Latvia's Export Perspective Improves

In 2009, the world saw a substantial contraction in the global trade activity, with volumes of the so called cyclically sensitive commodities, i.e. those needed in the process of production and a large number of durable consumer goods shrinking and protectionist pressures aggravating. The pace of weakening in the domestic and external demand differed, hence Latvia's imports of goods declined more dynamically than exports (by 38.4% and 19.4% respectively), with the pace of decrease in real terms (accounting for the unit value changes) at 34.2% and 10.5% respectively. As a result, the trade balance improved markedly and a surplus in the current account emerged.

The share of capital goods in Latvia's imports diminished to a great extent due to the draining up of resources for lending, dropping construction, and narrowing industrial production. All significant groups of Latvia's commodity exports recorded downturns in the first half of the year, to stabilise or to grow in the second half of the year due to progressive recovery of the global economy primarily in such significant commodity groups as wood and articles of wood, products of the chemical and allied industries, mineral products, and certain agricultural and food products. Likewise, towards the close of the year, exports of base metals and articles of base metals stabilised, whereas those of optical instruments and apparatus increased substantially, to mount to historic monthly and quarterly highs in December and the fourth quarter respectively.

With corporate cost optimisation activities and the negative effects on price dynamics from the falling demand in place, the price and cost levels declined at a faster pace in Latvia than on average in its major trade partners. Consequently, as suggested by the downward trend in the real effective exchange rate, the price and cost competitiveness indicators improved. Latvia's export share expanded or remained at the previous level in some major trade partner markets. According to the 11-month data on mutual trade, Latvia's exports to its neighbouring countries Estonia, Lithuania and Russia expanded substantially. Positive albeit less pronounced changes were recorded for Latvia's export market shares in Sweden, the Netherlands, Germany, Poland and Finland; meanwhile, after recording an almost double drop in the fourth quarter of 2008, Latvia's export share in the UK had been steadily expanding over the entire 2009.

Notwithstanding the ongoing austerity policy, subdued investment activity and slow recovery of the Latvian economy, the factors not actually in support of import growth in 2010, the outlook for exports is improving along with the global economic revival and strengthening of the Latvian export cost competitiveness. This would be a good basis for retaining the current account surplus at the previous year's level provided that the government measures to bolster a more benevolent business environment are appropriate and effective.