Early repercussions of the state of emergency in the first quarter's balance of payments
The state of emergency restrictions and a broad-based deceleration of economic activity were also partly reflected in the balance of payments developments in the first quarter of 2020.
Exports of transport services were affected the most: in addition to a fall in the export value of transport services by sea and rail which was already observed previously and is likely to persist further due to lower freight volumes, exports of transport services by air and road also decreased because of the lockdown.
With the overall economic sentiment deteriorating, deceleration was observed also in other services groups, most notably towards the end of the quarter. Despite a weaker economic sentiment and external demand in general, the increases in the export value of individual groups of goods observed in the first quarter have even translated in an overall positive export growth. Looking at imports, the impact of restrictions is also best observed in services, where the imports of information and communication technologies as well as transport services have suffered most from the crisis caused by the pandemic.
At the same time, despite the prolonged decline observed in the imports of intermediate and capital goods and also quite a low level of household optimism, imports of goods have overall ended the quarter in a slightly positive territory, albeit outpaced by exports. As a result, the balance of trade in goods improved and the goods and services balance ran a surplus of 1.8% of GDP.
Due to EU funding inflows and a stable balance of compensation of employees, income account was in a surplus which is typical of the first quarter. Meanwhile, investment income, the largest outflow of the income account, has decreased in annual terms. The most significant drop was reported for reinvested earnings and (to a smaller extent) dividends paid. This has overall resulted in a surplus of the income account (3.8% of GDP), as well as a surplus of the current account in general in the first quarter of 2020 (5.5% of GDP).
The largest flows in the financial account were recorded for the government and credit institution sectors. External assets of the government were reduced in relation to the needs of the emergency state, while new issues of securities and repayments of the existing liabilities resulted in an overall decrease in the external liabilities in the first quarter. Credit institution liabilities have contracted on account of deposits and their assets have decreased on account of debt securities. Despite the state of emergency and the deterioration of the global economic sentiment, foreign direct investment in Latvia increased by 2.2% of GDP, with the largest contribution stemming from equity investment and not as much from reinvested earnings. This trend is likely to persist, as it would be affected by the weakening of corporate profitability as a consequence of the pandemic.