Efficiency 2015 Annual Report

The Latvian Economy: Focusing on Growth

Māris Kannenieks, ABLV Bank Chief Financial Officer, talks about what the year 2015 was like for the Latvian economy, what happened to exports, and why the value of money has decreased.

Despite the tense geopolitical situation in the region, the Latvian economy continued to grow in 2015. Latvia’s Gross Domestic Product (GDP) grew by 2.7% compared with the previous year, and this increase was above expectations.

The shrinking amount of exports to Russia was compensated by growing exports to many EU countries, Asia, and the USA. Moreover, the export of services was facilitated by the Latvian Presidency of the Council of the EU during the first half of 2015.

Given the aforementioned economic growth, the situation in the labour market also improved. A considerable increase in jobs was observed in the service sector including commercial and social ones, healthcare, food service industry, and domestic services. In contrast, the most rapid decrease in jobs was in the processing industry, in particular, in food production, especially fish processing, clothing manufacturing, construction, and the public administration sector. Ultimately, the unemployment rate has decreased: as at the end of the year, it amounted to 9.9%, which is 0.9% less than in the previous year.

Inflation remained low and continued to decrease — its average level was 0.2% over 12 months. Internal factors, such as reduced taxes and electricity prices, largely compensated for external factors such as decreasing oil and agricultural goods prices.
According to Bloomberg data, the prices of raw materials on average dropped by 25% on the global exchange in 2015, while the Bloomberg Commodities Index reached the lowest level since 1999.

The increasing pace of economic growth and climbing retail turnover during the final months of the year allow one to forecast that overall economic growth will be more rapid in 2016, possibly reaching 3.2%

ECB monetary policy, liquidity, and money markets

Latvia has now been a full member of the euro area for two years. At the beginning of 2015, the ECB Council made the decision to extend stimulation policy measures, under which a new programme of purchasing public sector securities was launched, and this, in turn, has substantially decreased the interest rates of the whole euro area, including those of Latvian securities and the money market.

Interest rates of money markets in the euro area continued to decline in 2015, reaching new historical minimums. Since April, the 3M Euribor indicator has been negative.

In 2015, the ECB continued the Targeted Longer Term Refinancing Operation (TLTRO) auction programme started in 2014. The principles of the TLTRO programme are based on granting new loans to credit institutions, which in turn are able to borrow more from cheap long-term resources of European central banks for further financing. From September 2014, the Eurosystem held quarterly auctions for euro area credit institutions, and these will be continued until June 2016 (reaching a total of eight), ensuring the opportunity to borrow European resources providing corresponding assets as security and paying just the refinancing interest rate, which currently equals 0.05% (from March 2015, the Eurosystem has ceased to apply a margin of 10 base points to the main refinancing interest rate). Under first five auctions, the Eurosystem has lent EUR 399.4 billion to credit institutions of the euro area, including EUR 220.5 million lent to Latvian credit institutions.

Record-low rates of Latvian government securities

The stimulation policy of the ECB allowed Latvia to issue securities with historically low rates on both the internal and external market. Moreover, on 15 April 2015 Latvia joined the small group of “prestigious” countries that have issued government notes with negative rates. Latvia has also issued bonds with historically low rates on international financial markets.

On 8 December 2015, the Treasury of Latvia, taking advantage of the unique situation on financial markets, under the public debt management, partly refinanced the debt obligation undertaken in US dollars for eurobonds with the respective maturity. A favourable situation for purchasing the bonds in US dollars was formed by substantial differences between Latvian bonds in the US dollars and the credit risk premiums of eurobonds existing on financial markets. Therefore, this transaction resulted in decreased medium term public debt servicing costs.

In the first half of 2015, the export of services increased due to the Latvian Presidency of the Council of the EU.

First Latvian Presidency of the Council of the EU

Every six months, the EU member states alternately become the presiding countries which regulate the work of the Council of the European Union. The Presidency allows each of the EU member states to set the agenda and guide the work of the Council, regardless of the size of the country and the time of its accession to the European Union. For our country, the presidency in the first half of 2015 was special not just because of the high responsibility involved, but also since it was the first time Latvia had to take decisions on an all-European level. The overall success of our presidency can be discussed in detail, but one thing is sure: this was a great international experience for the country in the political, social, and economic area.

Table of Contents

Creative team: Arnis Artemovičs, Ernests Bernis, Jānis Bunte, Anna Celma, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Samanta Priedīte, Jūlija Surikova, Romans Surnačovs
Project managers: Anna Celma, Jūlija Surikova
Interviews: Jānis Bunte, Ingrīda Drazdovska, Konstantīns Gaivoronskis, Katrina Gordejeva, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Romāns Meļņiks, Sergejs Pavlovs, Romans Surnačovs, Jānis Šķupelis
Text authors: Leonīds Aļšanskis, Jānis Bunte, Anna Celma, Vladislavs Hveckovičs, Jānis Grīnbergs, Māris Kannenieks, Ļubova Kazačenoka, Jekaterina Koļesina, Zane Kurzemniece, Aleksandrs Pāže, Gints Pumpurs, Dmitrijs Semjonovs, Jūlija Surikova, Kaspars Vanags, Benoit Wtterwulghe
Photography: Arnis Artemovičs, Uldis Bertāns, Mārtiņš Cīrulis, Ieva Čīka, Krišjānis Eihmanis, Andrejs Hroneloks, Alise Jastremska, Valdis Kauliņš, Valts Kleins, Marks Litvjakovs, Sergejs Mazurs, Reinis Oliņš, Samanta Priedīte, Gatis Rozenfelds, Polina Viljun, LETA foto, Marka.photo, Studija F64
Proofreader: Jānis Frišvalds
Translators: Jekaterina Koļesina, Nataļja Malašonoka, Lidija Marsova, Jūlija Surikova
Design: Aivis Lizums, Valters Horsts

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