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Press Release of December 30, 2004

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In the third quarter of 2004, the current account deficit of the balance of payments reached 232.7 million lats or 12.2% of gross domestic product (GDP; 9.3% in the corresponding period of 2003). With exports growing at a much higher pace than imports, the share of goods deficit against GDP decreased (from 20.1% to 18.6% of GDP). The third quarter growth in the current account deficit was determined by a decrease in the share of services and current transfers surplus against GDP, and an essential increase in income deficit.

Evaluation and outlook
In the third quarter of 2004, the trend of the previous quarters continued, with the year-on-year growth in both imports and exports of goods reporting a very high level at around 30%. It should be noted, however, that such growth rate was largely triggered by notable changes in import and export prices, which, in turn, were driven by a price rise for certain products in the global markets and consolidation of the euro against the lats. The impact of the price changes excluded, the growth of imports and exports in real terms was 13%-14% and should be regarded as relatively high. It indicates that, on the one hand, Latvian producers remain competitive on the main markets, while, on the other, a strong domestic demand is persisting.

Latvia's robust domestic demand, expanding formation of stocks and imports of capital goods under a number of investment projects are the main causes underlying the all time high level of the current account deficit in the balance of payments of Latvia in the first three quarters of the current year on the whole and also in each quarter separately. The growth in inflow of direct investment, which in the first three quarters of the year almost doubled year-on-year, is a positive development. However, as also the current account deficit almost doubled under the impact of the above causes, its share covered by foreign direct investment has remained broadly unchanged at around 30%.

It is most likely that in the coming year the impact on the current account deficit of some factors referred to above will diminish or even stop to exist. The stock formation of durable goods experienced this spring and the volume of capital goods imports observed this year are not to be expected. Nonetheless, a number of other investment projects using the EU structural funds will be implemented. In addition, the domestic demand is expected to be relatively high. Hence no substantial change in the current account deficit could be expected. In order to ease macroeconomic-stability- related risks and to prevent a further rise in the current account deficit, the fiscal policy of the country should be oriented towards a balanced budget. It implies the setting of an even lower fiscal deficit target than currently projected.

Notes to Latvia's Balance of Payments for the Third Quarter and First Nine Months of 2004
Foreign trade of Latvia continued its dynamic growth in the third quarter. With both external and internal demand being sustained and even expanding, exports of goods grew by 28.8%, while imports of goods expanded by 20.8% year-on-year. The global economic activity became more buoyant, the volume of export orders expanded, and the economy of Latvia continued to grow rapidly.

Year-on-year, the largest increase was recorded for exports of mineral products, base metals and articles of base metals, agricultural products and foodstuffs, machinery and mechanical appliances, electrical equipment, and wood and articles of wood.  The growth in exports was determined by a rise in both the prices and the volume of these goods.

Latvia's major export partners were the United Kingdom (13.9% of total exports), Germany (11.4%), Sweden (10.5%), Lithuania (9.3%), Estonia (7.7%) and Russia (7.0%).

Compared with the corresponding period of the previous year, the growth in imports of goods was mostly ensured by mineral products, machinery and mechanical appliances, electrical equipment, base metals and articles of base metals, and agricultural products and foodstuffs. The growth in imports was primarily determined by an expanding volume of imported goods, although prices also somewhat increased.

In the third quarter, Latvia's major import partners were Lithuania (14.9% of total imports), Germany (13.6%), Sweden (8.0%), Estonia (7.4%) and Russia (7.4%).

Services surplus recorded a slight year-on-year decrease in the third quarter as a result of an increase in the volume of transportation services (particularly freight transportation) and other services received. Travel services deficit continued to improve along with an increase in the services rendered to non-residents.

Income deficit grew by 37.8 million lats year-on-year due to a sizable increase in non-residents' income in Latvia from direct investment.

Net inflow of the capital and financial account was 231.5 million lats. The inflow of financial funds was mainly in the form of foreign direct investment and other investment.

In line with the growing foreign direct investment in Latvia, foreign direct investment inflow amounted to 68.8 million lats. The bulk of investment in Latvia  (in manufacturing, construction, trade and financial intermediation) was made in the form of re-invested earnings.

Portfolio investment balance of the third quarter was negative (112.5 million lats).

Other investment balance was positive (313.0 million lats). Other investment of residents abroad increased, primarily with banks pushing up their demand deposits with foreign credit institutions and expanding short-term lending to foreign credit institutions. Liabilities to non-residents grew mainly as a result of banks receiving non-residents' time deposits and demand deposits.

Reserve assets increased by 77.9 million lats in the third quarter, and the rise was mainly a result of the Bank of Latvia's interventions in the foreign exchange market.

In the first nine months of 2004, the current account deficit in the balance of payments of Latvia accounted for 13.1% of GDP (7.8% in the corresponding period of the previous year). With imports growing at a faster pace than exports, the share of goods deficit against GDP increased. Services surplus declined as a result of a more rapid growth in services (mainly transportation services) received. Income deficit increased substantially, while current transfers surplus remained broadly unchanged.

Despite the rapid growth in exports of goods in the third quarter, imports of goods recorded a more notable overall increase in the first nine months of 2004. In terms of exports, the largest increase was recorded for wood and articles of wood, base metals and articles of base metals, mineral products, and machinery and mechanical appliances, electrical equipment, whereas in terms of imports, the expansion of the volume of machinery and mechanical appliances, electrical equipment, mineral products, transport vehicles and base metals and articles of base metals contributed to the rise.

In the first nine months of 2004, services surplus dropped 24.6 million lats year-on-year in line with a decrease in transportation services surplus and an improvement in travel services deficit as well as an increase in other services surplus.

Income deficit grew year-on-year (by 102.2 million lats) mainly as a result of a sizable rise in non-residents' income in Latvia from direct investment.

Net inflow of the capital and financial account was 652.0 million lats in the first nine months of 2004. The inflow of financial funds was mainly in the form of foreign direct investment and other investment.

Foreign direct investment net inflow was in the amount of 210.6 million lats. Re-invested earnings formed the bulk of foreign direct investment in Latvia.

With portfolio assets abroad slightly increasing and the Government of Latvia redeeming eurobonds issued in 1999, portfolio investment recorded an inflow of 49.4 million lats in the first nine months of 2004.

Inflow of other investment was 471.3 million lats. Liabilities to non-residents recorded a larger increase than did residents' other investment abroad.

In the first nine months of 2004, reserve assets increased by 134.1 million lats.

LATVIA'S BALANCE OF PAYMENTS 
(in thousands of lats)

  2003       2004    
  I II III IV I II III
CURRENT ACCOUNT

-70,518

-136,694

-149,144

-164,286

-151,137

-308,535

-232,704

  GOODS

-224,993

-268,411

-322,982

-324,614

-296,795

-402,149

-354,199

    Credit (exports)

403,861

465,480

452,129

486,946

481,544

558,346

582,236

    Debit (imports)

-628,854

-733,891

-775,111

-811,560

-778,339

-960,495

-936,435

  Services

93,901

86,244

85,774

64,241

78,825

85,156

77,308

    Credit (exports)

201,968

219,626

235,323

207,845

201,263

241,745

262,977

    Debit (imports)

-108,068

-133,382

-149,549

-143,604

-122,438

-156,589

-185,669

  Income

4,569

-22,583

-9,138

14,736

-9,936

-72,538

-46,925

    Credit

49,775

50,484

55,160

55,063

54,352

57,408

68,726

    Debit

-45,206

-73,067

-64,298

-40,327

-64,288

-129,945

-115,650

  Current transfers

56,006

68,056

97,203

81,350

76,769

80,996

91,111

    Credit

98,187

119,548

147,893

160,274

143,032

148,652

154,001

    Debit

-42,181

-51,492

-50,690

-78,924

-66,263

-67,656

-62,890

 

 

 

 

 

 

 

 

CAPITAL ACCOUNT

7,355

11,500

11,318

13,151

13,906

12,596

38,028

    Credit

7,932

12,118

11,832

13,518

14,344

13,841

38,857

    Debit

-577

-617

-514

-367

-439

-1,245

-830

 

 

 

 

 

 

 

 

FINANCIAL ACCOUNT

58,522

98,912

137,870

168,520

169,128

224,872

193,430

  Direct investment

60,063

51,103

6,353

33,861

61,463

80,364

68,757

     Abroad

-4,343

-1,974

-9,564

-4,758

-16,668

-20,936

-9,636

     In Latvia 1

64,407

53,077

15,917

38,619

78,130

101,300

78,393

  Portfolio investment

-33,561

-24,781

-89,671

21,413

49,506

112,364

-112,454

    Assets (investment in foreign securities)

-41,799

-33,175

-100,625

9,460

35,631

-18,119

-105,574

      Equity securities

375

-678

1,796

2,043

-1,223

-49

-1,848

      Debt securities

-42,174

-32,497

-102,421

7,416

36,854

-18,069

-103,726

        Bonds and notes

-41,646

-26,266

-105,924

5,780

36,397

18,354

-105,768

        Money market instruments

-527

-6,231

3,503

1,636

457

-36,424

2,042

    Liabilities (foreign investment in Latvian securities)

8,238

8,394

10,954

11,953

13,875

130,483

-6,880

      Equity securities

1,266

6,150

1,436

13,038

14,443

-1,851

433

      Debt securities

6,972

2,244

9,518

-1,085

-567

132,334

-7,313

        Bonds and bills

6,962

2,340

9,518

-1,032

-960

132,727

-7,313

        Money market instruments

10

-95

0

-53

392

-392

0

  Financial derivatives

-5,090

4,429

1,236

2,945

-7,802

-3,979

2,005

    Assets

-1,946

-2,153

1,545

-74

-521

-1,267

1,465

      Monetary authorities

-1,908

135

-138

577

-561

-1,993

565

      General government

0

0

0

0

0

0

0

      Banks

-463

-2,348

1,685

-653

39

733

1,085

      Other sectors

425

61

-1

1

0

-7

-185

    Liabilities

-3,144

6,581

-309

3,019

-7,281

-2,712

540

      Monetary authorities

-2,973

4,227

305

926

-5,335

-1,102

1,515

      General government

0

0

0

0

0

0

0

      Banks

-157

2,354

-614

2,093

-1,946

-1,714

-978

      Other sectors

-14

0

0

0

0

105

3

  Other investment

-52,188

141,461

287,360

97,344

46,795

111,449

313,046

    Assets (Latvia's loans to foreign countries etc.)

-27,953

-95,510

-114,519

-149,017

-225,630

-96,686

-395,795

      Monetary authorities

61

88

-17

147

-60

-808

59

      General government

-724

-155

147

817

174

-4

199

      Banks

-2,777

-83,987

-118,971

-151,926

-195,256

-98,369

-376,383

      Other sectors

-24,514

-11,456

4,322

1,945

-30,488

2,495

-19,670

    Liabilities (foreign loans to Latvia etc.)

-24,235

236,971

401,878

246,361

272,425

208,134

708,841

      Monetary authorities

-1,663

-1,341

-1,231

-1,614

-1,687

8,505

-3,028

      General government

-10,348

-2,356

294

-23,897

41

-2,872

738

      Banks

-5,408

209,696

377,734

256,905

264,327

118,249

653,506

      Other sectors

-6,816

30,973

25,081

14,967

9,745

84,252

57,625

 

 

 

 

 

 

 

 

RESERVE ASSETS

89,298

-73,300

-67,408

12,958

19,166

-75,326

-77,925

 

 

 

 

 

 

 

 

NET ERRORS AND OMISSIONS

4,641

26,281

-44

-17,385

-31,896

71,066

1,247

1 As of year 2004, equity capital data of direct investment in Latvia are reported possibly closer to the market value. In assessing the value of listed enterprises, the Riga Stock Exchange data are used, while the value of non-listed enterprises is obtained using the equity capital method (own funds at book value) recommended by the European Central Bank.