Exports still grow at a fast rate; investment and awareness of risks needed for the future

In August 2010 the Latvian foreign trade continued on a path of fast growth, with both goods export and import turnover increasing by an annual 44.2% and 39.1% respectively.

The exporters could effect a rapid rise in the turnover of their enterprises as a result of own-initiated and external processes. Effective cutting of costs and attracting new clients in the foreign markets, according to enterprise information, was particularly the case in pharmaceutics, construction, and the power sector. The rise in demand in trade partners, as, e.g., the German and Swedish economies growing faster than expected, should be mentioned among the positive external factors.

As in previous months, the annual rise in exports in August was mostly stimulated by exports of timber and metal and metal products and chemical products; the exports of mechanisms, devices and electronic equipment also grew substantially.

As household consumption stabilized, the imports of consumer goods and vehicles grew in August. The rise in the imports of food products was probably promoted by the global price rises. The need of the exporting sectors for imported raw materials and equipment as well as the renewal of business stores was behind the rise in the imports of intermediate consumption goods necessary for production.

Even though exports grew at a fast rate in recent months, the growth of exports is expected to slow down as early as the end of this year and next year. That will be determined by a combination of several factors. First, the uncertainty regarding the prospects of world economic development is on the rise and it is already reflected in the dynamics of new export orders. Second, the base effect will diminish, for export volumes began to rise evenly as early as the end of 2009. Third, as the full load of industrial production capacity increases, any rise in production and exports will to a much greater extent depend on new investment in  expanding production and opportunities for raising production by increasing the full load of production capacity will be exhausted soon.

Additional risks that in 2011 could slow down the rapid export growth observed this year are related to decisions considered and taken outside Latvia. First, it is Russia's decision to reduce the number of permits of the European Transport Minister Conference shipments, which, according to the VSIA "Autotransporta direkcija" (Road Transport Agency) calculations, will diminish the opportunities for the Latvian road transport businesses to cooperate with Russia by at least one third in 2011. Second, the proposals by the European Commission to reduce fishing quotas for brisling sardines and sprats in the Baltic Sea by 10-28% as of 2011 may reduce food exports.

From the long-term perspective, an important role in preserving rapid Latvian export growth will be played not only by raising cost competitiveness, which is yielding positive results in expanding our export market shares in the imports of many partner countries, but also by investment in raising the productivity of enterprises, new technologies and manufacturing of innovative products.