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Press Release of June 30, 2004

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In the first quarter, the current account deficit of the balance of payments was 152.2 million lats or 9.5% of GDP, calculated in accordance with the Eurostat methodology (71.3 million lats or 5.0% in the first quarter of 2003). A rise in the goods deficit determined the year-on-year increase in the current account deficit. Exports and imports of goods grew by 19.2% and 23.8%, respectively. The driving factors for the rapid acceleration in imports were the continuously high domestic demand and the rapidly growing exports, as well as the fact that businesses accumulated stocks of goods before May 1, 2004, when import duties and taxes on several commodities rose.

Although the economic growth was moderate in Europe, in the first quarter Latvia's exports to EU countries increased by 20.1% year-on-year. Exports to the CIS countries grew only slightly, whereas exports to other countries (mostly Estonia, Lithuania and US) rose rapidly.

As in the previous year, the highest pickup in imports was reported for capital goods and intermediate goods. Machinery and mechanical appliances, electrical equipment, transport vehicles, products of the chemical industry, mineral products, and base metals and articles of base metals were the most significant goods in imports. A major increase was observed in imports of goods from Germany, Sweden, Lithuania, Estonia and Poland.

In the first quarter, with the transportation services surplus declining and that of the travel services improving, the services surplus shrank by 12.2 million lats year-on-year. Income from exports of freight transportation by sea decreased, as charter rates for older tankers dropped on the global markets. With non-resident spending in Latvia growing, the travel services deficit fell by 4.9 million lats.

The income surplus, mostly due to non-resident income from direct investment in Latvia growing, decreased by 18.2 million lats year-on-year, turning negative. Nearly all non-resident income from direct investment in equity was reinvested.

The current transfers surplus, mostly as a result of an increase in current transfers received by other sectors (incl. private persons), grew by 21.5 million lats year-on-year.

In the first quarter, the surplus of the capital and financial account amounted to 166.5 million lats. The inflow of funds was mostly observed in the form of direct investment and bank borrowings (time deposits), as well as banks reducing their investment in debt securities (on the asset side of portfolio investment).

Direct investment net inflow was 58.2 million lats and covered 38.2% of the current account deficit. Foreign direct investment in Latvia amounted to 74.1 million lats. Investors' reinvested earnings and loans received from foreign investors (trade credit) accounted for the major part of investment.

With assets of the portfolio investment (bank investment in bonds and notes) abroad decreasing and non-resident investment in equity securities issued by residents increasing, portfolio investment recorded a net inflow (45.6 million lats).

Other investment posted a net inflow of 44.6 million lats. Banks received 69.1 million lats from non-residents. Banks borrowed (received time deposits) in the amount of 48.7 million lats, as well as attracted demand deposits and placed demand deposits abroad in a slightly larger amount. Banks also reduced their loans to non-residents. Other investment of enterprises (other sectors) recorded a net outflow of 22.9 million lats. Enterprises increased their trade credit to non-residents and decreased their deposits and loans abroad.

In the first quarter, reserve assets shrank by 19.2 million lats. The Bank of Latvia met its currency swap obligations to banks and repaid foreign currency received from them previously. In March, with the exchange rates of the US dollar and the euro on the interbank market weakening against the lats within the intervention band set by the Bank of Latvia, the Bank conducted interventions, purchasing foreign currency from banks on the foreign exchange market.

Evaluation and outlook

In the first quarter of 2004, Latvia's balance of payments was negative, and foreign direct investment and other long-term capital did not fully cover the current account deficit. With a rapid increase in domestic demand and hence also in imports of goods, the current account deficit of the balance of payments grew in the first quarter. A rise in imports in April should be noted, when one of the reasons for such growth was the fact that businesses accumulated stocks of goods before Latvia's accession to the EU, when import duties and taxes on several commodities rose.

Although the current account deficit is driven by an objective factor - modernisation of the Latvian economy requires sizeable financing which fosters imports of capital goods - it is also partly affected by a rapid pickup in the domestic consumption. The growing current account deficit, financed by foreign capital inflows, makes Latvia's economy increasingly dependent on external assessment: investors' opinion about Latvia's macroeconomic risks. Therefore, it is essential to continue reducing the general government budget deficit and to maintain high standards for bank loans in order to limit the private consumption growth.

As projected before, in 2004 the current account deficit might approach 10% of GDP. Data for the first quarter support these projections, since the growth in imports of several commodity groups (e.g. cars and fuel) is based on higher demand in view of Latvia's accession to the EU; however, it should level out during the year. Moreover, the current account deficit in 2004 will also be affected by the scheduled investment projects (e.g. reconstruction of several enterprises), as well as projects whose implementation is related to the EU structural funds.

Latvia's Balance of Payments
(in thousands of lats)    

     

2003 

  2004
  I II III IV I
CURRENT ACCOUNT

-71256

-149667

-156684

-165336

-152188

  GOODS

-224866

-268411

-321837

-322689

-296864

    Credit (exports)

403988

465480

452129

486946

481544

    Debit (imports)

-628854

-733891

-773966

-809635

-778408

  Services

95443

86404

86795

65433

83194

    Credit (exports)

203411

221594

237633

209332

204710

    Debit (imports)

-107968

-135191

-150839

-143899

-121516

  Income

4141

-32931

-17092

11950

-14066

    Credit

48971

49801

54864

54602

53897

    Debit

-44830

-82732

-71956

-42651

-67963

  Current transfers

54027

65271

95450

79970

75548

    Credit

96211

117399

146160

158883

141826

    Debit

-42184

-52128

-50710

-78914

-66278

 

 

 

 

 

 

CAPITAL ACCOUNT

1270

5619

4965

7358

6673

    Credit

1951

6305

6005

7888

8872

    Debit

-681

-686

-1040

-531

-2199

 

 

 

 

 

 

FINANCIAL ACCOUNT

57306

113041

139542

165737

159816

  Direct investment

62435

62358

15365

47258

58186

     Abroad

-4072

-1676

-9268

-3119

-15911

     In Latvia

66508

64034

24634

50378

74097

  Portfolio investment

-38409

-19866

-97933

24378

45644

    Assets (investment in foreign securities)

-41799

-33172

-100625

9184

36267

    Equity securities

375

-678

1796

1782

-1117

     Debt securities

-42174

-32494

-102421

7401

37383

     Bonds and notes

-41647

-26266

-105924

5810

36926

     Money market instruments

-527

-6228

3503

1591

457

    Liabilities (foreign investment in Latvian securities)

3390

13305

2692

15195

9377

      Equity securities

641

6150

515

9007

14442

      Debt securities

2749

7156

2176

6188

-5064

        Bonds and bills

2739

7251

2176

6241

-5457

        Money market instruments

10

-95

0

-53

392

  Financial derivatives

-5090

4429

1236

2945

-7802

    Assets

-1946

-2153

1545

-74

-521

      Monetary authorities

-1908

135

-138

577

-561

      General government

0

0

0

0

0

      Banks

-463

-2348

1685

-653

39

      Other sectors

425

61

-1

1

0

    Liabilities

-3144

6581

-309

3019

-7281

      Monetary authorities

-2973

4227

305

926

-5335

      General government

0

0

0

0

0

      Banks

-157

2354

-614

2093

-1946

      Other sectors

-14

0

0

0

0

  Other investment

-50929

139421

288281

78198

44622

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

-28349

-95459

-114398

-138361

-216029

      Monetary authorities

61

88

-17

147

-60

      General government

-724

-155

147

817

174

      Banks

-2777

-83987

-118971

-151926

-195256

      Other sectors

-24909

-11405

4442

12601

-20887

    Liabilities (foreign loans to Latvia etc.)

-22580

234880

402680

216559

260651

      Monetary authorities

-1663

-1341

-1231

-1614

-1687

      General government

-10348

-2356

294

-49549

41

      Banks

-5408

209696

377734

256905

264327

      Other sectors

-5161

28882

25883

10818

-2029

 

 

 

 

 

 

RESERVE ASSETS

89298

-73300

-67408

12958

19166

 

 

 

 

 

 

NET ERRORS AND OMISSIONS

12680

31007

12178

-7759

-14301

           

1As 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.