Current account surplus in 2016 – 369.5 million euro

Both the weak global environment and the slow-down in Latvia's economic growth was reflected in the current account dynamics in 2016. In 2016, current account posted a surplus of 369.5 million euro or 1.5% of GDP, with the balance of goods developments mostly contributing to the surplus. The previous time when the current account ran a surplus in Latvia was the period of the global crisis and deceleration of Latvia's economic growth in 2009 and 2010.

In the fourth quarter of 2016, the current account surplus of Latvia's balance of payments amounted to 160.9 million euro or 2.4% of GDP. The quarter-on-quarter increase mostly resulted from inflows of financing of the European Union (EU) funds, particularly those of European Social Fund (ESF) and EU agricultural funds.

For the first time since 2000, exports of goods and services exceeded imports, thus resulting in a surplus of 136.8 million euro or 0.5% of GDP in the goods and services account in 2016.

In contrast to the fall in imports of goods in the previous quarters, the fourth quarter of 2016 saw their growth recovery. At the same time, factors which had emerged in late 2015 persisted also in 2016:

• weak domestic investment activity and a decrease in global prices were reflected in a decline in imports of goods;
• the sluggish development of external demand dampened income from exports.

With the fall in imports dominating, the deficit of goods moderated to 7.0% of GDP
(-8.4% of GDP in 2015). Nevertheless, the observed global rise in oil prices, as well as more accelerated absorption of EU funds and domestic investment activity is likely to find reflection in an increase in imports in the next quarters as well. Along with a gradual improvement in external demand, positive prospects of income growth from Latvian exports in 2016 can be expected. In the fourth quarter, the goods account ran a deficit of 434.4 million euro or 6.4% of GDP.

In 2016, the services account posted a 1.9 billion euro surplus or 7.5% of GDP in 2016 (7.2% of GDP in 2015). Although transportation services rendered to foreign customers continued on a downward trend in 2016, overall exports of services grew. The decline in transportation services was more than offset by income from telecommunication, and computer and information services having an upward trend throughout the year.

With companies seeking alternatives in the circumstances where the domestic demand for construction services saw a considerable decline due to the sluggish absorption of EU funds, the supply of construction services abroad also increased, particularly in Sweden and Norway, as well as in Germany and the UK.

Although spending of foreign visitors in Latvia shrank in 2016 over 2015, analysis of the Central Statistical Bureau data on the number of visitor arrivals in Latvia and the length of their stay shows that both indicators increased. The number of visitors from Russia also posted a slight increase of 2.5%.

In the fourth quarter, like in the previous quarters, the services account registered a surplus of 516.5 million euro or 7.7% of GDP. In 2016, exports of services recorded the highest annual growth rate at 9.1%. Transportation services data demonstrated good results, following a decrease observed in all previous quarters in 2016. Transportation services by road and by sea were the main contributors to the positive development.

In 2016, in contrast to the weak absorption of structural funds, higher inflows of financing from EFS and EU agricultural funds (by 28.5% in comparison with 2015) were registered in the primary income and secondary income accounts. The above also had a positive effect on the current account.

In 2016, the primary income account had a surplus of 58.0 million euro or 0.2% of GDP, in contrast to the deficit (0.2% of GDP) recorded in 2015. A surplus was recorded in the secondary income account also in 2016, amounting to 174.7 million euro or 0.7% of GDP (0.6% of GDP in 2015). Quarterly changes in both accounts mostly resulted from the above inflows of EU funding accounting for slight surpluses in the fourth quarter.

In the fourth quarter, the capital account in Latvia showed more active inflows of funding from EU structural funds in comparison with the third quarter, amounting to 83.5 million euro and a mere 6.6 million euro respectively. However, the total annual inflow of financing from EU structural funds was 262.2 million euro, a low of the last ten years. This is related to the slow absorption of financing in the new EU structural fund programming period. In 2016, the capital account balance was 249.7 million euro or 1.0% of GDP (2.8% of GDP in 2015), while in the fourth quarter it was 81.9 million euro or 1.2% of GDP.

The cross-border financing flows in the forth quarter of 2016 and in 2016 overall were affected by the decisions made by both the private and public sectors. In the fourth quarter, foreign assets contracted by 185.3 million euro, while liabilities to foreign financial partners decreased at a faster rate by 381.1 million euro. In annual terms, foreign assets posted a higher increase of 2 billion euro than foreign liabilities growing by 1.5 billion euro.

The growth dynamics of foreign assets mostly is a reflection of the euro area monetary policy. The investment of the central bank of Latvia in foreign assets is three times higher than in 2015. The most notable factor affecting the liabilities side was a decrease in foreign customer deposits with Latvian credit institutions; nevertheless, it was partly offset by an increase in government liabilities as it issued euro bonds in international markets.

Both in the fourth quarter and in 2016, the largest cross-border financing flows in the private sector on the asset side accounted for decreases in the deposits of credit institutions with foreign banks and in portfolio investments abroad.

Changes in credit institution deposits reflect the regular interbank transactions which are affected by bank group decisions on liquidity shifts inside the group. Changes in portfolio investment are related to a decrease in foreign customer deposits with Latvian credit institutions observed already since the beginning of the year as a result of stricter money laundering prevention requirements and the weak economic growth in Russia. The credit institutions funded the outflow of deposits with a decrease in foreign assets. In 2016, foreign customer deposits with credit institutions contracted by 3.2 billion euro, while credit institution portfolio investment abroad fell by 1.3 billion euro.

As to the private sector, inflows of foreign direct investment (FDI) in the amount of 0.5% of GDP were registered in Latvia in 2016. The largest inflows of FDI were reported in wholesale and retail trade, as well as repair of motor vehicles and motorcycles, transportation and storage, and information and communication services sectors. FDI inflows came from Luxembourg, Russia and Austria.

In 2016, a decrease in FDI was observed in Latvia as compared to the data for the previous year - 2.5% of GDP. However, it can be explained by the capital structure optimization of the AS Swedbank group in the first and second quarters of 2016 which contributed to the decrease in FDI in Latvia. Apart from the above, FDI inflows in Latvia in 2016 can be assessed as positive: in the first and second quarters they were equal to the inflows in the respective quarters of the two previous years, while the third and fourth quarters saw inflows of FDI of 3.6% of GDP and 2.4% of GDP in Latvia respectively which exceeds the FDI in the respective quarters in 2014 and 2015.

Like in the previous periods, flows resulting from the public sector decisions also in the fourth quarter and the whole year were mostly related to Latvijas Banka's participation in the asset purchase programme in the Eurosystem. 

In the fourth quarter, Latvijas Banka invested 527.3 million euro in foreign assets, while the annual investment amounted to 2.7 billion euro in 2016. To attract funds for refinancing the government's previous liabilities, in May and September 2016 Latvia issued euro bonds in the international markets with the term to maturity of 20 and 10 years respectively. Each issue amounted to 650 million euro.