Exports have a growing need for imports and higher value added

In November 2010 the differences at the growth rate of the Latvian goods exports and imports increased as a result of seasonality, base effect, and the slower growth of economic activity in Latvia's export trading partners. Goods exports increased 29.4%, lagging behind the annual growth of imports at 38.3%. The goods trade deficit increased significantly reaching -122.0 mil. lats.

The annual rise in exports once again increased a little year-on-year: from 24.9% in October to 29.4% in November. Yet month-on-month, the volume of goods exports dropped 4.0%, determined by the drops in the exports of wood pulp (6.6%), pharmaceuticals (25.0%), and grain (67.8%). The month-on-month drops in the exports of wood pulp and grain were seasonal in character. In the exports of other groups of goods an increase or a very small decrease has been registered.

Ferrous metals, plastics, mechanisms and mechanical appliances as well as wood pulp posted the greatest annual increases in goods exports. In additional to the still persistent foreign demand, the export growth in all these industrial branches was determined also by the increased competitiveness of Latvian producers, which was based not only in competitive prices but also in increased productivity. Latvia's main export partners in November were Lithuania, Estonia, and Russia.

Even though goods exports in the most important industries have dropped, producers do not see a lasting drop in volumes. A rise in the global demand, albeit a little slower, is predicted over this year as well, preserving favourable conditions for the development of Latvia's foreign trade. Accordingly, the activity in the export industries will continue to grow in 2011, but slower than in 2010. For example, the volumes of wood pulp product exports in 2011 will not rise as fast as up to now, because timber exports, which account for about 30% of wood pulp exports, may remain at the 2010 level or even drop in 2011. That will be determined by the drop in the prices of timber in the global markets and the decreased availability in sawn timber, for in 2011 the extra timber cutting quota adopted in 2008 and applied to 2009 and 2010 will no longer be in effect. The export businesses of the furniture industry are expecting to replace Denmark with the increasingly important Germany as the main export consumer, but, given the slower rise in demand for durable goods, furniture exports may remain at about the 2010 level. The sales volumes of energy and cellulose raw materials may increase in the exports of wood pulp, resulting from the rise in the proportion of value-added production, e.g., granules, in the export structure.

In Latvian imports in November, the greatest growth was posted by intermediate and capital goods, including mineral fuel products (45.2% annually), plastic products (45.9%), ferrous metals (twofold), and mechanisms (60.5%). Latvia's top import partners were Lithuania, Germany, Russia, Poland, and Estonia.

Up to now, the goods import growth was closely tied to the development of exports, i.e. to the need for raw materials by the export industry producers. With a gradual resumption of consumption, the share of consumer goods may also rise slowly in the 2011 goods imports.

Since risks related to the debt crisis still exist in the euro zone and EU countries are planning stricter fiscal measures, the economic growth of the trading partners will proceed at a more moderate pace than in 2010. With the market capacity not growing rapidly while the competition in foreign markets increases, the producers in the Latvian export industries will have to increasingly look for new niche products and produce goods with a higher value added. A support to this – as well as to the growth of the Latvian economy at large – would be lent by governmental structural reforms in education, health care, and state administration; improvement of the efficiency of industrial policies; introduction of a package of measures supporting micro-businesses, and straightening out the system of determining cadastral values, which would send a signal to both local and international investors that the Latvian economy is continuing to improve its competitiveness and stabilize its investment environment.