Purchases of capital goods continue to account for the current account deficit
In July 2011, the Latvian balance-of-payments current account deficit increased to160.0 mil. lats, and the increase was primarily accounted for by the substantial purchases of capital goods made by several enterprises.
The goods foreign trade negative balance according to the balance-of-payments methodology rose to 195.6 mil. lats. To a great extent, it was reflected already in the external trade statistics published by the Central Statistical Bureau (because of the rise in the imports of mechanisms and mechanical devices), but, according to the balance-of-payments methodology, the total goods trade deficit was increased also by purchases of other capital goods. The drop in the positive balance in services external trade to 55.7 mil. lats was determined by a small reduction in services exports in many groups of services.
The negative balance in the income account (26.1 mil. lats) resulted equally from the profits made by foreign direct investor enterprises and the dividends they paid out.
The positive balance in the current transfers account was the smallest since November 2008 and did not compensate the rising trade deficit. The drop in the positive balance of current transfers account was determined by a smaller amount of financing received from EU funds. In July a relatively small amount of EU funding still flowed into the capital account, but information on budget revenue indicates that at the end of August income from the EC ERDF and Cohesion fund, suspended by Latvia since last October, resumed.
The positive balance of the financial account (204.9 mil. lats, which is the largest positive balance since September 2008) was substantially impacted by the sales of credit institution long- and short-term foreign assets (securities). The increase in net foreign direct investment in Latvia was substantially smaller than the monthly average in the first half of the year, yet it must be noted that the monthly financial account data tend to fluctuate, and the data for one month do not yet indicate a changing trend. The interest of foreign investors in projects in Latvia has grown substantially.
The June and July balance-of-payments data are evidence that certain large transactions in Latvia can have a substantial impact on the macroeconomic indicators (relative to the size of the economy). The development trends of the global economy also have a significant effect on a small, open economy, and at the moment they do not point to Latvian export growth in the next few months. That is yet another indication of how important it is to develop and maintain comprehensible and stable economic policies, so that the local entrepreneurs would not lose their incentive and it would be possible to attract foreign investment for long-term goals in the development of production and export.