Export volumes not growing yet, new market niches appearing

In the first seven months, the rates of annual growth for both exports and imports were similar, growing by 34.1%. The deterioration of the external environment along with the falling prices of some goods continued to determine a drop in the activity of Latvian external trade in July as reflected in the contraction of goods exports by 1.4% over a month. With goods imports rising 14.1% month-on-month, a new record was achieved in July.

A drop in goods exports in July was experienced in regard to chemical industry production, mineral products, food, and wood pulp, whereas development was positive concerning animal products, base metals, plastics and plastic products, textiles and knitted apparel. Year-on-year, goods exports grew 19.8% in July. As predicted before, the rate of annual growth of goods exports, which experienced a significant rise in the first six months, began to slow down as a result of both weakened external demand and base effect.

As indicated by the data of the first six months, the extant price and cost dynamics as well as the improved competitiveness of manufacturers has allowed Latvia to maintain and even increase its export market shares in all the most important partner markets in the EU, with the sole exception of Estonia, and in Russia, as well as to conquer new market niches. Exports to Asia have grown substantially, also increasing the share of these countries in total exports (from 5.4% in the first quarter of last year to 7.6% in the second quarter of this year). The expansion of the export market is not taking place on account of main groups of export goods but because new groups are appearing and small groups growing. Compared to last year, the share of mineral and chemical fertilizers (African countries – Chad, Cameroon), peat (Morocco, Turkey, China), products of animal and plant origin (Azerbaijan), plastic products, oil products (Turkey, Afghanistan, Azerbaijan), land transport vehicles and their parts (Afghanistan, China), energy and electronic devices and their parts (UAE, Paraguay, China), production equipment (Kazakhstan), textile wearing apparel (Azerbaijan), wheat and grain mixture flour (Gambia, Thailand, Afghanistan), medicine (Kazakhstan, Azerbaijan) and various articles has grown.

The growth in goods imports is still more related to the growth of manufacturing branches, which are oriented toward exports and less concerned with the stabilization in the internal market. In imports, the growth was most notable concerning intermediate consumption goods and capital goods, including raw materials and manufacturing equipment, e.g., mechanisms and electronic equipment, plastics, base metals and their products and mineral products. The increase in the imports of mechanisms and mechanical devices of 53 mil. lats accounted for two thirds of the monthly import growth in July. In goods imports, agricultural goods decreased in July.

Further development of the external trade in Latvian goods can be negatively impacted by the economic problems in the United States, Japan, the United Kingdom and the euro area. As a result of the above as well as base effect, the annual growth rate of exports will continue to drop in the second half of the year. Yet both the current export market share dynamics and export structure, which has become more complicated during the crisis, allow us to hope that this year exports will not lose much of its importance in our economic development because of weakened external demand. Even though the EC published confidence indicators point to a slight worsening in the evaluation of export order volumes, the third quarter indicators have improved both with regard to the export order volumes and evaluation of competitiveness both domestically and within the European Union.

Latvia's credit rating which was raised at the beginning of 2011, has made Latvia more attractive to investors as indicated by several positive decisions on substantial investments in the branches of mechanical engineering, transport and logistics services, agriculture etc. In just two quarters of this year, foreign investment inflows have been greater than last year overall. A positive development, which can help potential investors and local entrepreneurs to better plan their business in a situation of destabilizing external environment, is the "Tax Policy Strategy for Years 2011-2014" submitted for government's approval, which provides for "not introducing new objects for taxation and not adding substantially to the total tax burden. ".