita
ly
Pola
nd
Port
ug
al
Fin
lan
d
Hu
ng
ary
Slo
venia
Slo
vakia
Austr
ia
De
nm
ark
Cro
atia
Irela
nd
Bulg
ari
a
La
tvia
Esto
nia
Lithu
ania
Cyp
rus
Ne
the
rla
nds
Cze
ch R
ep
ub
lic
Gre
ece
Ge
rman
y
Sw
eden
Malta
Lu
xe
mb
ou
rg
21,3
0
2
4
6
8
10
12
14
16
18
20
22
24
26
2011 2012 2013 2014* 2015 2016 2017Total capital ratio (%) CET1 ratio (%) Minimum requirement for total capital ratio (8%)
Source: Financial and Capital Markets Commission
* As of Q1 2014 capital adequacy is calculated according to the CRDIV/CRR requirements and is not directly comparable with the
data until Q1 2014 due to differences in methodology. Tier 1 ratio matches CET 1 ratio. The regulatory minimum capital
adequacy requirement is 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer.
Latvia’s Economy:
Flexibility and Resilience
Latvia is in the top 5 fastest growing countries in the EU with a 3.3% average in the last 6 years
Robust growth coupled with low inflation and balanced external accounts
Low net external debt enhances resilience to external risks
Source: Bank of Latvia
Source: Central Statistical Bureau of Latvia Source: Bank of Latvia
9
10
11
12
13
2011 2012 2013 2014 2015 2016
0
10
20
30
40
50
60
1Q2010
3Q2010
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
1Q2016
3Q2016
1Q2017
3Q2017
The Latvian Economy is Growing Sustainably
Selected Elements of Balance of Payments of Latvia (% of GDP)
Gross Domestic Product per Capita (EUR thousands) Net External Debt (% of GDP)
17
Contribution to Real GDP Growth (pp.)
-6
-4
-2
0
2
4
6
8
10
12
2011 2012 2013 2014 2015 2016
Private consumption Public consumption GFC Net exports
Source: Central Statistical Bureau of Latvia
-6
-4
-2
0
2
4
6
8
2011 2012 2013 2014 2015 2016 1Q 2017 2Q 2017 3Q 2017
Current account FDI in Latvia
Implicit Tax Rate on Capital (2016, %)
Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia
Source: Eurostat
Light taxation of capital provides stimulus to business investments
Diversification reduces vulnerability to external demand shocks
0
10
20
30
40
50
60
70
80
90
100
2000 2016
Others
Optical, medical, musical inst.
Transport vehicles
Machinery, electricical
Base metals
Building materials
Textiles
Paper
Wood
Plastics
Chemical
Mineral products
Food and drinks
Agricultural
0
10
20
30
40
50
60
70
80
90
100
2000 2016
Others
USA
Turkey
France
Finland
Norway
Netherland
Denmark
Poland
UK
Sweden
Russia
Germany
Estonia
Lithuania
Diversified Economic Structure and Business Friendly
Environment Among Main Driving Forces of Balanced Growth
Structure of Merchandise Exports (%) Structure of Merchandise Exports (%)
18
12,5%
13,0%
13,9%
9,1% 4,8%
5,2%
15,9%
3,2%
22,4%
Manufacturing
Real estate activities
Wholesale and retail trade, repair of motor vehicles andmotorcyclesTransportation and storage
Information and communication
Construction
Public administration, defence, compulsory social securit;Education; Human health and social work activitiesAgriculture, Forestry and Fishing
Other sectors
Composition of Gross Value Added by Sectors (2016, %)
9,0 13,1 13,6 14,1 14,3 14,7
15,5 15,7
16,5 16,7
17,5 18,9 19,3 19,4 19,6 20,0
21,5 22,5
23,1 23,6
25,5 26,6
27,6 28,2 28,3
30,3 32,2
38,4
BulgariaCyprus
LithuaniaIrelandLatvia
RomaniaSloveniaEstoniaCroatia
Czech Rep.PolandFinland
HungarySwedenSlovakia
DenmarkU.K.
NetherlandsAustria
ItalyLuxembo…Portugal
GreeceGermanyBelgium
SpainMalta
France
Source: ZEW (2016)
Source: European Trade Union Institute Source: Eurostat
Source: Eurostat Source: European Trade Union Institute
Latvia has strong labour market fundamentals
Robust growth of participation and real productivity
62
64
66
68
70
72
74
76
78
Latvia Euro area (19)
1,9%
EU-28: 0.6%
-2
-1
0
1
2
3
4
5
6
7
Irela
nd
Rom
ania
Bu
lga
ria
Latv
ia
Ma
lta
Slo
vakia
Lith
uania
Luxem
bourg
Esto
nia
Sw
eden
Cze
ch R
ep.
Neth
erla
nds
Sp
ain
Denm
ark
Slo
venia
UK
Fra
nce
Be
lgiu
m
Germ
any
Po
rtuga
l
Cro
atia
Cyp
rus
Au
str
ia
Hungary
Fin
lan
d
Italy
Gre
ece
Highly Flexible and Resilient Labour Market Supports
Competitiveness and Domestic Demand
Collective bargaining coverage (% of workforce) Participation Rate (age 15-64; %)
Trade union density (% of workforce) Real Productivity Growth per worker (2012-2016 average y-o-y, %)
19
20%
0%
20%
40%
60%
80%
100%
Au
str
ia
Be
lgiu
m
Slo
venia
Po
rtuga
l
Fra
nce
Fin
lan
d
Sw
eden
Neth
erla
nds
Gre
ece
Sp
ain
Denm
ark
Italy
Cyp
rus
Germ
any
Luxem
bourg
Ma
lta
Cze
ch R
ep.
Irela
nd
Po
lan
d
Slo
vakia
UK
Rom
ania
Bu
lga
ria
Esto
nia
Hungary
Latv
ia
Lith
uania
16%
0%
20%
40%
60%
80%
100%
Denm
ark
Sw
eden
Fin
lan
d
Cyp
rus
Ma
lta
Be
lgiu
m
Luxem
bourg
Slo
venia
Au
str
ia
Irela
nd
Italy
Gre
ece
Rom
ania
Slo
vakia
UK
Cze
ch R
ep.
Germ
any
Neth
erla
nds
Bu
lga
ria
Hungary
Latv
ia
Po
lan
d
Sp
ain
Po
rtuga
l
Lith
uania
Esto
nia
Fra
nce
Source: World Trade Organization;
Source: Eurostat
Favourable position in both price and non-price competitiveness
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012 2013 2014 2015
Germany Latvia
1
2
3
4
5
6
115
120
125
130
135
140
145
150
155
160
REER (deflator: consumer price indices - 37 trading partners)
REER (deflator: nominal unit wage cost, manufacturing - 37 trading partners)
Profit margin in manufacturing, rhs
Source: Eurostat
Improved Competitiveness and Climbing up the Value Added
Ladder are Major Export Growth Drivers
Export Market Shares (2002=100) Real Effective Exchange Rate (REER) index (2005 = 100)
and profit margin (%)
High – Tech Exports (% of total exports)
20
Goods Exports Growth (2016 over 2009,%)
98 %
-20
0
20
40
60
80
100
120
Bu
lga
ria
Latv
ia
Rom
ania
Lith
uania
Cyp
rus
Po
lan
d
Esto
nia
Cze
ch R
ep.
Slo
vakia
Cro
atia
Sp
ain
Po
rtuga
l
Slo
venia
Hungary
Germ
any
U.K
.
Gre
ece
Neth
erla
nds
Italy
Au
str
ia
Irela
nd
Be
lgiu
m
Sw
eden
Ma
lta
Fra
nce
Denm
ark
Fin
lan
d
Luxem
bourg
90
110
130
150
170
190
210
230
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Republic
Slovenia
Source: Eurostat; Data: 4Q/2016
Source: Central Statistical Bureau of Latvia Note: * - operative data
Source: European Commission, Autumn projections, 2017
Real GDP growth, % Composite PMI
Real GDP (y-o-y, %)
21
Average GDP growth projection for euro area countries,
2017-2018
Growth Expected to Strenghten over Medium Term
6,4
4,0
2,6 2,1
2,7
2,0
3,7 3,4
3,8 3,9 4,2 3,5
0
1
2
3
4
5
6
7
2011 2012 2013 2014 2015 2016 2017 F 2018 F
Actual data MoF IMF EC
Source: Central Statistical Bureau of Latvia, EC, IMF, MoF of Latvia; F - forecast
1,6
2,8 3,3
2,4 2,5
1,9 1,9 1,5
2,1
2,9
3,6
2,6 2,4 2,6
0,5
2,8
4,0 4,0
6,2
-1
0
1
2
3
4
5
6
7
Q-o-q Y-o-y
3,85%
0
1
2
3
4
5
6
Euro area – 2,15%
Source: Markit
46
48
50
52
54
56
58
EU World Neutral 50 points
External sector benefiting from global recovery
Improving consumer sentiment leading to more robust domestic demand
Source: Central Statistical Bureau of Latvia
Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia
Conjunctional Indicators Confirm Growth Momentum
Is Picking Up
Retail trade turnover and tourism value added (y-o-y growth, %)
Industry output growth (y-o-y growth, %) Cargo handled in ports and by railway (y-o-y growth, %)
22
Construction growth, y-o-y, % and confidence indicator
(long-term average=100)
Source: Central Statistical Bureau of Latvia
-15
-10
-5
0
5
10
15
20
2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1
Manufacturing Energetics
0
2
4
6
8
10
12
2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1
Retail trade Tourism
75
80
85
90
95
100
105
110
-25
-20
-15
-10
-5
0
5
10
2015Q1
Q2 Q3 Q4 2016Q1
Q2 Q3 Q4 2017Q1
Q2
Output Confidence (rhs)
-25
-20
-15
-10
-5
0
5
10
15
2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 2017 Q1
Ports Rail
Acceleration of economic activity broadly based across sectors
Source: Eurostat
Source: Central Statistical Bureau of Latvia Source: Central Statistical Bureau of Latvia
Both Goods and Services Exports Starting 2017 On a Strong
Growth Path
Group's contributions to the annual growth of merchandise export (pp)
Annual growth of merchandise export (y-o-y, %) Annual growth of nominal merchandise export (y-o-y, %)
23
Source: Bank of Latvia
2,3 1,1
-0,1
9,6
-4
-2
0
2
4
6
8
10
12
2014 2015 2016 10 months 2017
Export unit price
Real exports
Nominal exports
17,1
-23,8
0,5
2,0
1,1
-2,2
-5,2
3,4
-2,1
-0,05
10,6
36,6
8,4
4,2
9,6
-25 -15 -5 5 15 25 35 45
Others (19.2%)
Russia (8.9%)
Other EU (43.2%)
Baltic countries (28.7%)
Total exportsJan-Okt 2017
2016
2015
-6
-4
-2
0
2
4
6
8
10
12
2014 2015 2016 2017 Q1 2017 Q2 2017 Q3
Other services
Other business services
Telecommunications, computerand information services
Financial services
Construction
Travel
Transport services
TOTAL
-3
-1
1
3
5
7
9
11
13
15
2014 2015 2016 9 months2017
Others
Machinery and transport
Manufactured goods
Chemical
Mineral fuels
Crude materals, exc. fuels
Food, beverages
Total export growth (y/y %)
Export of services (y-o-y growth in nominal terms, %) and contributions of
services groups (pp)
Diversified and flexible structure of the economy allows benefiting early from the global
cyclical upswing
Source: Bank of Latvia
Source: Bank of Latvia Source: Bank of Latvia Lending data on Sept.-Nov.2017 are corrected to exclude one-off effects due to structural
changes in the banking sector.
Lending recovery is firming, especially to NFCs
Changes in loan demand (BLS data)
Interest rates on long-term loans to non-financial enterprises (%) Annual growth rate of domestic loans (%)
24
Loans to domestic non-financial enterprises and households
(annual change, millions of euro)
Source: Bank of Latvia; F - forecast
0.3
-10
-8
-6
-4
-2
0
2
4
6
I2013
IV VII X I2014
IV VII X I2015
IV VII X I2016
IV VII X I2017
IV VII X
Government Financial institutions
Households Non-financial enterprises
Non-financial enterprises and households
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%
Loans for housepurchase
Consumer credit andother lending tohouseholds
Loans to SMEs
Loans to largeenterprises
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
5,5
Small and medium loans (up to 1 million euro) Large loans (over 1 million euro)
Extraordinary loose monetary policy starting to work through the economy
-600
-500
-400
-300
-200
-100
0
100
200
300
2015
2016
2017 F
2018 F
2019 F
Non-financial enterprises Structural one-offHouseholds TotalTotal excluding structural one-off
Source: Central Statistical Bureau, State Employment Agency and Eurostat data Source: Central Statistical Bureau of Latvia data; Bank of Latvia staff calculations
Source: Central Statistical Bureau of Latvia data Source: Central Statistical Bureau of Latvia data
Unemployment close to natural rate since 2013
Wage growth supports domestic demand
0
1
2
3
4
5
6
7
8
9
10
2012 2013 2014 2015 1Q2016
2Q2016
3Q2016
4Q2016
1Q2017
2Q2017
3Q2017
Gross nominal wages
Real net wages
6
9
12
15
18
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
1Q2016
3Q2016
1Q2017
3Q2017
Registered unemployment rate Job seekers rate
Favourable Labour Market Developments Contribute to
Strenghtening of Domestic Demand
Registered and headline unemployment rate
(% of econ.act. population)
Unemployment: headline and natural rates
(seasonally adjusted; % of econ.act. population)
Participation and employment rates (age 15-64; %) Average Net Monthly Wage for Full-time Job (y-o-y; %)
25
55
60
65
70
75
80
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
1Q2016
3Q2016
1Q2017
3Q2017
Participation rate Employment rate
0
5
10
15
20
2005 Q
1
Q3
2006 Q
1
Q3
2007 Q
1
Q3
2008 Q
1
Q3
2009 Q
1
Q3
2010 Q
1
Q3
2011 Q
1
Q3
2012 Q
1
Q3
2013 Q
1
Q3
2014 Q
1
Q3
2015 Q
1
Q3
2016 Q
1
Q3
2017 Q
1
Q3
Headline unemployment Natural unemployment
Source: Central Statistical Bureau of Latvia data, Bank of Latvia calculations
Source: Central Statistical Bureau of Latvia data
Source: Eurostat data
Both headline and core inflation moderate and stable during the recent months
-2,0
0,0
2,0
4,0
6,0
2011 2012 2013 2014 2015 2016
Total inflation Goods inflation Services inflation
Inflation is Just Below 3%
Inflation (HICP)
Inflation in Latvia (HICP, y-o-y, %)
12-month Average HICP (November 2017, y-o-y, %)
26
Average HICP projection for euro area 2017-2018 (%)
Source: European Commission, Autumn projection, 2017
-2
-1
0
1
2
3
4
Jan
-12
Ma
r-12
Ma
y-1
2Jul-1
2S
ep-1
2N
ov-1
2Jan
-13
Ma
r-13
Ma
y-1
3Jul-1
3S
ep-1
3N
ov-1
3Jan
-14
Ma
r-14
Ma
y-1
4Jul-1
4S
ep-1
4N
ov-1
4Jan
-15
Ma
r-15
Ma
y-1
5Jul-1
5S
ep-1
5N
ov-1
5Jan
-16
Ma
r-16
Ma
y-1
6Jul-1
6S
ep-1
6N
ov-1
6Jan
-17
Ma
r-17
Ma
y-1
7Jul-1
7S
ep-1
7N
ov-1
7
Energy (contribution, pp)
Food, alcohol, tobacco (contribution, pp)
Inflation (y-o-y, %)
Inflation excl. energy, food, alcohol, tobacco (y-o-y, %)
2,9
0
1
2
3
4
Lith
uania
Esto
nia
Latv
ia
United…
Cze
ch R
ep.
Hungary
Be
lgiu
m
Au
str
ia
Sp
ain
Luxem
bourg
Sw
eden
Germ
any
Po
lan
d
Po
rtuga
l
Slo
venia
Cro
atia
Italy
Neth
erla
nds
Ma
lta
Slo
vakia
Gre
ece
Fra
nce
Bu
lga
ria
Denm
ark
Rom
ania
Fin
lan
d
Cyp
rus
Irela
nd
EU-28 1.7%
2,85
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Euro area – 1,45%
Merchandise Exports to Russia and Ukraine (% of total exports)
Source: Central Statistical Bureau of Latvia
Impact of Russia’s Sanctions and Weaker Rouble Contained
Source: Central Statistical Bureau of Latvia
Several sectors affected, but adverse impact is marginal
Latvia's export position to UK remains favourable
• Total exports to Russia that are affected by sanctions do not exceed
0.2% of GDP.
• The drop in exports to the CIS, in particularly to Russia, compensated
by growth in exports to the EU countries and other markets.
• However, some indirect impact from increased uncertainty and a drag
on consumer confidence has materialized in somewhat slower
economic growth.
Brexit: The Direct Exposure of Latvia via Trade Links
Exports and export market share to UK (2011=100)
Impact of Russian Sanctions and Exposure to Brexit Risks
is Manageable
27
10,6 11,4 11,6 10,7
8,1 7,6
0,9 1 0,9
0,7
0,7 0,9
0
2
4
6
8
10
12
14
2011 2012 2013 2014 2015 2016
Russia Ukraine
2016 EUR million % of total exports
Goods exports 579.4 5.6
Services exports
(according to payment country) 351.8 7.7
Overall 931.2 6.2
100
120
140
160
180
200
220
240
2011 2012 2013 2014 2015 2016
goods export to UK goods market share in UK
wood products export to UK
A Highly Profitable, Stable and
Well Capitalised Banking Sector
Foreign banks have shown commitment to their local subsidiaries and branches in
Latvia, reducing contingent liability risk to the Government
• The Latvian banking sector is dominated by subsidiaries and branches
of banks from the European Economic Area, mostly Nordic countries(1)
(54% of the banking sector capital, 51% of assets, 81% of domestic
loans and 80% of domestic deposits).
• Capitalisation and liquidity ratios are well above minimum
requirements. The banking sector’s capital is mostly made of CET1
capital (in 3Q 2017 CET1 ratio was 21.3% (EU average 1Q 2017 –
14.1% (2)), in 3Q 2017 FCMC liquidity ratio amounted to 59% and LCR
was 260%).
• As of November 2014 the three largest banks are directly supervised
by the ECB. Since January 2016 four banks fall under the remit of the
Single Resolution Mechanism.
Source: (1) - Financial and Capital Markets Commission (2) – EBA risk dashboard Source: Financial and Capital Market Commission
Source: Financial and Capital Markets Commission
Note: Data on 2Q2017
* As of Q1 2014 capital adequacy is calculated according to the CRDIV/CRR requirements and is not directly
comparable with the data until Q1 2014 due to differences in methodology.
Tier 1 ratio matches CET 1 ratio.
The regulatory minimum capital adequacy requirement is 8%. Since 28 May 2014 the FCMC also applies a
2.5% capital conservation buffer.
Source: Financial and Capital Market Commission
Note: Data on 3Q2017
Foreign owned banks
81%
Domestically owned banks
19%
Nordic Banks 54%
Other foreign owned
banks 27%
0%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 2015 2016 2017
FCMC liquidity ratio (all liquid assets/all short-term liabilities)
Minumum requirement
Sound, Well Capitalised and Liquid Banking Sector
Key Highlights Capital Ownership of the Banking System (3Q 2017, %)
FCMC Liquidity Ratio (%)
21,3
0
2
4
6
8
10
12
14
16
18
20
22
24
26
2011 2012 2013 2014* 2015 2016 2017
Total capital ratio (%) CET1 ratio (%) Minimum requirement for total capital ratio (8%)
Capital Adequacy (%)
29
Source: European Central Bank, Note: Data on October 2017
Source: FCMC
Domestic lending recovers, loan portfolio quality is above EU average and continues to improve
• After prolonged period of deleveraging lending growth turned positive
in April 2016.
• Loans to domestic households and NFCs stand at 46% of GDP, down
from almost 100% at the outset of the crisis.
• Loan-to-deposit ratio has fallen substantially leading to more balanced
and sustainable domestic funding for loans.
• The quality of loan portfolio is above EU average and continues
improving further. The coverage ratio of overdue loans remains high.
• The ECB bank lending survey indicates gradual increase in demand
for loans in Latvia.
• Expansionary monetary policy of the ECB is a supportive factor for
lending.
Source: European Central Bank
0%
5%
10%
15%
20%
2011 2012 2013 2014 2015 2016 2017
Share of loan loss provisions in outstanding loans
Share of loans over 90 days past due in outstanding loans
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Estonia Latvia Lithuania Eurozone
2011 September 2017 September
-15%
-10%
-5%
0%
5%
2012 2013 2014 2015 2016 2017
Lending growth in Latvia
Excluding structural one-off*
Lending growth in Eurozone combined
*One-off effect due to structural changes in the banking sector is excluded.
Bank Lending Recovers and Supports Growth
Loans to Domestic clients Excluding Government (y-o-y, %)
Total Loan Portfolio Quality (%)
Key Highlights
Domestic Loan-to-Deposit Ratio (%)
30
9%
12%
Source: Bank of Latvia
Source: Bank of Latvia; Note: * Banks which grant more than 50% of loans domestically and receive more than
50% of deposits from domestic clients ** Other banks
;
The FCMC requires banks mainly servicing foreign clients to hold an additional capital
buffer up to 9.5% of risk-weighted assets and up to twice the minimum liquidity
requirement
Source: Bank of Latvia; Note: * Credit institutions which grant more than 50% of loans domestically and receive
more than 50% of deposits from domestic clients ** Other banks
Total domestic lending
Total domestic deposits
• Servicing foreign clients has been part of Latvia’s banking sector
since the early 1990s. However, the banks actively engaged in FC
(foreign client) business have little domestic operations.
• FC deposit growth was relatively stable until end-2015, but then
reversed in 2016 with continuously deteriorating CIS economies
and enhanced enforcement of tougher AML/CFT requirements.
• Additional liquidity and capital requirements for banks servicing
FCs hold significant liquidity and capital buffers to counter potential
liquidity outflows and to withstand potential shocks.
78,3
45,3
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Banks servicing FCs**
Domestically active banks*
Minimum requirement for liquidity ratio (all liquid assets/all short-term liabilities)
62%
38%
Domesticallyactive banks*
BanksservicingFCs**
- 30%
- 20%
- 10%
0%
10%
20%
30%
2012 2013 2014 2015 2016 2017
Anual growth rate of foreign client deposits (adjusted for exchange rate)
Anual growth rate of domestic non-financial private sector deposits
Banks servicing Foreign Clients Have a Negligible Role in the
Domestic Financial Market and the Economy
Growth Rates of Domestic and Foreign Client Deposits (%)
FCMC Liquidity Ratio (%)
Key Highlights
Banking Assets including Foreign Branches
(end of November 2017, %)
31
* One-off adjusted data
Source: Bank of Latvia, Note
Banking sector profitability is supported by stable interest spread and economic growth
• In the first eleven months of 2017 profit of domestically active banks was in line with the previous year; whereas, the profit of banks servicing FCs
levelled off due to decline in business and increased administrative expenses, which were largely caused by implementing enhanced AML/CFT
requirements.
• ROE and ROA of the Latvian credit institutions are relatively high, and still exceeds the EU average. In the first eleven months of 2017 ROE was
8.3%(1) (EU average – 7.0%(2)) and ROA – 1.1%.
• Domestically active banks' returns are more stable and less dispersed than returns of banks servicing FCs.
• With record-low loan and deposit rates, interest rate spread on outstanding amounts remains stable at around 3 pp.
Source: Bank of Latvia, Note: MFI interest rates on outstanding loans to domestic households and NFCs, and
outstanding deposits from domestic households and NFCs
Banking Sector Profitability Remains Healthy
ROE Dispersion (%)
Key Highlights
Interest Spread on Outstanding Loan Amounts (%)
32
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2015 2016* 2017XI
2015 2016* 2017XI
Domestically active banks Banks servicing foreigners
Interquartile range Min-max range Weighted average Median
0%
1%
2%
3%
4%
5%
6%
7%
8%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Interest rate on deposits Interest rate on loans
Parent and related banks have high credit ratings, good profits, and on average they
outperform their European peers on stock exchanges (compared to Eurostoxx Bank index)
• Financial performance and capitalization level of the parent banks is strong.
• Nordic banking groups' profitability is higher than the average in Europe.
• Banks continue to invest in IT related projects to increase their operational efficiency and lower administrative expenses.
• Nordea group has started reorganization process of transforming its subsidiaries in Norway, Denmark and Finland into branches to increase operational
efficiency and to simplify its group structure.
• In October 2017 Nordea group and DNB group merged Nordea and DNB entities in the Baltics into one financial institution Luminor that will be
incorporated in Estonia with branches in Latvia and Lithuania.
Source: Reuters Source: Nordic banking groups' public quarterly financial reports, Note: data on September 2017
Swedbank SEB Nordea DNB
Assets (EUR bn) 254.9 304.0 615.3 294.0
CET1 ratio (%) 23.9 19.2 19.2 16.3
ROE (%) 15.0 12.1 10.5 11.2
S&P Global long term rating
AA- A+ AA- A+
Moody`s long term rating
Aa3 Aa3 Aa3 Aa2
Parent Banks are Stable, Financially Sound and Profitable
Key Highlights
Banking Groups' Equity Prices (01.01.2016 = 100, local currency) Nordic Banking Groups' Consolidated Financial Information
33
40
60
80
100
120
140
160
2012 2013 2014 2015 2016 2017
Nordea DNB SEB Swedbank Eurostoxx Banks
Government Debt and Funding
Strategy
Latvia remains committed to keeping government debt at moderate levels
• Fiscal consolidation and reduction of the deficit along with
economic growth has helped stabilise levels of government debt
• General government debt is amongst the lowest in the EU at 40%
of GDP at the end of 2016
• Latvia enjoys one of the lowest debt servicing costs across the
region, significantly lower than the EU and Eurozone averages
• Since March 2014 Latvia participates in the European Stability
Mechanism, which provides additional financial stability to its
members
NB: General government debt includes that of central government, local government and social security funds. The debt ratio is calculated in accordance with European System of Accounts (ESA) standards, a methodology which differs
from that used to calculate the cash flow based budget deficit numbers
Source: Eurostat, The Treasury; Forecasts: 2017 – 2018 General Government Debt as % of GDP are the
Treasury forecasts
Conservative debt position
Source: Eurostat
Conservative debt position
EU-28 83.5%
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2011 2012 2013 2014 2015 2016 2017(F) 2018(F) 2019(F)
Latvia Lithuania EU-28 Eurozone
Source: European Economic Forecast, Autumn 2017, European Commission
Public Debt Remains at Moderate Levels
Key Characteristics of Latvia’s Government Debt
Interest Costs (% of GDP)
General Government Debt Year End
(EUR million and % of GDP, ESA methodology)
General Government Debt (2016, % of GDP)
35
8 708 9 086 8 893 9 660 8 899 10 038 10 327 10 591
43% 42% 39%
41%
37% 40% 39% 37%
0
5 000
10 000
15 000
20 000
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2011 2012 2013 2014 2015 2016 2017 (f) 2018 (f)
40%
0
50
100
150
200
Esto
nia
Luxem
bo…
Bu
lga
ria
Cze
ch R
ep.
Rom
ania
Denm
ark
Latv
ia
Lith
uania
Sw
eden
Slo
vakia
Po
lan
d
Ma
lta
Neth
erla
nds
Fin
lan
d
Germ
any
Hungary
Irela
nd
Slo
venia
Cro
atia
Au
str
ia
Fra
nce
Sp
ain
Be
lgiu
m
Cyp
rus
Po
rtuga
l
Italy
Gre
ece
Source: The Treasury; (1) - Fixed rate debt with a maturity in excess of one year; (2)-Central government debt at the end of
the period less the amount of loans and receivables, where impairment loss of guarantees are not taken in account
(including Treasury’s cash accounts, investments in deposits and fixed income securities, loans, receivables (including
receivables of derivative financial instruments which are not classified as risky from credit risk perspective)), and increased
by provisions of guarantees as well as liabilities of derivative financial instruments which are not classified as risky from
credit risk perspective.(3) – In line with Central Government Debt Strategy point 2.3.2 deviation from the limits of the
Macaulay Duration ir permissible if the deviation does not cause additional financial risks.
In 2017 Latvia extended EUR curve up to 30 years
Source: The Treasury
An exchange rate of USD/EUR 0.847 on 29 September 2017
• International:
— Regular benchmark bond issuances in international markets
— Loan agreement signed with European Investment bank
— Liability management option
• Domestic:
— Regular government debt securities auctions
— Retail instruments (Savings Bonds and other)
Latvia is conducting a prudent and efficient debt management strategy
Source: The Treasury
In 2014 first international bond issuance after joining the Eurozone
Source: Data as of 11th January 2018, Bloomberg
Conservative Borrowing Based on Pre-funding
Borrowing Instruments
Debt Portfolio Management
Secondary Market (mid yield to maturity, %)
Government Debt Securities Issues (EUR million)
Parameters Strategy 30 June 2017 30 September 2017
Maturity profile (%)
— up to 1 year ≤ 25% 11.4% 11.6%
— up to 3 year ≤ 50% 31.2% 30.9%
Share of fixed rate(1) ≥ 60% 92.0% 91.8%
Macaulay duration
(years)(3) 4.70 – 6.25 6.31 6.09
Net debt(2) currency
composition
100% EUR with a
deviation of +/- 5% 100.20% 100.15%
36
Outstanding Bonds in the International Markets
(nominal amount, million)
0 200 400 600 800 1000
2018
2020
2021
2024
2025
2026
2036
2047
2020
2021
LATVIA 1,375% 16/05/2036
LATVIA 0,375% 07/10/2026
LATVIA 1,375% 23/09/2025
LATVIA 2,875% 30/04/2024
LATVIA 2,625% 21/01/2021
LATVIA 0,500% 15/12/2020
LATVIA 5,500% 05/03/2018
LATVIA 2.250% 15/02/2047
LATVIA 2,750% 12/01/2020
LATVIA 5,250% 16/06/2021
USD
EUR
0
500
1 000
1 500
2 000
2 500
3 000
2011 2012 2013 2014 2015 2016 2017 Q3
External borrowing Domestic borrowing
-0,58
-0,21 0,20 0,46 0,59
1,44 1,75
2,29 2,36
-0,6
-0,1
0,4
0,9
1,4
1,9
2,4
0 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930
Mid
YTM
, %
LATVIA EUR Eurobond LATVIA USD Eurobond
0,5%
41%
43%
14% 2%
Savings bonds
3 years bonds
5 years bonds
10 years bonds
11 years bonds
37
Source: The Treasury
Achievements in the Domestic Market
• Primary dealer system in Latvia is operating since 11 February 2013
• The outstanding amount of domestic debt securities constituted EUR
1.121 billion as of September 2017
• The Treasury maintains regular domestic debt securities auctions
mainly by medium term T-bonds. Long term segment to be covered by
international bond issues.
— On 28th January 2016, the Treasury introduced a new short-term
borrowing instrument by issuing T-bills with maturity of 21-day.
— Historically for the first time Latvia achieved negative yields:
for T-bills in April 2015 (-0,012%, 6m benchmark)
for T-bonds in September 2016 (-0,04%, 3y benchmark)
— Net issuance in 2016 is negative (EUR -55,48 million)
• In 2014 Savings Bonds were introduced to target retail investors
— EUR 5 million were outstanding as of the end of September 2017
Domestic Securities Outstanding by Original Maturity
(September 2017, %)
Demand is steady and average yields remain low
Source: The Treasury Bid-to-Cover ratio: Bid Amount to State Treasury offered amount
Note- * Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to
9 months.
Domestic T-Bill and T-Bond Competitive Multi-Price Auctions
Weighted Average Yields on Domestic Securities Auctions (%)
Source: The Treasury; Note - * Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in
maturity brackets from 4.5 to 9 months. ** Since 2016 3m T-Bills benchmarks are tap issues of original
12m T-Bills in maturity brackets from 2 to 4.5 months.
Low yields reflect continued investor confidence
Source: The Treasury
Domestic Market Continues to Perform Strongly
1
2
3
4
5
6
7
8
9
0
5
10
15
20
25
30
3-y
5-y
3-y
3-y
3-y
3-y
5-y
5-y
5-y
5-y
5-y
Aug Sep Oct Dec Jan Mar May Nov Dec Jan
2016 2017 2018
Amount sold, million EUR (LHS) Bid-offer Ratio (RHS)
-0,302
-0,121 -0,055
0,045
-0,025
0,362
-0,4
-0,2
0
0,2
0,4
0,6
0,8
1
1,2
21days 3months* 6months* 12months 3years 5years
38
International Loan Programme has been largely refinanced in international capital
markets, while government debt redemptions remain moderate
Source: The Treasury Source: The Treasury
Source: The Treasury; Note: *In the primary market
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
Eurobonds
Loans from financialinstitutions (incl.IMFand EC loans)
Domestic T-bonds
Domestic T-bills
Other
Source: The Treasury; Note: *In the primary market
Central Government Debt Profile
Debt structure by Instruments (%)
Distribution of Investors of Latvia’s Eurobonds by Geography*
Debt Redemption Profile (EUR million)
Distribution of Investors of Latvia’s Eurobonds by Type*
24 13 1 10
16 9
49
27 54
59 56
31
1
8
2
7 8
15
9
20
31
12
12
5
8
5
7
7
2
10
1 1
4
5
7 11 8 4 8
21
2 2 3 1 1 1 1 1 1
0%
20%
40%
60%
80%
100%
2016 May, 20year
2016 Sep, 10year
2017 Feb, 10year TAP (2026)
2017 Feb, 30year
2017 June, 10year TAP (2026)
2017 June, 20year TAP (2036)
Asia and other countries Latvia Other EuropeFrance BeNeLux ScandinaviaSwitzerland Germany, Austria Uk, Ireland
Europe
100% Europe
99%
Europe
99% Europe
99%
Europe
100% Europe
99%
2 10
34
8 10 26 31
88 53
68 73
62 65
11 20 12 5
2 4 5 7 4
0%
20%
40%
60%
80%
100%
2016 May, 20year
2016 Sep, 10year
2017 Feb, 10year TAP (2026)
2017 Feb, 30years
2017 June, 10year TAP (2026)
2017 June, 20year TAP (2036)
Other International InstitutionsFund Managers / Pension & Insurance Funds Banks/Central BanksHedge Fund Managers
0
200
400
600
800
1 000
1 200
1 400
1 600
2017oct -dec
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 -2035
2036 2037 -2046
2047 >=2048
Domestic debt redemption Other external debt liabilities World Bank loan (Program)
EC loan (Program) Eurobonds
39
External borrowing instruments will represent the most significant share of the overall
borrowing volume
• Goal:
— To ensure continuous borrowing opportunities in the international
and domestic financial markets on optimal terms and conditions
• Principles:
— Flexibility (towards timing, maturities and currencies)
— Achieve balance between risks and costs
— Consistency and transparency to markets
Borrowing Instruments Available Medium Term Borrowing Strategy
• Benchmark issuances in global capital markets
• Continuing issuances in domestic market
• Niche capital market instruments (JPY, CHF, etc.)
• Private placements (reverse enquiries)
• Loans from international financial institutions (EIB,
CEB, etc.)
Debt Redemptions
Budget Execution
Budget Net Lending
and Other Flows
PRE-FUNDING
STRATEGY
FOR
REFINANCING
DEBT
Medium Term Funding Requirement and Borrowing Strategy
2017-2020
Central Government financing estimation
(2018-2020, EUR million)
as on 31-December-2017 2018 2019 2020 TOTAL
(Jan 2018-
Dec 2020)
Central government budget financial balance, net
lending and other flows at the Treasury's accounts -676 -510 -461 -1 647
Outstanding central government debt redemption
(as on 31 December-2017) -875 -983 -1 270 -3 127
of which domestic debt repayment -365 -383 -114 -862
external debt repayment -510 -600 -1 156 -2 265
TOTAL -1 551 -1 493 -1 731 -4 774
Gross borrowing in corresponding period 870 1 890 2 120 4 880
of which syndicated international issuance (nominal value,
indicative) 500 1 500 2 000
GENERAL
FINANCING
REQUIREMENT
Conclusion
41
Flexible and Resilient Economy Decreasing Unemployment
Solid Export Growth Balance of Payments improvement
Sustainable Current Account Balance
Well Capitalised Banking Sector
Credit Growth is being restored
Economic Development promoted
Resilient towards external shocks
Proven track record in overcoming
economic crisis in the past
Belongs to the Core of Europe
EZ membership
The member of all the important
international organizations
Predictable public policies and outstanding track record
of successful structural reforms
Long term growth reinforced
Sustainable Debt Levels and Prudent Fiscal
Management Investor attractiveness
Latvia recovered from the economic recession and managed to build-up an outstanding
fiscal position, together with a sustained growth, based on an increased competitiveness,
a robust domestic demand, and a flexible business sector able to adjust to external shocks
Credit rating gains Investors confidence boosted due to
reforms and sound macroeconomic
fundamentals
Latvia Investment Highlights
Thank You