The current account surplus totalled 216 million euro or 3.4% of GDP in the first quarter of 2018
The current account surplus was largely driven by the inflows from the European Union (EU) funds in the first quarter of 2018. Although growth in exports of goods and services was slower than in the previous periods, the overall external market demand still remains strong. The current account posted a surplus of 216 million euro (3.4% of GDP).
Exports of Latvian goods continues to reflect positive developments in the international economy, even though the export growth moderated in comparison with the average growth rate registered in the previous year. In the first quarter, the annual growth rate of exports of goods was 7.5% (9.2% in the previous year). The solid growth rate was dragged lower by a fall in exports of goods in March. This was mostly on account of the high base achieved in the previous year, the seasonal factors (in exports of cereals) and the deceleration in re-exports of transport vehicles. Although exports of domestically produced goods continued to grow, the increase in exports of goods was supported by the rising re-exports in the first quarter of 2018. The development of imports of goods also showed a similar trend: they grew by 5.8%, which is a slower rate than in the previous year (13.3%). The annual increase in real volumes played the decisive role in the growth of imports of goods. The buoyancy of investment activity, the availability of the EU structural funds, as well as the surge in private consumption continue to be the main drivers of the rise in imports also in 2018.
In the first quarter of 2018, income from exports of services likewise increased at a slower pace, with the annual growth rate standing at 1.8%, compared to 5.6% in the corresponding period in 2017. This was determined by the weakening of exports of transportation services. At the same time, the rise was supported by growing exports of telecommunication and computer services and spending of foreign visitors. The latter was determined by increases in the number of foreign visitors and the duration of their stay (15.3% and 14.3% respectively) compared to the first quarter of the previous year. Visitors from Russia, Estonia, Lithuania, Germany and the UK continue to contribute most to the growing number of arrivals. Imports of services also remained on an upward trend, increasing by 11.8%. This was supported by a rise in transportation services (particularly transportation by air) as well as telecommunication, computer and information services.
Overall, inflows of EU funds into Latvia's balance of payments amounted to 372 million euro in the first quarter, with most of the funding coming from the agricultural funds. The past few years have shown that a large proportion of financing from the agricultural funds tends to be recorded in the current account at the beginning of the year, with the inflows slowing down in the next quarters. Overall, larger inflows of EU funds into the balance of payments are also expected in the periods to come.
The external environment will be further affected by important developments observed over the past few months, namely, the heightened geopolitical and political risks and the risks associated with trade tariffs ad sanctions.
Turning to the balance of payments data on cross-border financial flows, it is evident that foreign assets and foreign liabilities decreased by 1.8 billion euro and 2.3 billion euro respectively in the first quarter of 2018. The credit institution sector has seen the most significant outflows of funding, with foreign customer deposits with Latvia's credit institutions recording a decrease of 2.4 billion euro. The portfolio investment assets and other foreign assets of the credit institutions were used to repay them. Part of the government deposits abroad consisting of the financing borrowed on international markets in the previous year and mainly used for the redemption of matured international debt securities also shrank during this period. Inflows of foreign direct investment in Latvia accounted for 157 million euro, remaining at the average quarterly level of the previous year. The largest flows were registered in trade, real estate, energy and construction sectors, with the most significant contributions coming from the Netherlands, Estonia, Russia and Germany.