Foreign trade affected by price volatility, domestic and global political developments

The trade turnover of Latvian goods posted a 7.1% month-on-month contraction in April 2011: the steep rise of the previous month was followed by a decline in the volumes of both exports and imports of goods, while a high annual growth rate was sustained, with export growth at 27.6% and that of imports at 29.9%. The balance of trade in goods improved notably, and the deficit dropped to 77.1 million lats.

As was formerly anticipated, the foreign trade activity decelerated somewhat and exports of goods shrank by 3.9% month-on-month in April, both due to weaker foreign demand. A pickup was sustained for exports of wood (3.0% month-on-month), live animals and animal products (7.8%), alcoholic and non-alcoholic beverages (8.3%), tobacco products (20.3%), mineral products (40.7%), and textile articles (3.0%). Owing to the global rise in sawn wood prices, the export value of wood has increased to determine a rise in the income from the respective exports. The economic instability in Egypt caused by the local political unrest impairs the role the Egyptian market plays for Latvian exports of sawn wood. In the first quarter of the year, the UK retained its leading position as the largest export market of sawn wood from Latvia, whereas Egypt slid down from the second to fifth position, ranking after Germany, Japan and the Netherlands. However, the producers state that the industry's export market has been restructured and the focus from Egypt removed. The natural disaster in Japan notwithstanding, sector performance indicators show that sawn wood exports to this country have not contracted year-on-year and are even likely to grow in the coming months due to stronger demand.

According to the first quarter data, Latvia's market share in global exports is continuously expanding, albeit at a slower pace than of the other Baltic States. Such expansion was recorded relative to almost all major trade partners of Latvia, with Estonia an exception. In most countries, Latvia's market share did not grow on account of shrinking trade partners' imports but rather as a result of improved competitiveness of Latvian producers and rising export prices due to the global price hikes. In the first quarter, the terms of trade improved for all export commodity groups, except wood, mineral products and building materials (stone, plaster, cement, etc). The observed deterioration in the terms of trade for these goods was triggered by higher import prices.

Resulting from the weak domestic demand, import volumes shrank at a faster month-on-month pace than those of exports in April, however lingering above the respective levels of the first two months of the year. The annual growth in imports continued to be heavily determined by the development of export-oriented manufacturing branches. In April, an increase was recorded only for imports of the chemical industry, including pharmaceutical products (16.1% month-on-month), and transport vehicles, including rail transport (28.2%).

Russia's recent resolution not to import vegetables from the EU is unlikely to affect the respective exports from Latvia substantially, since their volumes are subject to strong seasonal volatility, and statistics confirm that the largest export volumes (predominantly potatoes and onions) from Latvia go to Russia in January, February, March and the last three months of the year after harvesting. Admittedly, this decision of Russia might slightly push down the domestic vegetable prices, as the Latvian market is quite likely to absorb a part of formerly Russia-oriented exports at lower prices.

The confidence indicators released by the EC suggest that the assessment of export order volumes slightly improved in April but deteriorated again in May. The indicators for the second quarter worsened both for export orders and competitiveness. It is indicative of a decline in producers' optimism which was observed at the beginning of the year but now has abated due to hiking raw material prices and a potential future drop in demand. Given the political uncertainty and low domestic demand, exports are likely to act as a primary driver of the Latvian economic growth in the future as well. Although the pace of growth in global trade is expected to decelerate against the previous year, it could be faster than projected at the beginning of the year.