Current account deficit totalled 300.8 million euro or 4.2% of GDP in the third quarter of 2017

  • Linda Vecgaile

    Linda Vecgaile

    economist, Latvijas Banka
Photo by: Shutterstock
The current account of Latvia's balance of payments continued to reflect the recovery of the imports of goods in the third quarter.

This resulted in a significant build-up of the deficit, to 300.8 million euro or 4.2% of GDP. Robust global demand and that of Latvia's major trade partners also supported an increase in exports.

Since the end of the previous year, Latvia's foreign trade balance has been reflecting the recovery of the global economy. For example, in November the Economic Sentiment Indicator (ESI) for the euro area has reached a high since October 2000, whereas that for the European Union (EU) has climbed to the highest level since June 2007. Hence, the external economic environment is supportive of Latvia's exports. The strengthening of external demand has an upward effect on global prices. This supports an increase in Latvia's export income as well as higher imports, as the inputs used in Latvia for production of goods have become more expensive. Imports of goods are also supported by a recovery in investment in production equipment. This could suggest that businesses have become more confident and changed their strategies from the last year's waiting out to action. As a result, the annual growth of exports of goods was 6.7% in the third quarter, whereas imports of goods grew by 18.7%.

Income from exports of services continued on an upward trend in the third quarter of 2017, with the annual growth rate reaching 8.8%. The main contribution came from exports of transport services, particularly transportation by road. Exports of computer services and construction services also expanded, continuing a trend observed already for quite some time.

Exports of construction services to Sweden, the United Kingdom and Germany continue to grow; this year a considerable increase is reported in those to Lithuania.

Looking at travel services, the overall spending of incoming visitors was smaller in the first half of the year in comparison with the previous year, although a small increase was reported in the third quarter. The number of visitors from abroad and the duration of their stay in Latvia overall continue to grow. This is mainly on account of visitors from Russia, Lithuania, Estonia and Finland.

Imports of services also continued to expand, growing by 10.3%. The most significant contributors were the sectors of transport, particularly transportation by air, road and sea. 

Overall EU funds inflows into Latvia's balance of payments amounted to 94.5 million euro in the third quarter, totalling 563.7 million euro in the first three quarters, which is half of all EU funds inflows expected this year.

As to the developments in the financial account of the balance of payments, data on cross-border financial flows show that the growth of foreign assets (549.9 million euro) was lower than that of liabilities (741.0 million euro),

Financial inflows in the third quarter consisted of foreign direct investment (FDI) in Latvia into the sectors of finance, transport and storage as well as manufacturing. FDI totalled 393.8 million euro or 5.5% of GDP representing the largest quarterly inflow of the last few years, with the most significant contributions coming from Sweden, the Netherlands and Cyprus.

Foreign deposits with Latvia's credit institutions continued to decrease, although at a lower rate than previously, and this was offset by depleting foreign assets. The largest financial flows in the public sector resulted from Latvijas Banka's participation in the expanded asset purchase programme within the framework of the Eurosystem's monetary policy, thereby continuing to have an upward effect on foreign assets.

APA: Vecgaile, L. (2019, 23. jan.). Current account deficit totalled 300.8 million euro or 4.2% of GDP in the third quarter of 2017. Taken from https://www.macroeconomics.lv/node/3983
MLA: Vecgaile, Linda. "Current account deficit totalled 300.8 million euro or 4.2% of GDP in the third quarter of 2017" www.macroeconomics.lv. Tīmeklis. 23.01.2019. <https://www.macroeconomics.lv/node/3983>.
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