Exports continue to have a positive effect on the current account surplus

In October, the improved competitiveness and recovery of the foreign demand was reflected in a significant continued increase in exports, which was at the basis of an increase in the current account surplus.  Both the exports of goods and services increased over September (12% and 10% respectively) and their year-on-year drop decreased to 7%, which is the best indicator since an annual drop has been observed in exports during the crisis.

The improved services export indicators were based on the increase in financial services exports. For a second consecutive month, however, the annual decrease in cargo services deepened as a result of contracted cargo services exports both by ship and by rail. The imports of goods and services remained close to the levels they have been since the beginning of the year. The fact that the losses of direct investment companies were lower in October than in September had the greatest contracting influence on the current account surplus.

The capital and financial account was negative as the deposits of the private sector abroad were on the rise. Capital inflows were determined by the financing received from EU funds as well as the increase in Latvian banks, which was the greatest since May 2008. According to the bank statistics, the latter was the result of an increase in deposits by non-resident private individuals and businesses, which may indicate a gradual resumption of confidence in the Latvian financial system. Previously, starting December 2008, the balance of deposits kept decreasing monthly.

Albeit a part of the rise in exports (e.g., financial services exports) may be short lived, it can be expected that the export and especially foreign trade indicators will continue to improve as a result of better competitiveness and a growing foreign demand. The exports of transport services are affected by the interaction among several factors. Even though foreign demand is recovering and, according to the Baltic Dry index, cargo transportation prices are rising and trade routes connected with Central Asian countries developing, the keen competition for cargoes among the Baltic countries has a negative effect.  In the next few months, the cargo transportation volumes through Latvia may diminish as a result of the relatively stricter border controls: the Russian customs controls on the border with Latvia have become heavier and the customs union between Belarus-Russia-Kazakhstan will also have its effect.

In 2009, the total goods and services balance is expected to be close to healthy, whereas the current account surplus will be most affected by the losses of direct investment companies, which, as a result of seasonal factors are likely to rise even more in the fourth quarter. Next year, exports will continue to grow, especially as a result of a gradual rise in the exports of goods, yet the risks related to the exports of transportation services will remain. The current account surplus as a whole will be determined by the losses suffered by the direct investment companies, which however are expected to be lower than this year. Even though the investment climate is positively affected by budget adoption, significant investment can only be expected when fiscal policies, including tax policies, become more predictable.