Current account deficit totalled 204 million euro or 0.8% of GDP in 2017

  • Linda Vecgaile

    Linda Vecgaile

    economist, Latvijas Banka
Photo by: Shutterstock

There was a 113 million euro or 1.6% of GDP surplus in the current account of Latvia's balance of payments in the fourth quarter of 2017, whereas the overall deficit of 2017 totalled 204 million euro or 0.8% of GDP.

Although Latvian exporters benefited considerably from the strengthening of the global economy and more active international trade, due to the rising global prices and the recovery of the domestic economic activity the current account run a deficit in 2017 overall.

Exports of goods continued to expand notably in the fourth quarter of 2017, resulting in a build-up of a current account surplus. Throughout the year, exports were supported by the strengthening of the external demand, which, in turn, contributed to the increase in global prices as well. On the one hand, this boosted Latvia's income from exports of goods, yet, on the other hand, also the costs of imported goods.

At the same time, the volume of exports also increased on account of a significant improvement in the domestic economic activity. In the fourth quarter, the growth of imports of goods was lower than the average figure of the previous quarters; nevertheless, it exceeded that of the exports in overall annual terms. Although the recovery of domestic investment was one of the reasons behind a higher trade deficit of goods (7.1% of GDP and 9.7% in the fourth quarter of 2017 and 2017 overall respectively), it provides an opportunity to improve the future competitiveness of exports.

Stronger external demand and higher activity in international trade also had a positive effect on the services sectors. With exports of services at the turn of the year and in 2017 overall growing at a higher rate than in the previous year and still significantly faster than the respective imports, the services account retained a surplus of 7.9% of GDP and 8.4% of GDP in the fourth quarter and 2017 overall respectively.

In both periods, transport (particularly transportation by road and air) and construction services remained the largest contributors, with exports of computer services also retaining an upward trend. Income from spending of foreign travellers increased slightly in the fourth quarter, although remaining at the level of the previous year in annual terms. Nevertheless, the number of visitors from abroad and the duration of their stay in Latvia overall continued to grow.

In the fourth quarter and 2017 overall, the nominal imports of services also retained similar growth rates to the average rates reported in a couple of previous periods. The growth of services imports was dampened by a drop in telecommunication services received from abroad.

EU funding inflows into the current account could not compensate the negative goods and services trade balance thus leading to a current account deficit of 0.8% of GDP in 2017, opposite to a surplus reported in the previous year.

The gradually improving external demand supports a positive outlook for Latvia's export income growth in 2018. However, the current rise in global oil prices as well as the strong domestic consumption, better absorption of EU funding in the future, high degree of capacity utilisation in businesses and anticipated domestic investment activity are likely to boost the demand for imports. Therefore, with Latvia's economic growth rates remaining solid, a moderate increase in the current account deficit can also be expected.

Turning to the balance of payments data on cross-border financial flows in the fourth quarter of 2017 and 2017 overall, it is evident that foreign assets increased slightly more than foreign liabilities, by 910 million euro and 848 million euro in quarterly terms and by 2.7 billion euro and 2.5 billion euro in annual terms respectively. This resulted in a net outflow of financing from Latvia.

The increase in foreign financial assets in the fourth quarter was primarily driven by the public sector. Latvijas Banka continued to participate in the expanded asset purchase programme (APP) within the framework of the Eurosystem's monetary policy operations. Foreign reserve assets in the form of securities also grew. Although, following a dive in 2016, the overall FDI inflows in Latvia returned to their historical average in 2017, the increase in the central bank's assets within the framework of the expanded APP, the increase in the foreign reserve assets as well as in the portfolio investment of non-bank financial institutions abroad exceeded that of FDI inflows.

The largest inflows in 2017 overall were recorded in the financial sector, wholesale, transport and agriculture, mostly from Sweden, Lithuania and Luxembourg. In the fourth quarter, FDI transactions decreased by 70 million euro on account of information and communication services, energy and manufacturing sectors. Although investment in equity and reinvested earnings increased, this could not offset the FDI outflows associated with lending transactions between a direct investment enterprises in Latvia and the direct investors. Direct investment also decreased as a result of the government's decision to buy out the stock of AS Conexus Baltic Grid, the operator of Inčukalns underground gas storage facility, from its foreign direct investor. Moreover, dividend payouts also reduced investment.



APA: Vecgaile, L. (2018, 14. dec.). Current account deficit totalled 204 million euro or 0.8% of GDP in 2017. Taken from https://www.macroeconomics.lv/node/4079
MLA: Vecgaile, Linda. "Current account deficit totalled 204 million euro or 0.8% of GDP in 2017" www.macroeconomics.lv. Tīmeklis. 14.12.2018. <https://www.macroeconomics.lv/node/4079>.

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