Latvia's Balance of Payments in July

According to preliminary data, the current account of Latvia's balance of payments continued to record a surplus in July. Although the current account posted a slight month-on-month decrease, the contribution from the goods and services trade balance was much smaller than that from the income account dynamics. As indicated by the previous month's data, the impressive improvement in the current account was temporary (due to the bank provision-making policy) and a result of non-residents' reinvested loss, which declined considerably in July, to the first quarter level.

In comparison with June, the services exports grew slightly on account of travel services expanding typically for the season. As has been already suggested by the movements in the Baltic Dry index, exports of transportation services contracted somewhat. The Baltic Dry Index issued daily by the London-based Baltic Exchange tracks international shipping prices of various dry bulk cargoes worldwide; since the beginning of July, the index declined gradually, thus pointing to the contraction in the demand for global shipping services. Due to an increase in imports of financial and transportation services, the services surplus shrank.

The capital and financial account recorded a surplus due to the inflow of EU funds, net inflow of direct investment in Latvia (with banks boosting equity), and the EC loan to the general government. At the same time on account of the latter, the reserve assets increased notably against the previous months, with the government pushing up deposits.

In the environment of weak signals from recovering global demand and accounting for persisting low domestic economic activity, import growth should not be expected in the upcoming periods; dynamic changes in exports are unlikely either. As a result, the significant year-on-year improvement in the current account will most probably be sustained, and the current account is likely to record a surplus in the year overall as well.