Current account surplus totalled 158.5 million euro in the first quarter of 2017

A positive current account balance was recorded also last year, mainly supported by the surplus of the goods account explained by the depreciation of imports. This, in turn, was primarily caused by lower domestic investment activity and the falling global prices. Although the foreign trade activity was high and the global prices were rising in the first quarter of 2017, this time the current account surplus was underpinned by the inflows from the European Union (EU) agricultural funds.

The year 2017 began with a significant increase in the exports and imports of goods. This was determined by an improvement in the demand from Latvia's major trade partners as well as a recovery of the domestic demand and particularly investment activity.

At the same time, with the global economic growth gradually stabilising and global demand recovering, prices have also increased. As a result, the export value of goods demonstrated the highest rise of the last four years at 11.9%, whereas the growth of the imports of goods at 13.6% slightly outpaced that of the exports. Thus, the deficit of the balance of goods (542.5 million euro or 9.2% of GDP) increased year-on-year in the first quarter of 2017.

Both consumer goods as well as capital goods contributed significantly to the import growth. The rise of the exports was supported by almost all commodity groups, particularly by food products, articles of wood, animal products etc.

Supported by the exports of information and communication technologies (ICT), services account continued to expand. There was a 513.5-million-euro surplus in the services account in the first quarter of 2017, representing 8.7% GDP.

The share of ICT services (telecommunication, computer and information services) in Latvia's exports of services as well as that of construction services continued to expand. Income received from spending by foreign travellers, particularly from Lithuania, Estonia and Sweden, has fallen as compared to the previous year. According to the data of the Central Statistical Bureau of Latvia, the number of travellers arriving from Lithuania and Estonia was higher than last year. The number of travellers from Sweden was also slightly larger. Moreover, the overall number of visitors and their length of stay increased.

Lower spending on behalf of the travellers from Sweden could be explained by the depreciation of the Swedish krona which made shopping in the euro area less attractive. The spending behaviour of the visitors from Estonia and Lithuania is rather explained by the fact that together they constitute the largest part of the one-day traveller group. Moreover, the popularity of the Airbnb-type accommodation is increasing as it is less expensive.

Exports of financial services also continued to decrease. This, most likely, can be explained by the shrinking of foreign customer's deposits placed with Latvian credit institutions.

Imports of services grew slightly by 3.9% on account of construction services and other business services, particularly accounting and marketing related services.

EU funding inflows resulted in an increase of the surpluses of the primary income and secondary income accounts. The first quarter of 2017 saw significant inflows from the EU agricultural funds as well as stable inflows from the European Social Fund and the European Maritime and Fisheries Fund. Capital account, however, saw no inflows from the EU structural funds during the first quarter. Inflows into the capital account are expected to resume within the coming periods with gradual absorption of the EU structural funds.

The surplus of the primary income account totalled 139.1 million euro or 2.4% of GDP. Within the given period, inflows from the EU agricultural funds into the primary income account amounted to 256.0 million euro or 4.4% of GDP and were the largest observed during the last years. The surplus of the secondary income account was 48.4 million euro or 0.8% of GDP, with the inflows from the European Social Fund and the European Maritime and Fisheries Fund remaining broadly unchanged in comparison with the previous periods.

The foreign assets reflected in the financial account expanded more than the respective liabilities in the first quarter of 2017 (by 582.7 million euro and 336.9 million euro respectively).

The largest cross-border financing flows in the private sector on the asset side were attributable to an increase in the deposits of credit institutions with foreign banks and a decrease in portfolio investment abroad. Changes in the deposits of some credit institutions reflect the regular interbank transactions which are affected by the bank group decisions on intra-group liquidity shifts. Portfolio investment contracted on account of outflows of foreign customer deposits with Latvian credit institutions on the liabilities side observed already since 2016 (3.2 billion euro in 2016; 32.9 million euro in the first quarter of 2017), which were offset by the credit institutions by cutting their foreign assets.

The inflows of foreign direct investment (FDI) amounted to 142.7 million euro or 2.4% of GDP. The largest inflows of FDI were recorded in real estate activities, electricity, gas supply and heating as well as in information and communication services sectors. Looking by country, the largest contributors were Russia, Luxembourg, Norway and the Netherlands.

Public sector flows were mainly related to Latvijas Banka participation in the expanded asset purchase programme (APP) within the framework of the Eurosystem's monetary policy measures as well as its foreign reserve management operations affecting changes in portfolio investment in debt securities. The foreign liabilities of the government decreased overall in the first quarter. The largest flows were related to the maturing 5 year US dollar-denominated bonds in the amount of 1 billion euro in February 2017 as well as the new euro bonds issue in the amount of 650 million euro in February.