1) Latvia is experiencing rising inflation driven by increasing energy costs, while economic sentiment remains close to pre-pandemic levels. 2) While exports continue to grow, transportation services exports are still far below pre-COVID levels. Domestic economic activity is also recovering but construction capacity constraints could emerge. 3) Overall the Latvian economy is recovering from the pandemic, but risks remain from supply chain issues, rising prices and the potential of overheating in some sectors like construction.

1. Current Economic Trends in Latvia
Ieva Opmane
October 29, 2021

2. Current and new challenges to economics
2
Pictures: Shutterstock, Pixabay, Flaticon.
Covid-19 still here
Cartel in construction industry,
construction prices rising
Saeima elections
next year
Santions to Belarus
Prices increasing, problems with
resources and supply chains

3. IEROBEŽOTA PIEEJAMĪBA
Source: Our World in data.
Covid-19 cases (7 day smoothed average,
per million people)
3
European countries are experiencing Delta outbreaks
Covid-19 deaths (7 day smoothed average,
per million people)
0
200
400
600
800
1000
1200
1400
1600
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Africa Asia Australia
Europe Latvia North America
South America World
-2
0
2
4
6
8
10
12
14
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Africa Asia Australia
Europe Latvia North America
South America World

4. 0
50
100
150
200
250
300
350
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
US recession,
9/11
War in Iraque,
SARS
Financial
crisis
Eurozone
debt crisis Brexit
Trade tensions between
US and China
COVID-19
pandemics
Source; IMF https://worlduncertaintyindex.com/data/, European Commision.
World uncertainity index (long term average= 100)
4
Economic sentiment close to normal, but uncertainity remains
Economic sentiment index in Latvia (reverse; long
term average = 100)
30
40
50
60
70
80
90
100
110
120
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Transition to
market economy
Russian
financial
crisis
Covid-19
Financial
crisis
problems with
Parex banka
Banka Baltija
bankruptcy

5. 84
88
92
96
100
104
108
112
2019 2020 2021 2022
USA
Developing countries
Eurozone
USA (previous forecast)
Developed countries
(previous forecast)
Eurozone (previous
forecast)
Souce: ECB March and September forecast for eurozone, IMF April and June forecast for developing countries, OECB March and September forecast for the USA
Real GDP (2019 = 100)
6
Strong recovery from crisis all around the world
Forecast

6. 0
50
100
150
200
250
EE BU LU CZ DK SE RO LT LV MT PL SK NL IE DE FI HU Sl AT HR CY ES FR BE PT IT GR
2019-Q4 2021-Q2
Source: Eurostat.
Govenment consolidated gross debt (% of GDP)
7
Due to crisis level of government debt increased all across the EU

7. ► LV debt in 2020 was 6680 euro
per capita (15K per employed).
► If spending continues as in 2020,
debt ceiling can be reached
already in a few years.
► Weaker debt and budgetary deficit
rules during pandemics.
► Low interest rates will not last
forever. At what cost can be the
debt refinanced?
0
10
20
30
40
50
60
70
Baseline scenario
If primary deficit at the level of that
in 2020
In Latvia we don't have much free space to increase the
government debt
Scenarios of Government debt
development in Latvia, % of GDP
Souce: Treasury of Latvia, IMF debt sustainability tool, Bank of Latvia calculations 8
-4.5
-6.7
-4.0
-2.2
-8
-7
-6
-5
-4
-3
-2
-1
0
2020 2021 F 2022 F 2023 F
Budget balance, % of GDP

8. 0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
MT PT EL FI FR SI IT NL AU CY BE IE ES LU SK DE LV EE LT
Source: Eurostat.
Eurozone inflation September 2021 (y-o-y, %)
9
Also there is pression on inflation rise in all eurozone countries

9. -2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Jan
2019
Apr
2019
Jul
2019
Oct
2019
Jan
2020
Apr
2020
Jul
2020
Oct
2020
Jan
2021
Apr
2021
Jul
2021
Services
Energy
Manufacturing excl.
energy
Food
Total
Source: Eurostat, Bank of Latvia calculations
Inflation in eurozone, main components pp
10
Eurozone inflation based on energy cost increase

10. 0.3
2.2
1.7 1.5
2020 2021 2022 2023
Septembris, 2021 June 2021
-6.5
5.0 4.6
2.1
2020 2021 2022 2023
Source: ECB
Eurozone inflation (%)
11
Eurozone forecasts
Eurozone real GDP (%)

11. Inflation over the medium term close but below 2%
Inflation over the medium term 2%
► This new inflation target has symmetric approach.
► Long term negative deviation from inflation target is not acceptable, as economics is close to nominal interest
rate lower bound, there is a need for long term monetary intervention.
► During the transition period inflation can be above the target.
ECB strategy review – new inflation target
12

12. Activity in Latvia

13. 50
70
90
110
t t+2 t+4 t+6 t+8 t+10t+12t+14t+16t+18t+20t+22
Manufacturing
Components of economic sentiment in Latvia
14
Economic sentiment in Latvia is close to pre-crisis level
40
60
80
100
120
t t+2 t+4 t+6 t+8 t+10t+12t+14t+16t+18t+20t+22
Services
50
70
90
110
t t+2 t+4 t+6 t+8 t+10t+12t+14t+16t+18t+20t+22
Consumers
50
70
90
110
t t+2 t+4 t+6 t+8 t+10t+12t+14t+16t+18t+20t+22
Trade
10
30
50
70
90
110
t t+2 t+4 t+6 t+8 t+10t+12t+14t+16t+18t+20t+22
Construction
2007 (June 2007 = 100)
2020 (January 2020 =
100)
Source: European Commision

14. -1.1
-7.3
5.5
1.5
0.5
2.6
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
2020 Q1
Q2 Q3 Q4 2021Q1 Q2
Imports of goods and services
Exports of goods and services
Changes in inventories
Total gross fixed capital formation
Government consumption
Private consumption
GDP
Source: CSP
GDP comparable prices, q/q, %, sa and components (contrubutions, pp)
15
GDP grows faster than expected, expenditure side
components do not provide clear insight why
2021Q3
flash
+0.3

15. 5 000
5 500
6 000
6 500
7 000
7 500
8 000
8 500
9 000
9 500
10 000
2015
2016
2017 2018 2019 2020 2021
Deposits (actual data) Deposits (actual data till 2019 and tendency)
► Deposits additional to trend
during pandemics: 800
million euro
► Per person:
423 euro
=
► Consumption per HH
member per month**
423 euro
Source: Bank of Latvia, Bank of Latvia calculations. *Base scenario without pandemic influence made with ARIMA model. **HH budget survey 2019 (pre Covid-19 level).
16
Prudence and unrealized consumption continue to increase
bank deposits
Household deposit tendencies* and actual data (million euro, nsa)

16. Source: Bank of Latvia. *for comparision reasons changes of banking sector structure and one-off factors excluded.
New loans, flow million euro
17
More loans to households, cooperations not too eager to
borrow and invest
0
50
100
150
200
250
300
I
2019
IV VII X I
2020
IV VII X I
2021
IV VII
New contracts, Non financial cooperations (NFC)
New contracts, Households (HH)
-0.5
-3.0
2.1
-6
-4
-2
0
2
4
6
I
2019
III V VII IX XI I
2020
III V VII IX XI I
2021
III V VII IX
NFC+HHs* NFC* HH*
Loans issued, y-o-y, %

17. Production capacity utilization (average per yer,
long term avearage=100)
Production capacity utilization high, to grow – investment is
needed
Source: Eurostat, European Commmision, Bank of Latvia calculations. *Q1-Q3 18
75
80
85
90
95
100
105
110
115
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021*
100
150
200
250
300
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Estonia Latvia Lithuania
Investment (comparable prices; 2000=100)

18. 80
90
100
110
120
130
140
-25
-15
-5
5
15
25
35
45
I
2019
III
V
VII
IX
XI
I
2020
III
V
VII
IX
XI
I
2021
III
V
VII
Other goods Vehicles
Machinery and electronic equipment Base metals and products
Wood products Chemical products
Agriculture and food Total exports (2019=100, right axis)
50
60
70
80
90
100
110
120
130
-50
-40
-30
-20
-10
0
10
20
I
2019
III
V
VII
IX
XI
I
2020
III
V
VII
IX
XI
I
2021
III
V
VII
Transport Travel Other Total exports (%, right axis)
Source: Central Statistical Bureau, Bank of Latvia.
Merchandise exports (2019=100 right axis,
contributions by product, pp)
19
Merchandise exports continue the good run; exports of travel
and transport services still far from pre-pandemic level
Services' exports (2019=100 right axis, contributions
by type, pp)

19. Source: Central Statistical Bureau, Bank of Latvia.
Transportation (index; 2018 average = 100)
20
Only road transportation sector has reached 2018th levels;
cargos of coal and oil products keep decreasing
Cargos in ports (t; y/y; %) by cargo type
(contribution pp)
0
20
40
60
80
100
120
140
160
Avrg. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Jul Aug
2018 2019 2020 2021
Road freight turnover (t-km) Rail freight turnover (t-km)
Cargos loaded in ports (t) Airline passengers (people)
Coal cargos in ports (t)
9.9
-10.0
-8.5
-13.3
-29.8
-31.7
-29.6
-23.9
-9.7
-12.4
-8.8
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
Q1
2019
Q2 Q3 Q4 Q1
2020
Q2 Q3 Q4 Q1
2021
Q2 Q3
Cereals Coal
Oil products Chemical products
Wood Metals
Others Cargoe in containers
Overall cargo

20. IEROBEŽOTA PIEEJAMĪBA
Active is mainly domestic tourism; Number of tourism this year has
decreased by 1/4th. Both export and import of these services – low
21
Number of guests
Source: CSP, Bank of Latvia
-150
-100
-50
0
50
100
150
200
250
300
350
0
50000
100000
150000
200000
250000
300000
2019
janv
apr jūl okt 2020
janv
apr jūl okt 2021
janv
apr jūl
Hotels Guest houses Campings Number of tourists (y/y, % rhs)
-200
-150
-100
-50
0
50
100
150
200
250
300
2019
Q1
Q2 Q3 Q4 2020
Q1
Q2 Q3 Q4 2021
Q1
Q2
export import
Travel (million euro)

21. Source: CSP
Agriculture in weaker position this year. Dry summer and rains in
August. Grain produced in 2021 by 1/5th lower than year ago
22
Grain crops statistics in Latvia
10
15
20
25
30
35
40
45
50
0
500
1000
1500
2000
2500
3000
3500
4000
2019 2020 2021
Sown area, thsd ha Produced, thsd t Average productivity, cnt from 1 ha (rhs)

22. Source: CSP, “Arco Real Estate”, Zemesgrāmata.
Standard type apartment average price in Riga (EUR/m2), purchase agreements registered
23
Real estate in stronger positions - prices are rising & trade
activity rise as well
887
740
760
780
800
820
840
860
880
900
0
1,000
2,000
3,000
4,000
5,000
6,000
I
2019
III V VII IX XI I
2020
III V VII IX XI I
2021
III V VII IX
Purchases in Latvia
Purchases in Riga
Average price ("Arco Real Estate" - rhs)

23. Will the ceiling of capacity in construction be reached soon?
Source: CSP 24
Construction indixes (comparable prices, sa 2015=100)
40
60
80
100
120
140
160
180
2002
Q1
Q3
2003
Q1
Q3
2004
Q1
Q3
2005
Q1
Q3
2006
Q1
Q3
2007
Q1
Q3
2008
Q1
Q3
2009
Q1
Q3
2010
Q1
Q3
2011
Q1
Q3
2012
Q1
Q3
2013
Q1
Q3
2014
Q1
Q3
2015
Q1
Q3
2016
Q1
Q3
2017
Q1
Q3
2018
Q1
Q3
2019
Q1
Q3
2020
Q1
Q3
2021
Q1
Production Employed Economically active population

24. 957
1188 1209 1252
1142
1898 1891
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Other investments (basic budget, municipalities)
COVID-19 investments
EU fund investments
NextGenEU
RailBaltica
-200
-100
0
100
200
300
400
500
600
700
2022 2023
RailBaltica
NextGenEU
Other EU funds
Basic budget, including COVID-19
Municipalities
Source: State Treasury, Bank of Latvia assumptions.
Government capital expenditures (million, EUR), cash
bases
25
Public investment growth in 2022 is linked to construction
projects
Assessment of contruction related projects (y/y;
million, EUR), cash bases
Additional investments in the economy
for a period of 2021-2023: PPP project
Ķekava bypass road (17.5 km); total
project costs approx. 250 million EUR

25. 0
2
4
6
8
10
12
14
16
18
VII
2020
VIII IX X XI XII I
2021
II III IV V VI VII VIII IX
Unemployment rate Downtime subsidies Wage subsidies
Unemployment rate and state support for downtime and wage subsidies (% of economic active)
26
State support during previous Covid-19 wave prevented
increase in unemployment
Source: CSP, Valsts ieņēmumu dienests, Bank of Latvia

26. 0
5
10
15
20
25
Q
Health
F
Construction
P
Education
B
Mining
M
Professional
services
J
ITC
G
Trade
R
Art
L
Real
estate
C
Manufacturing
D
Electricity
N
Administrative
A
Agriculture
E
Water
supply
O
Public
administration
H
Transportation
K
Finance
I
Accommodation
and
food
Source: CSP
Gross wage increase (2020Q3-2021Q2 average, y-o-y, %)
27
Wages are rising, but situation differs by sector

27. 28
Inflation increased mainly because of the cost of energy
-3
-2
-1
0
1
2
3
4
5
6
Jan
2019
Mar May Jul Sep Nov Jan
2020
Mar May Jul Sep Nov Jan
2021
Mar May Jul Sep
Unprocessed food Processed food Energy Other goods Services Y-o-y inflation
Inflation (y-o-y; %) and main components (contribution; pp)
Source: Eurostat.

28. -1
0
1
2
3
4
5
6
7
8
9
10
I
2016
V IX I
2017
V IX I
2018
V IX I
2019
V IX I
2020
V IX I
2021
V
LV EE Lietuva Eurozone
LIDL
opening in
LT
► Energy costs, supply chains,
labour in agriculture - not in
favour for food prices
► Weak harvest (also in LV dry
summer, rainy August)
► Increase in demand, desire
to build up food
stock/savings
Food prices increase following global trends
HICP food prices, including tobacco & alcohol, y-o-y, %
Source: Eurostat 29

29. -10
0
10
20
30
40
50
2015
I
IV
VII
X
2016
I
IV
VII
X
2017
I
IV
VII
X
2018
I
IV
VII
X
2019
I
IV
VII
X
2020
I
IV
VII
X
2021
I
IV
VII
Perceived inflation
Expected inflation
-20
-10
0
10
20
30
40
50
60
2015
I
V
IX
2016
I
V
IX
2017
I
V
IX
2018
I
V
IX
2019
I
V
IX
2020
I
V
IX
2021
I
V
IX
Manufacturing Construction
Services Trade
Consumers (over 12 month, balance of answers)
30
Inflation expectations have increased, especially in
construction
Producer inflation excpectations (over next 3
month, balance of answers )
Source: CSP, European Commision

30. Inflation (%; y-o-y)
31
Inflation peak is expected around the turn of 2021 – 2022
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
2020
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2021
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2022
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
Headline inflation
Forecast June 2021
Forecast September 2021
Source: CSP, Bank of Latvia forecast
In 2021 on
average
2.8% y-o-y

31. Inflation forecast
2.0%
2.8%
2023
2021 2022
Sept
2021
4.0%
2.7%
Sept
2021
Sept
2021
2.9%
2.0%
GDP and inflation forecasts for Latvia
32
GDP forecast
3.3%
5.3%
2023
2021 2022
June
2021
Sept
2021
5.1%
3.8%
Sept
2021
Sept
2021
6.5%
3.6%
June
2021
June
2021
June
2021
June
2021
June
2021

32. June forecast September forecast
2021 2022 2023 2021 2022 2023
GDP comparable prices (sa,
y/y,%)
3.3 6.5 3.6 5.3 5.1 3.8
Inflation (HICP) (y/y, %) 2.0 2.9 2.0 2.8 4.0 2.7
Inflation (HICP excl. food &
energy) (y/y, %)
1.2 1.6 2.1 1.8 2.2 3.1
Unemployment (% of ec.active) 8.3 7.3 7.0 7.5 6.8 6.5
Average wage 6.9 5.7 5.4 8.9 7.5 5.5
Current account 0 0.1 0 -2.1 -0.5 -0.8
Budget balance (% of GDP) -9.9 -2.1 -0.8 -6.7 -4.0 -2.2
Government debt (% of GDP) 48.9 50.6 47.8 45.9 47.2 45.8
Forecasts of main indicators for Latvia
33
Source: Bank of Latvia June and September forecasts

33. World:
► New Covid-19 wave around the world, still the number of death is quite low.
► Global economic growth is strong, many forecasts have been revised upwards. Increase in demand & safety measures in harbors disrupt
supply chains. Problems with supply of raw materials, as the result prices are increasing.
► Strong economic growth and comeback of inflation creates debate about decreasing monetary supply, but there is a wish not to be too fast
to cease the support.
Latvia:
► GDP data have been better than expected, also flash indicator for Q3 shows increase. Prices (for consumers, manufacturers,
construction etc.) rise faster than before.
► Both registered and full unemployment is decreasing, wages are increasing, especially in public sector.
► Agriculture, Transportation and tourism not in a good position, but manufacturing, construction, real estate and trade are thriving.
► Tax income is higher than previously planned (especially VAT), budget deficit is smaller than estimated previously.
► But low rate of vaccination and rising number of infected sets new challenges for winter to come.
World has adapted new rules of the game, still question about prices
Summary:
34

34. Comments about economic issues and
newest statistic available at
www.makroekonomika.lv
P.S. Competition of Student Scientific Research Papers
is held by Bank of Latvia each year.
35

35. Please fill in the evaluation of the presentation
36
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