Balance of payments under the sign of COVID-19
In the third quarter of 2020, the balance of payments developments were driven by the economic recovery which was facilitated by the easing of the mobility restrictions, introduced to contain the outbreak, and improved economic sentiment among consumers and businesses.
However, with the number of new infections rising and restrictions tightening once again, the cross-border economic activity is expected to moderate to some extent.
Chart. Main components of the current account (% of GDP)
While during the economic downturn foreign trade was affected more severely than the overall economy, in the third quarter it recorded a stronger recovery. Despite the fact that the economic situation remained difficult, exports of goods expanded markedly compared to the respective quarter of the previous year and even exceeded the volume of the first nine months of 2019.
It should be noted that Latvia's main trade partners have weathered the crisis relatively well. Moreover, during the pandemic Latvia enjoyed resilient demand for its exports, rich in agricultural, wood and food products. In this regard, the significant export performance of cereals should be highlighted: at the beginning of the export season in September, their export value reached a monthly high.
However, exports overall declined year-on-year in the third quarter on account of the weak performance of the more severely affected cross-border services. With various mobility restrictions still in place and people remaining cautious with respect to private and business trips, exports of travel services, the worst-affected sector, improved only slightly reaching merely 40% of the export value recorded in the third quarter of the previous year. Against the background of the low travel activity, the recovery of air passenger transport services was hampered in the third quarter which is typically the most active commercial period for the sector. Thus, the export performance of the entire transport services sector was affected negatively. The overall contraction in economic activity was also detrimental to the development of road transport services and transit-related transport services by sea and rail, with the sectors recording negative results already since the beginning of the year.
During the pandemic, other services sectors such as business services and construction services were more resilient, and their performance even improved. However, these sectors could not offset the contraction in travel-related services. With the imports of goods recovering strongly from the deep fall experienced in the second quarter, the overall goods and services trade balance turned negative (–0.8% of GDP) and contributed to a current account balance deficit (–0.7% of GDP) in the third quarter.
The income account flows offset each other in the third quarter of 2020. The secondary income account recorded a surplus due to large personal transfer flows which exceeded those reported for the corresponding period of the previous year. Meanwhile, the primary income balance shrank quarter-on-quarter. With foreign investors typically reporting a large part of their profits in the third quarter, these profits only slightly lagged behind those reported for the respective period of the previous year, suggesting that the impact of the pandemic on the profitability of foreign businesses operating in Latvia has been limited.
In the third quarter, the largest flows in the financial account were related to the investment of funds of Latvian commercial banks in foreign securities and the participation of Latvijas Banka in Eurosystem monetary policy operations. With reinvested earnings recovering, inflows of direct investment in Latvia continued (3.2% of GDP).