Presentation by Zoja Razmusa, Member of Council, Bank of Latvia. Euro Conference Latvia 2013.

1. Changing Latvia in the Changing
Euro Area
Zoja Razmusa
12 September 2013

2. CHANGES FROM THE
LATVIAN PERSPECTIVE

3. Economy is dominated by micro enterprises while
large enterprises contribute around one third of the
total value-added created by businesses
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%
20052011
Micro Small Medium Large
Economically active market sector
statistical units (%)
Source: Central Statistical Bureau of Latvia; Eurostat
19
23
26
32
Micro Small Medium Large
Value added by enterprise size class,
non-financial business economy (available
information for 2010, %)

4. During crisis the economy re-adjusted towards a
more export-oriented model
125.5%
0
20
40
60
80
100
120
140
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
Exports Imports
Exports and imports to GDP ratio (%)
Sources: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast.

5. With euro area countries becoming more
important trading partners for Latvia, euro is a
major currency in foreign trade settlements
Currency structure of foreign trade turnover
in Latvia (%)
Source: Central Statistical Bureau of Latvia.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012
Other
currencies
(services)
Other
currencies
(goods)
USD
(services)
USD (goods)
EUR
(services)
EUR (goods)
Merchandise export breakdown by country (mln
LVL)
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
2000 2005 2008 2012
Other
Other EU
Scandinavia(ex
Finland) +UK
CIS
Baltics*
Euro area
* Estonia included in the euro area since 2011

6. Latvia’s export has undergone a significant
diversification, diminishing the vulnerability to
asymmetric shocks
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2005 2008 2013
1H
Others
Textiles
Transport vehicles
Mineral products
Chemical
Machinery and
electrical equipment
Base metals
Food products
Wood
Structure of exports (%)
Sources: Central Statistical Bureau of Latvia, Bank of Latvia..
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2005 2008 2013 H1
Government services,
n.i.e.
Personal, cultural and
recreational services
Other bussiness services
Royalties and licence fees
Computer and
information services
Financial services
Insurance services
Construction services
Communication services
Travel
Other transportation
services
Pipeline transport
Auto transport
Railway transport
Air transport
Sea transport
ServicesGoods

7. Latvian economy being sufficiently flexible has
undergone a significant adjustment and regained
competitiveness: wage-productivity gap has been
closed
Real hourly wage and labour productivity
per hour in manufacturing (s.a., 2005 Q1
= 100)
Sources: Central Statistical Bureau of Latvia;; Bank of Latvia staff calculations.
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
20131H
Bulgaria
Czech
Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak
Republic
Slovenia
Merchandise export shares in world
import (2002=100)
100
120
140
160
180
Q12005
Q3
Q12006
Q3
Q12007
Q3
Q12008
Q3
Q12009
Q3
Q12010
Q3
Q12011
Q3
Q12012
Q3
Q12013
Labour productivity Real wage

8. Macroeconomic challenges
• No ailing macroeconomic imbalances are
evident as external and internal balance has
been restored and competitiveness has been
regained.
• Challenges ahead are rather of structural nature
• Labour market: long-term unemployment; quality of
education
• Product market: export sophistication; innovations,
R&D; business environment

9. Changes in monetary policy framework (I)
ESCB Bank of Latvia until 2014
Main channel of
monetary transmission
Interest rate channel Exchange rate channel
Main source of liquidity
for the banking system
Central bank liquidity providing -
open market operations
Central bank liquidity providing -
foreign exchange operations
Liquidity obtained from the mother
companies, external financing
Excess liquidity in the
banking system
~250 bln. EUR (2.6% of GDP) ~ 700 mln. LVL (~4.3% of GDP)
Role of exchange rate Flexible exchange rate, FX
interventions only in exceptional
circumstances
Tightly fixed exchange rate,
automatic FX interventions

10. Increasing role of interest rate channel will be
determined by currency structure of private
sector borrowing from banks
non-financial corporations
0
1
2
3
4
5
6
7
8
Bln. LVL
Volume in lats Volume in euro Volume in other currencies
0
1
2
3
4
5
6
7
8
Bln. LVL
Outstanding bank loans to
households
Source: Bank of Latvia.

11. Changes in monetary policy framework
(II)
Eurosystem Bank of Latvia
Main refinancing
operations
0.5% 2%
Marginal lending
facility
1% 2.5%–7%
Deposit facility 0% 0.05%–0.075%
Minimum reserve
requirement ratio
0–1% 0–2%–4%
Non-traditional
monetary policy
operations
Long-Term Refinancing Operations
Outright Monetary Transactions
Securities Markets Programme
None

12. Money market rates in Latvia have
historically been higher and more volatile
than in the euro area
3 month money market rates in
Latvia vs the euro area
0
1
2
3
4
5
6
7
jan.2010 jan.2011 jan.2012 jan.2013
RIGIBOR 3M EURIBOR 3M
12 month money market rates in
Latvia vs the euro area
0
1
2
3
4
5
6
7
8
9
10
jan.2010 jan.2011 jan.2012 jan.2013
RIGIBOR 1Y EURIBOR 1Y
% %

13. RECENT POLICY CHANGES IN
THE EURO AREA

14. Euro area's policy response to crisis
POLICY AREA BEFORE THE CRISIS NOW
Economic and fiscal
policy
Stability and Growth
Pact (SGP)
Enhanced EU economic
governance under the
European semester;
A reinforced fiscal
surveillance (SGP; Fiscal
Compact)
A new initiative –
macroeconomic
surveillance
(Macroeconomic
Imbalances Procedure
(MIP))
Monitoring of structural
reforms (Europe 2020
Strategy)

15. Structural budget balance, general government
(% of GDP), 2003-2007 average
-7 -6 -5 -4 -3 -2 -1 0 1 2 3
Greece
Portugal
Italy
Malta
France
Cyprus
Slovakia
Euro area average
Slovenia
Latvia
Germany
Austria
Belgium
Netherlands
Estonia
Luxembourg
Spain
Ireland
Finland
Source: European Comission.
New threshold

16. Countries that tightened fiscal policy during the
boom can relax during the dowturn. Countries
that did not, cannot
FI
DKSE
BG
LU
ES
NE
IE
EE
BE
CY
AU
DE
SKSI
CZ
LV
LTFR
PL
IT
UK
RO
MT
PT
GR
HU
-1
0
1
2
3
4
5
6
7
-8 -6 -4 -2 0 2 4
Changesinstructuralbalance2011-2013
(%ofGDP)
Average structural balance 2004-2008 (% of GDP)
Source: European Comission.

17. Sovereign risk assessments by markets
in the euro area
2008
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0.0 25.0 50.0 75.0 100.0 125.0
Governmentbondyields(%)
Government debt (% of GDP)
2012/2013
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0 25 50 75 100 125
Government10YbondyieldsJuly2013(%)
Government debt in 2012 (% of GDP)
Source: Eurostat.

18. Permanent vs temporary changes in policy
framework
• Extraordinary loose monetary policy and non-standard
monetary policy measures are temporary
o should and will be withdrawn when economic conditions in
the euro area normalize
• Moreover, these measures cannot replace the necessary
structural reforms and fiscal discipline, going forward
• Changes to the euro area's fiscal and financial
frameworks, on the other hand, are permanent

19. 78,7%
82,7%
86,1%
87,3%
91,2%
10,4%
8,7%
3,6%
5,4%
4,5%
10,8%
8,6%
10,3%
7,3%
4,3%
0% 25% 50% 75% 100%
Latvia must show solidarity with
other European countries
because in the long run
it will be beneficial also for us
In the economic sphere, Latvia should
activelly collaborate with the core
partners
Low interest rates on loans are
important for the development of the
country and for individual borrowers
In the coming years, the national
debt and debt service burden
should be reduced
The Government should not spend
more than it earns
To what extent do you agree with the following statements?
Fully + more agree Fully+ more disagree Don't know/NA
Population in Latvia generally shares euro
area's main working principles
Source: Latvijas Fakti.