A small deficit in the current account in the first quarter
In the first quarter of 2013, a small deficit formed, in the amount of 49.9 mil. lats (1.4% of predicted gross domestic product (GDP)). The deficit was smaller than the previous year’s average, which was 1.7% of GDP, as well as smaller than the 3.1% of GDP, which was the case in the first quarter a year ago.
Figure. The main items of the current account of Latvia’s balance of payments
*The GDP prediction of the Bank of Latvia is used in the calculation.
The goods and services external trade deficit in the first quarter increased to 109.6 mil. lats or 3% of the predicted GDP. External trade activity dropped seasonally and, after the growth that Latvia achieved in the previous year, posting the fastest export growth among the European Union (EU) countries, the growth in the first quarter was more moderate, albeit still among the fastest in the EU. The annual growth of goods and services exports was 7.1%, but imports grew slower than exports (annual growth at 4.6%).
As predicted previously, in the first quarter, the value of services granted dropped quarter-on-quarter while the year-on-year growth remained positive (5.6%). That was affected both by seasonal factors (with the value of travel services down) and the limited external demand. The value of transportation services granted to foreigners did not change substantially quarter-on-quarter. Transportation services by rail in the next quarter could be impacted by the new opportunities of granting services for transporting military cargos from Afghanistan. The drop in oil and global resources prices along with the stagnating trends in several European economies, however, point to the likelihood that no substantial increase in external demand that could impact a faster growth in exports this year can be expected.
The negative balance of the financial account dropped to 128.7 mil. lats or 3.6% of the predicted GDP in the first quarter. The international ratings agencies continue to raise Latvia’s credit rating (in February it was raised by the Rating and Investment Information, and in March by Moody's) and the inflows of foreign direct investment continue to be stable. In the first quarter, 95.7 mil. lats (2.7% of predicted GDP) flowed into Latvia as foreign direct investment. Foreign direct investment increases were the greatest in wholesale and retail (primarily from Estonia and Russia), in electrical power branch (from Russia), and in manufacturing (from Lithuania and Ireland). Investment in economic sectors directed toward production will have a beneficial influence on the export potential of the economy in the coming periods as well.
The confidence indicators both regarding businesses and consumers recently published by the European Commission indicate that the situation in Latvia has improved slightly in May as a result of a more positive assessment of, among other things, the expected order and output volumes for the coming months by entrepreneurs involved in both trade and industry. In view of the inflows of investment in sectors related to production as well as the fact that the development of producer prices is favourable for continued competitiveness of Latvia and trade conditions continue to improve, it is expected that the external trade deficit this year will not increase substantially and the current account deficit will remain small.