Current Account Suggests Economic Stabilisation In The Environment Of Persisting Risks

According to preliminary data, the current account surplus for 2009 amounted to 8.8% of GDP. In the fourth quarter of 2009, it was 9.7% of GDP, while the excess of goods and services exports over imports reached 2.5% of GDP.* For Latvia as a small and open economy, this indicator definitely points to an on-going economic stabilisation, suggesting that the country is earning more foreign currency by exports than it spends on imports. A more detailed analysis confirms a continued overall upward trend in exports while the volumes of services exports diminish due to both tight cross-border competition in freight transportation and subdued exports of travel services resulting from weak external demand. Overall imports have had an increasing effect from expanding imports of intermediate goods, whereas imports of services, travel services among them, are still decreasing due to the weak domestic activity and declining personal consumption. The surplus in the income account lagged behind the level of the previous quarters, as in December direct investment companies incurred relatively low losses and dividends were paid out.

In the fourth quarter, with the private sector making investment into company equity capital, foreign direct investment in Latvia reached 193 million lats or 5.8% of GDP; at the same time, losses incurred by foreign investors in Latvia decreased.** In December and in the fourth quarter overall, banks attracted funding from both domestic and foreign households and corporations. In the meantime, liabilities to foreign banks contracted, short-term foreign assets increased, whereas domestic lending continued on a downward trend.

For 2010, the Bank of Latvia projects a somewhat larger current account surplus (11.3% of GDP) and the excess of exports over imports (4.8% of GDP); it is in the first quarter that the improvements in exports are expected to be coupled with a steep rise in these indicators due to seasonal factors. Recently, however, several downward risks have surfaced in relation to the overall annual dynamics: the pace of recovery in trade partner imports has decelerated, the competition for freight transportation has toughened, and the direct investment companies' losses (with potential decreasing impact on income account) have diminished.

The other data suggest that in the environment of free capital flows it is important for investors to be convinced that unwelcome economic-policy-related shocks are not threatening. Hence the already perceptible signs of economic stabilisation need to be supported by clear indications that no changes, either unpredictable or drastic, e.g. in the tax policy, can unexpectedly emerge.

* Bank of Latvia forecasts are used in the calculations.

**A more detailed breakdown by sector will be available after the publication of Latvia's payment balance and international investment position statistics on 5 March this year.