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Press Release of September 30, 2004

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The current account deficit of the balance of payments in the second quarter of 2004 reached 308.5 million lats or 17.4% of gross domestic product (GDP; 136.7 million lats or 8.8% in the second quarter of 2003). The growth of the current account deficit was mainly determined by an increase in the goods deficit due to rapidly rising imports in the months preceding Latvia's accession to the European Union (EU) and also purchase of ships. Compared with the corresponding period of the previous year, exports of goods increased by 20.0% and imports by 30.9%.

Year-on-year, the largest increase was recorded for exports of base metals and articles of base metals, machinery and mechanical appliances, electrical equipment, and the chemical and allied industries. The growth in exports of machinery and mechanical appliances, electrical equipment, and the chemical and allied industries was ensured by the expanding volume of theses goods, whereas the growth of exports of base metals and articles of base metals, and wood and articles of wood was caused by a price rise. Fluctuations of the lats exchange rate did not have a notable effect on Latvia's external competitiveness, and an overall competitiveness of export goods was maintained.

Compared with the corresponding period of the previous year, imports of all commodity groups increased, and the goods dominating Latvia's imports recorded the largest increase. The growth in imports of transport vehicles, machinery and mechanical appliances, electrical equipment, the chemical and allied industries, and plastics and articles thereof was determined by a rise in the volume of these goods, whereas the price rise more affected the rise in imports of base metals and articles of base metals, and mineral products.

In line with the EU enlargement, Latvia's foreign trade turnover with EU countries in the second quarter grew and reached 79.4% of total exports and 74.9% of total imports, with trade turnover with the other countries falling accordingly.

In the second quarter, services surplus decreased only slightly year-on-year as a result of an increase in the other services surplus and a decline in the transportation services surplus and travel services deficit. The volume of cargo transportation services rendered by sea continued to follow a downward trend, determined by a decrease in charter rates for ships owned by residents and in the number of ships operated by residents. By contrast, with non-residents' travel spending in Latvia growing, travel services deficit dropped by 4.2 million lats.

In line with a considerable rise in non-residents' income from direct investment in Latvia, income deficit grew by 50.0 million lats year-on-year.

Current transfers surplus increased by 12.9 million lats year-on-year, mainly due to more sizable current transfers received by other sectors (including private persons).

Net inflow of the capital and financial account was 237.5 million lats. Financial funds were evenly ensured by foreign direct investment, portfolio investment and other investment.

The volume of foreign direct investment in Latvia reached 101.3 million lats in the second quarter, with direct investment made by residents abroad totaling 20.9 million lats. The bulk of investment (channeled mainly in financial intermediation, trade and construction) was made in the form of re-invested earnings.

Portfolio investment balance was positive (112.4 million lats) mainly because the Government issued new eurobonds in the second quarter and redeemed the eurobonds issued in 1999.

Other investment recorded a net inflow of 111.4 million lats. Other investment of residents abroad was 96.7 million lats, due to primarily banks increasing loans to foreign non-banks and raising demand deposits with foreign credit institutions. Liabilities to non-residents amounted to 208.1 million lats as a result of mainly banks receiving demand deposits and loans from non-residents, as well as enterprises borrowing abroad.

In the second quarter, reserve assets increased by 75.3 million lats, and the rise was mainly a result of a transfer of funds from transactions with eurobonds to Treasury's account with the Bank of Latvia and the Bank of Latvia's interventions in the foreign exchange market.

In the first half of 2004, the current account deficit of the balance of payments accounted for 13.6% of GDP (7.0% in the corresponding period of the previous year). It was caused mainly by a rise in goods deficit, as imports of goods posted a higher growth rate than exports of goods.

Services surplus in the first half of the year decreased by 16.2 million lats year-on-year, due to shrinking transportation services surplus.

 Income deficit grew year-on-year (by 64.5 million lats) in line with a sizable increase in non-residents' income in Latvia from direct investment.

Current transfers surplus increased by 33.7 million lats year-on-year, mainly due to more sizable current transfers received by the other sectors.

Net inflow of the capital and financial account was 420.5 million lats in the first half of the year. Financial funds were mainly in the form of foreign direct investment, portfolio investment and other investment.

The volume of foreign direct investment was 141.8 million lats and covered 30.9% of the current account deficit. Foreign direct investment in Latvia increased notably. Re-invested earnings formed the bulk of investment. Direct investment abroad reached 37.6 million lats.

With portfolio assets abroad decreasing and the Government engaging in transactions with eurobonds in the second quarter, portfolio investment in the first half of the year recorded a net inflow (161.8 million lats).

Other investment posted a net inflow of 158.2 million lats. Other investment of residents abroad increased to 322.3 million lats, with mainly banks increasing the amount of demand deposits with foreign credit institutions and of the extended loans to foreign non-banks. Liabilities to non-residents amounted to 480.6 million lats, with mainly banks receiving demand deposits and loans from non-residents, as well as enterprises borrowing from non-residents.

Reserve assets increased by 56.2 million lats in the first half of the year.

Evaluation and outlook
In the first half of 2004, Latvia's balance of payments was positive, with capital inflows exceeding the current account deficit. Although increasing external demand accelerated growth of exports of goods, the domestic demand was also on the rise, and this explained the  atypically steep rise in imports of goods. It resulted in an increase in the goods deficit and the current account deficit. The increase in imports was mainly caused by the activities of businesses aiming to increase stocks prior to Latvia's accession to the EU due to expected increases in import tariffs and taxes; in this period, several significant one-off investment projects were also implemented. It should be noted that in the first half of the current year the inflows of direct investment in Latvia increased year-on-year and accounted for 5.3% of GDP, yet the contribution of direct investment to the financing of the current account deficit declined.

The current account deficit for 2004 is estimated at around 10% of GDP. The relatively fast growth of imports in the first half of the year supports this estimation. For several groups of commodities, the increase in imports is associated with a higher pre-accession demand, which is expected to level out in the course of the year, and a number of the most significant investment projects that were accomplished in the first half of the current year. The current account deficit is likely to be affected by a further expected growth in imports due to the implementation of projects financed from the EU structural funds in the second half of the year.

Though, on the one hand, the current account deficit mainly reflects modernisation of the Latvian economy facilitating imports of capital goods, the growth currently observed also in imports of certain groups of consumer goods indicates, on the other hand, that domestic consumption is also robust. At the same time foreign direct investment covers a smaller share of the current account deficit, increasing the dependence of Latvia's economy on the assessment of foreign investors. Under such conditions, the maintenance of high lending standards and the fiscal policy oriented to sustainable macroeconomic stability, including also consistent measures leading to the reduction of the planned fiscal deficit for the current and the coming year, retain their importance. These undeniably are important instruments to contain macroeconomic risks, including also the reduction of external imbalances and vulnerability.

LATVIA'S BALANCE OF PAYMENTS 

 (in thousands of lats) 2003       2004  
  I1 II1 III1 IV1 I1 II
CURRENT ACCOUNT

-70518

-136694

-149144

-164286

-151137

-308535

  GOODS

-224993

-268411

-322982

-324614

-296795

-402149

    Credit (exports)

403861

465480

452129

486946

481544

558346

    Debit (imports)

-628854

-733891

-775111

-811560

-778339

-960495

  Services

93901

86244

85774

64241

78825

85156

    Credit (exports)

201968

219626

235323

207845

201263

241745

    Debit (imports)

-108068

-133382

-149549

-143604

-122438

-156589

  Income

4569

-22583

-9138

14736

-9936

-72538

    Credit

49775

50484

55160

55063

54352

57408

    Debit

-45206

-73067

-64298

-40327

-64288

-129945

  Current transfers

56006

68056

97203

81350

76769

80996

    Credit

98187

119548

147893

160274

143032

148652

    Debit

-42181

-51492

-50690

-78924

-66263

-67656

 

 

 

 

 

 

 

CAPITAL ACCOUNT

7355

11500

11318

13151

13906

12596

    Credit

7932

12118

11832

13518

14344

13841

    Debit

-577

-617

-514

-367

-439

-1245

 

 

 

 

 

 

 

FINANCIAL ACCOUNT

58522

98912

137870

168520

169128

224872

  Direct investment

60063

51103

6353

33861

61463

80364

     Abroad

-4343

-1974

-9564

-4758

-16668

-20936

     In Latvia2

64407

53077

15917

38619

78130

101300

  Portfolio investment

-33561

-24781

-89671

21413

49506

112364

    Assets (investment in foreign securities)

-41799

-33175

-100625

9460

35631

-18119

    Equity securities

375

-678

1796

2043

-1223

-49

     Debt securities

-42174

-32497

-102421

7416

36854

-18069

     Bonds and notes

-41646

-26266

-105924

5780

36397

18354

     Money market instruments

-527

-6231

3503

1636

457

-36424

    Liabilities (foreign investment in Latvian securities)

8238

8394

10954

11953

13875

130483

      Equity securities

1266

6150

1436

13038

14443

-1851

      Debt securities

6972

2244

9518

-1085

-567

132334

        Bonds and bills

6962

2340

9518

-1032

-960

132727

        Money market instruments

10

-95

0

-53

392

-392

  Financial derivatives

-5090

4429

1236

2945

-7802

-3979

    Assets

-1946

-2153

1545

-74

-521

-1267

      Monetary authorities

-1908

135

-138

577

-561

-1993

      General government

0

0

0

0

0

0

      Banks

-463

-2348

1685

-653

39

733

      Other sectors

425

61

-1

1

0

-7

    Liabilities

-3144

6581

-309

3019

-7281

-2712

      Monetary authorities

-2973

4227

305

926

-5335

-1102

      General government

0

0

0

0

0

0

      Banks

-157

2354

-614

2093

-1946

-1714

      Other sectors

-14

0

0

0

0

105

  Other investment

-52188

141461

287360

97344

46795

111449

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

-27953

-95510

-114519

-149017

-225630

-96686

      Monetary authorities

61

88

-17

147

-60

-808

      General government

-724

-155

147

817

174

-4

      Banks

-2777

-83987

-118971

-151926

-195256

-98369

      Other sectors

-24514

-11456

4322

1945

-30488

2495

    Liabilities (foreign loans to Latvia etc.)

-24235

236971

401878

246361

272425

208134

      Monetary authorities

-1663

-1341

-1231

-1614

-1687

8505

      General government

-10348

-2356

294

-23897

41

-2872

      Banks

-5408

209696

377734

256905

264327

118249

      Other sectors

-6816

30973

25081

14967

9745

84252

 

 

 

 

 

 

 

RESERVE ASSETS

89298

-73300

-67408

12958

19166

-75326

 

 

 

 

 

 

 

NET ERRORS AND OMISSIONS

4641

26281

-44

-17385

-31896

71066

1Data have been revised.
2As 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.