Resumption of lending dependent on the formation of the new government and adoption of the 2011 budget
The gradual recovery of the Latvian economy has determined a further rise in the money in circulation. Just as in previous months, in September 2010 the money indicator M3, which characterizes the volume of cash and non-cash currency in circulation has grown (by 1.3%), but the annual rise in M3 has reached 12.8%.
The volume of money in September was mostly affected by the rise in deposits attracted by banks. The substantial growth of several branches of the economy and the rapid rise in export volumes promoted a rise in deposits by businesses. At the same time, the lats deposits of households continued to grow at a moderate rate. With both the overnight deposits attracted by banks and time deposits growing, the total amount of domestic deposits grew by 1.3% in September reaching the record rate of 5.4 billion lats, which exceeds the hitherto highest balance of deposits recorded in June 2008 by 50 million lats. The demand for cash currency has abated somewhat: its amount in circulation grew by a mere 0.2%.
In the conditions of pre-election uncertainty a slow shrinkage continued. The total volume of domestic loans dropped by 0.6% over a month, with loans granted to businesses and households dropping at the same rate. The annual rate of decrease in lending thus returned to the 7.7% level in September.
If we are to expect a moderate growth in deposits and money supply also in October and subsequent months, then a resumption of lending depends to a greater extent on forming a stable and predictable government, adopting the 2011 budget, and the reaction of market participants to these events. In the foreseeable future there is no reason to expect a rapid rise in lending, thus a key role will initially be played by the entrepreneurs' readiness to offer worthy projects to banks at which they could direct a part of the growing volume of attracted resources.