Current account surplus increases on account of EU fund inflows
In May 2011 Latvia's balance of payments current account surplus increased to 56.5 mil. lats, primarily on account of the inflows of received EU funding.
The foreign trade flows were on the rise in May. As imports grew slightly more rapidly than exports over a month, the goods trade deficit increased by a little more than 20 mil. lats. The seasonal increase of trip services exports and imports were equal, whereas the positive balance of services trade dropped to 57.5 mil. lats as a result of cargo transport imports growing at a slightly faster rate than exports. That did not compensate the goods trade deficit, therefore the overall monthly foreign trade balance was negative (20.7 mil. lats).
Success of foreign direct investment enterprise operations in Latvia was evidenced by a significant payout of dividends in May (dividends are typically paid in the next few months following the preparation of annual reports). The amount of reinvested profits thus shrank. A small income account surplus was mostly on account of compensations received by the employees.
In the capital account, a still rather small amount (4.4 mil. lats) of received Cohesion Fund financing was registered. The finance account balance in May was negative (-21.1 mil. lats), with the main outflows generated by the drop in credit institution liabilities. Foreign direct investment (FDI) in Latvia grew by 31.2 mil. lats; a positive development was an increase of their amount in the own capital of Latvian enterprises by 41.2 mil. lats, which exceeds the monthly average from January to April. However, as mentioned above, an FDI increase in the form of reinvested profits was reduced by the payout of dividends.
An improvement in the overall foreign trade balance of goods and services is not to be expected in 2011 and it could remain close to balanced. For example, the Baltic Dry and Harpex indexes, which characterize the intensity of international trade in cargo shipments by sea, have been at a low level since June and declining since the end of March. The latest PMI data point to a slowdown in the growth of industrial production and services industries in several of the developed countries that are among Latvia's most important trading partners, including the euro area and Great Britain. To gain from foreign trade it is becoming ever more important for enterprises to promote innovation and conquer new markets, yet investment activity is rising slowly. An indication that Latvian enterprises are not planning to increase their production capacity to a significant extent is their cautious evaluation of confidence indicators, low lending activity domestically, and the moderate rise in external liabilities.