The second quarter balance of payments also faced fluctuations due to COVID-19
The restrictions related to the exacerbation of the spread of the COVID-19 virus and the dramatic decrease in economic activity determined developments of the balance of payments in the second quarter of 2020. However, several sectors of the economy saw the shock caused by the virus abate already in May and rapid recovery start in June.
Similar dynamics were also observed in exports of goods, i.e. the effect of the fall in exports of goods observed in April and May was almost eliminated in June. The cross-border supply of services, on the contrary, was harder hit and remained at the April lows until the end of the quarter. Exports of travel services were the worst affected as movement restrictions hampered the cross-border movement, and people continued to exhibit caution with respect to leisure and business travels.
As to the transport services, exports of transport services by air and road contracted most notably, thus adding to the previously observed fall in the export value of transport services by sea and rail which is expected to decline even further (due to lower freight volumes from Russia). The effect of restrictions on imports of services, whose value was less than that of exports, was relatively symmetric, and the second quarter witnessed the positive balance of services edge down slightly. Taking account of the fact that imports of goods contracted much faster than their exports during the period of crisis aggravation, the overall trade surplus of goods and services improved in the second quarter (2.5% of GDP) and contributed to the major part of the positive current account balance – 3.8% of GDP.
The balance of income accounts also recorded a surplus on account of secondary income where the flow of personal transfers remained strong. In the second quarter, the primary income balance still stood slightly below zero. In quarter-on-quarter as well as year-on-year terms, remuneration to those employed abroad and other primary income followed a downward path, which was, to a certain extent, balanced by the fall in profits harvested by foreign direct investors in Latvia. Although in the second quarter businesses recorded small losses, the continued strong flow of dividends generated positive total profits of foreign investment. The impact of the second quarter 2020 might lead to a weaker flow of dividends next year.
In the second quarter, the largest flows in the financial account were related to the investment of funds of Latvian commercial banks in foreign securities and Latvijas Banka's participation in Eurosystem monetary policy operations. At the same time, the government raised funds by issuing bonds. Inflows of funds in the form of direct investment continued in Latvia (2.1% of GDP). Despite the fact that investment in reinvested earnings declined, foreign investors made new investment in equity and also granted loans to Latvian businesses.