In the fourth quarter of 2014, the current account deficit was 88 million euro

In the fourth quarter of 2014, the current account deficit was at 88 million euro (1.4% of GDP). The quarter-on-quarter improvement (QIII -4.0% of GDP) was primarily the result from an improvement in goods export (QIII -10.6% of GDP; QIV -8.4% of GDP) and reduction of outgoing interest payments on investment in Latvia.

In the fourth quarter, the goods external trade deficit dropped, reaching 541.4 mil. euro or 8.4% of GDP (664 mil. euro or 10.6% of GDP in the 3^rd quarter), which can be explained with a faster growth of goods exports compared to imports. The positive balance of services external trade (450.6 mil. euro or 7.0% of GDP) compared to the previous quarter (QIII 449.5 mil. euro or 7.1% of GDP) remained almost unchanged. In the fourth quarter, a small rise in services granted was in transport services (by sea, rail and automobile) and telecommunications services, computer services and information services as well as financial services. Compared to the previous quarter, the balance of personal trips services dropped slightly owing to seasonal factors.

The negative quarter-on-quarter balance of primary income in the fourth quarter dropped, reaching -1.2% of GDP (-1.9% of GDP in the 3^rd quarter). The reduction of the negative balance was determined by the drop in the outgoing interest payments on investment in Latvia.

The positive balance of the secondary income account contracted slightly in the fourth quarter, reaching 77.7 mil. euro (83 mil. euro in QIII). That can be explained by the year end 2014 decision of the government to pay additional funds into the budget of the European Union (EU). 

In the fourth quarter of 2014, the positive balance of the capital account shrank slightly (2.4% of GDP in QIII.; 2.1% of GDP in QIV). These changes were caused by the contraction in the flows of EU funds designated for investment.

The negative balance of the financial account dropped in the fourth quarter, reaching -0.2% of GDP (-4.8% of GDP in QIII). Compared to the third quarter, the changes in balance were impacted by a drop in portfolio investments abroad (-5.7% of GDP in QIII; -1.6% of GDP in QIV), and an increase in foreign direct investment (0.2% of GDP in QIII; 4.0% of GDP in QIV).

In 2014 overall and year-on-year, the current account deficit increased to 749 mil. euro or -3.1% of  GDP (-542.7 mil. euro or -2.3% of GDP in 2013). Compared to 2013, the greater deficit was formed under the impact of the export values of transport services. It was primarily fostered not so much by the drop in the volume of services offered, but the falling prices of transport services related to increased competition resulting from the Russia-related geopolitical conditions. In 2014, the inflows of EU funds contracted slightly and the payments into the EU budget increased. In 2014 overall, Latvia received in its current and capital accounts 1070.42 mil. euro or 4.5% of GDP from EU funds. The negative balance of the current account was primarily covered by the long-term capital in the form of foreign direct investment. Even though compared to 2013, the inflows of investment slowed down in connection with the geopolitical turmoil and the slow recovery of the euro area economy, it is a positive development that investments continued to flow in. Another positive development with regard to the Latvian financial environment was the raising of the national credit rating by several international agencies, thus fostering investor interest and trust in the Latvian economy.  At the end of May 2014, Latvia's credit rating was raised by Standard&Poor’s and in June by Moody's Investors Service and Fitch Ratings. 

Chart. The main components of current account, % of GDP

Source: Bank of Latvia Statistical Database