Republic of Latvia A Performing Eurozone Economy Presentation November/December 2015.

Republic of Latvia

A Performing Eurozone Economy

PresentationNovember/December 2015

Disclaimer

2

This presentation and its contents are confidential and may not be reproduced, redistributed, published or passed on to any other person, directly or indirectly, in whole or in part, for any purpose and should not be treated as offering material of any sort. If this presentation has been received in error it must be returned immediately to the Ministry of Finance of the Republic of Latvia (“Latvia”). This presentation is not directed at, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution or use would be contrary to law or regulation or which would require any registration, licensing or other action to be taken within such jurisdiction. 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Any investment activity to which this presentation relates will only be available to and will only be engaged with relevant persons.This presentation does not constitute or form part of, and should not be construed as, an offer or invitation to sell securities of Latvia, or the solicitation of an offer to subscribe for or purchase securities of Latvia, and nothing contained herein shall form the basis of or be relied on in connection with any contract or commitment whatsoever. Any decision to purchase any securities of Latvia should be made solely on the basis of the conditions of the securities and the information contained in the offering circular, information statement or equivalent disclosure document prepared in connection with the offering of such securities. Prospective investors are required to make their own independent investigations and appraisals of the business and financial condition of Latvia and the nature of any securities before taking any investment decision with respect to securities of Latvia. By accessing this presentation the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the information contained herein. The information in this presentation has not been independently verified. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the presentation and the information contained herein and no reliance should be placed on such information. None of Latvia, its advisers, connected persons or any other person accepts any liability for any loss howsoever arising, directly or indirectly, from this presentation or its contents. This presentation should not be construed as legal, tax, investment or other advice and any recipient is strongly advised to seek their own independent advice in respect of any related investment, financial, legal, tax, accounting or regulatory considerations. There is no obligation to update, modify or amend this presentation or to otherwise notify any recipient if any information, opinion, projection, forecast or estimate set forth herein changes or subsequently becomes inaccurate or in light of any new information or future events. This presentation contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or including the words “anticipates,” “estimates,” “expects,” “believes,” “intends,” “plans,” “aims,” “seeks,” “may,” “will,” “should” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Latvia's control that could cause Latvia’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements speak only as at the date of this presentation. Latvia expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or any new information or change in events, conditions or circumstances on which any of such statements are based.

For convenience, an exchange rate of EUR/LVL: 0.702804 was used throughout this presentation and it is the exchange rate Latvia used to adopt euro as lawful currency on 1 January 2014.

Presentation Overview

1. Overview 4

3. Stable and Well Capitalised Banking Sector Prepared to Restore Credit Growth 19

2. Latvia’s Economy Continues to Perform Strongly 9

5. Government Debt and Funding Strategy 31

4. Outstanding Track-record of Fiscal Consolidation and Structural Reforms 24

6. Credit Positioning of Latvia 36

7. Conclusion 38

8. Tender Offer 40

9. New EUR Issuance 43

Overview

Latvia Overview

5

Key Facts on Latvia

Latvia’s historic strides to become a robust global economy

• Territory: 64,569(3) sq. km

• Capital: Riga (population 0.64 million(3))

• Population (1/1/2015): 2.0 million(3)

• GDP per capita (2014): EUR 11,824(3)

• Nominal GDP (2014): EUR 23.6 billion(3)

• Currency: Euro €(4)

• Credit ratings: A- (S&P), A3(Moody’s), A- (Fitch), BBB+ (R&I)

• Borders: Estonia, Russia, Belarus, Lithuania

• Main economic sectors:

— Services (74.5%(3) GDP in 2014): logistics, IT, financial, trade— Manufacturing (12.2%(3) of GDP in 2014): wood, metal, chemicals, pharma, food

Becomes a Member of the UN

Sep 1991

Mar 2004

May 2004

Dec 2008

Entry into EU

Admitted to NATO

Approval of Loan Programme with IMF, EC and Bilateral Lenders

1991

Latvia Regains Independence

Dec 2011/ Jan 2012

May 2012

All rating agencies rate Latvia investment grade

May 2013

Initial Memorandum delivered to OECD

January2014

Latvia joins Eurozone/ EMU

International Loan Programme with IMF/EC Closed Successfully

May-June 2014

S&P and Fitch upgrades rating to A-

February 2015

Moody`s upgrades Latvia’s rating to A3

1991Sep 1991

Mar 2004

May 2004

Dec 2008

Dec 2011/Jan 2012

May 2012

May 2013

Jan 2014

May-Jun 2014

Jan-Jun 2015

Feb 2015

2016

Latvia’s Presidency of EU Council

Target for OECD membership

- High income(1), advanced economy(2)

Source: (1) - World Bank classification; (2) - IMF classification;(3) - Central Statistical Bureau of Latvia, (4) - formerly the Lat (LVL), Euro adopted as lawful currency on 1 January 2014

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6

● Average 3.9% GDP growth rate since 2011(1), when the post-crisis recovery started

● GDP growth was led by rising exports (driven by regained competitiveness), rebound of investments, and is supplemented by rising domestic demand in recent years

● Increased resilience to external risks, as net external debt is rapidly declining, and current account balance improved to a sustainable level

Sustained growthreached through a

successful economic

adjustment

Source : The Treasury (unless noted otherwise) Note: (1) - Central Statistical Bureau of Latvia; (2) – Financial and Capital Market Commission, capitalisation and liquidity ratios at the end of September 2015

Key Features of Latvia’s Sovereign Credit Profile

● Latvia joined the Eurozone on 1 January 2014, adopting the Euro as its lawful currency

● Latvia was already well integrated in the Eurozone's economy and the Eurozone membership reduced foreign exchange risks, eliminated currency conversion costs, improved financial stability and will facilitate trade and investments in the long term

● Participation in the Eurozone’s European Stability Mechanism brings additional financial security

Eurozone member since January 2014

● Over the last three years Latvia has consistently achieved one of the lowest fiscal deficits in the EU. General government budget deficit was 1.5% of GDP in 2014, while in the 2015 deficit is forecasted to be 1.4% of GDP

● Recent reform of social security system notably enhanced sustainability of government finance in the long term● Fiscal prudence is ensured by the implementation of the Fiscal Discipline Law, including fiscal rules with an

automatic correction mechanism (based on Swiss model), multi-year targets and independent oversight

Strong fiscal position & rigorous

fiscal discipline

● At the end of 2014, general government debt amounted to 41% of GDP and was one of the lowest in the EU

— With a repayment of EUR 1.2bn to the European Commission in January 2015, Latvia’s general government debt is set to decline further relative to GDP in 2015

● Latvia has successfully extended its EUR yield curve with a 7 and 10 year benchmark issues in 2014

● Government debt has smooth redemption profile, while investor base is diversified across Europe and the US

Low government indebtedness &

sound public debt management

● Well capitalised (21.6% CAR) and highly liquid (67,05% liquidity ratio) banking sector (2), predominantly owned by strong international owners

● The banking sector returned to profitability in 2012 and reached an 12,6% ROE in the-end-September 2014, as the quality of loan portfolio has been gradually improving since the mid of 2010(2)

● The three largest banks successfully passed the European Central Bank’s (ECB) comprehensive assessment in 2014, and are subject to the ECB’s Single Supervisory Mechanism since November 2014

Stable and well capitalised banking

sector

Latvia is Benefiting from Eurozone Membership Since January 2014

7

Strong economic rationale

Solid political foundationCompetitive economy with capacity to adjust

● For Latvia as a small, open economy with most of the trading partners in the euro area and EU, EMU membership brought greater exchange rate stability, reduced foreign exchange risks, and eliminated currency conversion costs

● In the long term Euro will give further boost to the economy and living standards by providing stimulus to trade and investments

● Fully integrated in the EU political, economic and financial system

● Eurozone membership has contributed to credit rating upgrades and further eased access to international capital markets, as Latvia re-opened EUR market in 2014 with a 7 and 10 year benchmark bond offerings achieving high oversubscription and record low borrowing costs

● Currently, Latvia benefits from ECB’s quantitative easing policy with the government bonds yields and spreads tightening on the back of ECB’s Public Sector Purchase Program

● Eurozone membership enhances financial stability through the Single Supervisory Mechanism and European Stability Mechanism

● Euro introduction has also helped to improve tax compliance since cash usage in the economy has fallen substantially, as evidenced by cash rate to monetary base dropping from an average of 38.6% in 2013 to an estimated 12.6% in 2014(1)

● Latvia has demonstrated that it has the structural flexibility needed to adjust to external imbalances and remained competitive in the context of a fixed currency regime

Euro brings significant economic gains, reduces risk and enhances stability

Source: (1) Bank of Latvia; Since joining of the Eurozone, the cash ratio is approximated by the ratio, which is based on Latvia’s share to the ECB capital.

Rating Upgrades Reflect Latvia’s Successful Adjustment Efforts

8

Rating agencies have recognised Latvia’s recovery from the crises, it’s continuing institutional strength, bold reforms, flexible labour markets and falling indebtedness

Long-term Foreign Currency Rating development

A/A2

A-/A3

BBB+/Baa1

BBB/Baa2

BBB-/Baa3

BB+/Ba1

BB/Ba2

BB-/Ba3

Source: S&P, Fitch, Moody’s

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

S&P

Fitch

Moodys

Sovereign Moody’s S&P Fitch

Germany Aaa AAA AAA

Belgium Aa3 AA AA

Czech Republic A1 AA- A+

Estonia A1 AA- A+

Slovakia A2 A+ A+

Poland A2 A- A-

Latvia A3 (stable) A- (stable) A- (stable)

Lithuania A3 A- A-

Ireland Baa1 A+ A-

Italy Baa2 BBB- BBB+

Slovenia Baa3 A- BBB+

Spain Baa2 BBB+ BBB+

Hungary Ba1 BB+ BB+

Source: S&P, Fitch, Moody’s

Source: Standard and Poor’s (29 May 2015, 28 November 2014), Fitch (20 June 2014, 5 December 2014, 15 May 2015) Note: (1) Selected quotes. Full report can be obtained from respective rating agency

Credit highlights (Standard & Poor’s) (1)

• “Latvia benefits from generally strong institutional and governance effectiveness.” “In our view, the government will maintain its focus on sustainable public finances, and energy supply diversification, as well as the efficient absorption of EU funds.”

• “Latvia's fiscal position remains a ratings' strength.”• “Latvia has one of the lowest net general government debt levels in

the eurozone.”• “With eurozone membership, Latvia now benefits from the highly

developed capital market of the monetary union as well as the credibility of ECB monetary policy.“

Credit highlights (Fitch) (1)

• “Eurozone membership enhances the sovereign’s creditworthiness with the reduction of foreign exchange rate risks, greater fiscal financing flexibility via the euro’s reserve currency status, and allows Latvian banks access to European Central Bank liquidity facilities.“

• “Latvia is one of the fastest growing eurozone countries, with growth in line with 'A' rated peers.“

• “Latvia’s ratings are currently supported by the sovereign’s stronger fiscal position relative to its ‘A’ range peers, its stable banking sector, as well as Fitch’s baseline assumption that economic growth will stay resilient against geopolitical risks.”

• Over the last 2 years, Latvia benefitted from the rating upgrades to the upper medium grade category from all three major agencies

Latvia’s Economy Continues to Perform Strongly

The Latvian Economy Remains Resilient

10

Contribution to real GDP growth (%)

Economy is in the fifth year of stable growth

Economic growth softened to 2.4% in 2014 and 2.7% in the first nine months of 2015, while the outlook is robust with strengthening of domestic demand projected to be the main growth driver in

2015-2016

Source: Central Statistical Bureau of Latvia

Gross Domestic Product (current prices, EUR billion) and Growth (n.s.a., %)

2010

2011

2012

2013

2014

2015

F

2016

F

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

17,921,450.020,244,383.0

21,810,516.022,762,890.023,580,868.024,146,808.824,871,213.1

-3.8

6.2

4.03.0

2.4 2.43.0

GDP (EUR billion) GDP growth, YoY (%)

Source: Central Statistical Bureau of Latvia, European Economic Forecast, Autumn 2015, European Commission No assurances can be given that forecasted information will prove to be correct and actual results may differ materially

2010 2011 2012 2013 2014 1H 2015

-10

-5

0

5

10

15

20

Private consumption Public consumption GFCF Exports Imports (-)

Manufacturing 12.2%

Real estate activities 12.4%

Wholesale and retail trade, repair of motor vehicles and motorcycles 14.0%

Transportation and storage 10.1%

Information and commu-nication 4.6%

Construction 6.8%

Public administration, de-fence, compulsory social

securit; Education; Human health and social work ac-

tivities 15.3%

Agriculture, Forestry and Fishing 3.3%

Other sectors 21.3%


Composition of Gross Value Added by sectors in 2014 (%)

Gre

ece

Cypru

s

Port

ugal

Italy

Spain

Cro

ati

a

Fin

land

Slo

venia

Neth

erl

ands

Denm

ark

Cze

ch R

epublic

Fra

nce

Belg

ium

Aust

ria

Bulg

ari

a

Hungary

Sw

eden

Germ

any

Rom

ania

Slo

vakia

Unit

ed K

ingdom

Irela

nd

Luxem

bourg

Malt

a

Pola

nd

Latv

ia

Lit

huania

Est

onia

-5

-3

-1

1

3

5

7

3.9

EU-28 0.7%

Average GDP growth 2011-2014 (YoY, %)

Source: Eurostat

Latvia has been one of the fastest growing EU economies over the last 4 years

In 2014 and first half of 2015 GDP growth was balanced between household consumption and exports

Leading Indicators Point to Strengthening Domestic Demand and Sustained Economic Growth

11

Economic sentiment indicators (Balance, %)

Retail trade turnover, S.A. data (2010=100)

Amid rising consumer confidence retail sales growth has increased to 3.7% in 2014 and further accelerated to 6.3% in the first half of 2015

Source: Eurostat; Note: Data on October 2015

Renewed confidence following recession

Retail trade turnover is steadily increasing

Source: Central Statistical Bureau of Latvia Note: Data on September 2015

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

60

70

80

90

100

110

120

European Union (28 countries) Latvia

Real manufacturing output, S.A. data (2010=100)

Source: Central Statistical Bureau of Latvia Note: Data on September 2015

Manufacturing output has surpassed pre-recession peak level

Jan-

08

May-0

8

Sep-0

8

Jan-

09

May-0

9

Sep-0

9

Jan-

10

May-1

0

Sep-1

0

Jan-

11

May-1

1

Sep-1

1

Jan-

12

May-1

2

Sep-1

2

Jan-

13

May-1

3

Sep-1

3

Jan-

14

May-1

4

Sep-1

4

Jan-

15

May-1

5

Sep-1

5

80

90

100

110

120

130

Consumer confidence indicator (Balance, %)

Source: Central Statistical Bureau of Latvia Note: Data on October 2015

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

-60

-50

-40

-30

-20

-10

0

Consumer confidence rises

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14

Jan-

15

May

-15

Sep

-15

90

100

110

120

130

140

150

Resilient and Well Diversified Exports Continue to Support the Economy

12

Composition of merchandise exports by country (2014)

Exports of goods and services


Source: Eurostat

The economy has shifted towards tradable sector driven by regained competitiveness

Composition of merchandise exports by sector (2014)


In 2014 Latvian exports of goods managed to grow by 2.3 percent, in spite of challenging external environment, including Russian sanctions, the falling rouble and slow recovery in Europe

Lithuania 18.7%

Estonia 11.9%

Russia 10.7%

Germany 6.9%Poland 6.5%Sweden 5.4%

UK 5.0%

Denmark 3.8%

Other EU 14,1%

Other 12,9%

CIS (ex. Russia) 4.2%

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

5000000

10000000

15000000

20000000

0

10

20

30

40

50

60

8,363,199.09,513,749.09,739,396.0

8,484,461.09,624,987.0

10,784,387.011,839,004.011,966,975.012,339,356.0

49

42 4045

54 53 54 53 52

Exports of goods and services (EUR billion) Exports of goods and services (% of GDP)

Merchandise exports revenue growth - (2014 over 2009,%)

Source: Eurostat

Latvia remains among the leaders in terms of export growth in EU

Wood and articles of wood 16.6%

Machinery and mechan-ical appliances; electri-cal equipment 16.8%

Prepared foodstuffs 9.4%

Base metals and articles of base metals 9.1%

Mineral products 8.3%

Products of the chemi-cal and allied industries

6.8%

Vegetable products 5.4%

Transport vehicles 5.1%

Live animals and animal products 4.3%

Textiles and textile ar-ticles 4.0%

Other 14.2%

Lithu

ania

Bulgar

ia

Roman

ia

Slovak

ia

Gre

ece

Cypru

sSpa

in

Nethe

rland

s

Hunga

ryIta

ly

Belgium

Franc

e

Finlan

dM

alta

-20

0

20

40

60

80

100

120

98.1

Flexible and Diversified Exports Help Limiting the Impact of Russia’s Economic Downturn and Trade Sanctions

13

Merchandise exports to Russia and Ukraine (% of total exports)

Past experience show high degree of export flexibility


Merchandise exports to Russia by product category (%)

Exports to Russia are diversified

Impact of Russia’s sanctions and weaker rouble contained

● Direct impact of Russian sanctions on Latvian economy is limited, and exports to Russia affected by sanctions do not exceed 0.2% of GDP

● In 2014, a direct impact of Russia’s sanctions and weaker rouble on Latvia’s economy was not significant. The drop in exports to the CIS, in particularly to Russia, was fully compensated by growth in exports to the EU countries and other markets.

● The provisional data for Jan-Sep 2015 suggest the same trend with the total merchandise export up by 2.0% y-o-y, in spite of 19.0% y-o-y decline in merchandise exports to CIS.

● However, increased uncertainty and cross border spill-overs from sanctions and economic downturn in Russia has an additional negative indirect impact on business and consumer confidence that has materialized in somewhat slower economic growth.


Sanctions affect only small part of Latvian exports


Weight adjusted merchandise exports index (2007 = 100)

Drop in exports to Russia and other CIS countries has been compensated by growth in core export markets in 2014

Source: Central Statistical Bureau of Latvia export data

1995 1996 1997 1998 1999 2000 2005 2011 2012 2013 2014 2015 Jan - Sep

0

5

10

15

20

25

30

35

25.3 22.8 21.0

12.16.6 4.2

7.9 10.6 11.4 11.6 10.77.7

5.56.2

3.9

2.9

2.92.4

1.40.9 1.0 0.9 0.7

0.6

Russia Ukraine

0102030405060708090

100 Others

Transport vehicles

Mechanic / Electr appliance

Metals

Textile

Wood

Plastics and articles thereof

Chemical manufacture

Agriculture and food

Beverages

2007 2008 2009 2010 2011 2012 2013 20140

20406080

100120140160180200

+2.3%

+4.6%

-5.0%

Total EU-27 CIS

Improved Competitiveness is a Major Export Growth Driver

Adjustment in labour costs and increased productivity have restored competitiveness

Growing export market shares point to a favourable competitive position

Export market shares (2002=100)

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

80

100

120

140

160

180

200

220

240 Bulgaria

Czech Repub-lic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovak Repub-lic

Slovenia

Source: World Trade Organization

Source: Eurostat

Unit Labour Cost (ULC) index (2005 = 100; seasonally and working day adjusted)

ULC is increasing slightly in the context of improving non-cost competitiveness and broadly in line with developments in major trading partners

Source: Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2014–2015

The Global Competitiveness Index 2014-2015 Rankings

Finland

Germany

Sweden

Denmark

Belgium

Ireland

Estonia

Spain

Portugal

Czech Republic

Lithuania

Latvia

Poland

Italy

Bulgaria

Romania

Hungary

Slovenia

Slovak Republic

Croatia

45

1013

182529

353637414243

4954

5960

707577

FinlandGermanySwedenDenmarkBelgiumIrelandCzech RepublicEstoniaLatviaLithuaniaSpainSloveniaPortugalPolandHungaryItalyBulgariaSlovak RepublicRomaniaCroatia

34

710

1420

2425262729303234

38404143

5355

Latvia ranks as a top 4 CEE country, and consideration of sustainability indicators lifts Latvia to top 3 in CEE

‒ Global Competitiveness Index Ranking

‒ Sustainability-adjusted Global Competitiveness Index Ranking

14Source: Eurostat, Note: data on 2015/Q2

20

05

Q2

20

05

Q4

20

06

Q2

20

06

Q4

20

07

Q2

20

07

Q4

20

08

Q2

20

08

Q4

20

09

Q2

20

09

Q4

20

10

Q2

20

10

Q4

20

11

Q2

20

11

Q4

20

12

Q2

20

12

Q4

20

13

Q2

20

13

Q4

20

14

Q2

20

14

Q4

20

15

Q2

90100110120130140150160170

REER (deflator: consumer price indices - 37 trading partners)REER (deflator: unit labour costs in the total economy - 37 trading partners)

Real Effective Exchange Rate (REER) index (2005 = 100)

Real Effective Exchange Rate remains in check after significant adjustment

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-20-10

01020304050607080

ULC nomin

Labour Market Remains Highly Flexible

15

Registered Unemployment and Jobseekers Rate (%)

Unemployment rate continues to fall. Recent wage increases will foster domestic demand and household consumption

Unemployment rate continuous to decline together with increased economic activity

Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations

Increase in wages has been accompanied by rise in productivity


Wages and productivity (historical average=100)

Source: Eurostat

Employment rate (% of population aged 20-64)

On track to reach 73% policy target by 2020

Gre

ece

Ma

lta

Ita

ly

Au

str

ia

Hu

ng

ary

Cy

pru

s

Be

lgiu

m

Fin

lan

d

Ne

the

rla

nd

s

UK

De

nm

ark

Cze

ch

Re

p.

Po

rtu

ga

l

Ge

rma

ny

Sw

ed

en

Cro

ati

a

Slo

ve

nia

Sp

ain

Ire

lan

d

Slo

va

kia

Ro

ma

nia

Esto

nia

Bu

lga

ria

Po

lan

d

La

tvia

Lit

hu

an

ia

-1

0

1

2

3

43.3

Real productivity growth 2010-2014 (per worker, average YoY, %)

Source: Eurostat data

Latvia’s labour productivity has demonstrated one of the strongest growth rates in recent years

EU-28 1.1%

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

Oct-1

4

Jan-

15

Apr-1

5

Jul-1

5

8

10

12

14

16

18

20

22 Registered unemployment rate (%)

Job seekers rate (%)

2000

Q2

2001

Q1

Q4

Q3

2003

Q2

2004

Q1

Q4

Q3

2006

Q2

2007

Q1

Q4

Q3

2009

Q2

2010

Q1

Q4

Q3

2012

Q2

2013

Q1

Q4

Q3

2015

Q2

0

20

40

60

80

100

120

140

Labour productivity per hour Real hourly wage

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

55

60

65

70

75

62.6

72.6

Employment rate (% of population aged 20-64)

The Pre-crisis External Imbalances Have Been Unwound, Resulting in a More Sustainable Balance of Payments Position

16

Private sector debt (% of GDP, 2013)

Source: Eurostat

Source: Bank of Latvia

Net external debt is progressively declining as a % of GDP


External Debt (Gross: EUR billion, Net: % GDP)

Current Account and its components (% of GDP)


Current Account balance has reached a more sustainable level

Latvia has one of the lowest private sector debts in the Eurozone

Financing of the Current Account (% of GDP)

Financial account flows reflect an orderly deleveraging of the economy

Lith

ua

nia

Slo

va

kia

La

tvia

Slo

ve

nia

Ge

rma

ny

Es

ton

ia

Ita

ly

Au

str

ia

Gre

ec

e

Fra

nc

e

Ma

lta

Fin

lan

d

Be

lgiu

m

Sp

ain

Po

rtu

ga

l

Ne

the

rla

nd

s

Ire

lan

d

Cy

pru

s

Lu

xe

mb

ou

rg

0

50

100

150

200

250

300

350

400

91

Eurozone = 163

Resilience to external risks is increasing as net external debt is declining rapidly

2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Goods Services Primary incomeSecondary income Current account

2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2

0

5000

10000

15000

20000

25000

30000

35000

-10%

0%

10%

20%

30%

40%

50%

60%58.1%

29.2%

Direct investment: Intercompany Lending MFIs (excl. Central Bank)General Government Other sectorsCentral Bank Net Exernal Debt % of GDP (right axis)

2007 2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2

-50

-40

-30

-20

-10

0

10

20

30

Current account Capital account Financial account

Growth Supported by FDI and Healthy Investments Shifts Towards Tradable Sector

17

FDI Stock (EUR billion and % of GDP)



Cumulative FDI geographic diversification in 2Q 2015 (%)

FDI is well diversified by source and sectors

FDI has recovered after slowdown during recession

EU countries have been dominant sources of FDI

FDI distribution by sector 2Q 2015 (%)



Non-financial investments (constant prices, structure in %)

Structure of investments has shifted towards tradable sector

2008 2010 2012 2014

0

10

20

30

40

50

60

70

80

90

100

2014 17 17

47 4 5

96 5 5

11

6 6 7

10

14 17 18

1723 19

20

28 30 31 27 Industry

Public administration and defence

Transportation and storage

Trade

Real estate and construction activi-tiesInformation and com-munication

Other

Significant FDI inflows were in financial and insurance activities, real estate and manufacturing

2008 2009 2010 2011 2012 2013 2014 2015Q1 2015Q2

0

2

4

6

8

10

12

25%

35%

45%

55%

65%

75%

8.1 8.1 8.29.4

10.3

11.612.1 12.5 12.8

33%

43%45% 46% 47%

50% 50% 52% 52%

Stock of FDI (EUR billion) Sotck of FDI (% of GDP)

27.0

16.4

11.7

10.6

3.9

3.13.62.7

21.0

Financial and insurance activities

Construction and real estate activities

Manufacturing

Wholesale and retail trade, auto repair

Electricity, air conditioning and utilities supply

Transportation and storage

Agriculture, forestry and fishing

Information and communication

Other

Sweden 19.6

Netherlands 8.0Cyprus 7.1

Russia 6.8

Norway 5.6

Germany 5.4

Estonia 4.5

Denmark 3.6

Lithuania 3.6UK 2.9

Luxembourg 2.9

Other 29.9

Inflation Driven by External Factors Remains Low

18

Currently low level of inflation reflects oil price effects and subdued food prices

Recent developments and outlook

Inflation (CPI)

● The level of inflation reflects moderate growth of economy, and particularly negative contribution of oil price and subdued food prices. Lower global energy and food prices are expected to influence inflation in the short-term.

● In the medium-term, economic growth and a gradual increase in purchasing power could intensify the impact of demand on inflation and that will determine further convergence of the price level to the European Union average.

Source: Central Statistical Bureau of Latvia, Bank of Latvia calculations

Inflation (HICP, YoY, %)

Inflation pressures are contained over the medium-term

Source: Eurostat

12-month average HICP in October 2015 (YoY, %)

Source: Eurostat

Ja

n-1

1M

ar-

11

Ma

y-1

1J

ul-

11

Se

p-1

1N

ov

-11

Ja

n-1

2M

ar-

12

Ma

y-1

2J

ul-

12

Se

p-1

2N

ov

-12

Ja

n-1

3M

ar-

13

Ma

y-1

3J

ul-

13

Se

p-1

3N

ov

-13

Ja

n-1

4M

ar-

14

Ma

y-1

4J

ul-

14

Se

p-1

4N

ov

-14

Ja

n-1

5M

ar-

15

Ma

y-1

5J

ul-

15

Se

p-1

5

-2

-1

0

1

2

3

4

5

October-0.2%

Energy (contribution, pp) Food (contribution, pp) Inflation (y-o-y, %)

Inflation excl. energy and food (y-o-y, %)

Ma

lta

Au

str

ia

Sw

ed

en

Be

lgiu

m

Po

rtu

ga

l

Cz

ec

h R

ep

ub

lic

La

tvia

De

nm

ark

Ne

the

rla

nd

s

Ge

rma

ny

(u

ntil 1

99

0 f

orm

er

te..

.

Fra

nc

e

Ita

ly

Es

ton

ia

Ire

lan

d

Fin

lan

d

Lu

xe

mb

ou

rg

Hu

ng

ary

Ro

ma

nia

Cro

atia

Slo

va

kia

Lith

ua

nia

Slo

ve

nia

Sp

ain

Po

lan

d

Bu

lga

ria

Gre

ec

e

Cy

pru

s-1.6

-1.2

-0.8

-0.4

0

0.4

0.8

1.2

0.3

EU-28 0.0%

-10

-5

0

5

10

15

20

October-0.1%

A Stable and Well Capitalised Banking Sector Prepared to Restore Credit Growth

Stable and Well Capitalised Banking Sector (1/2)

20

Latvia’s largest banks successfully passed the comprehensive assessment conducted by the European Central Bank (ECB) in 2014

● The banking system returned to profits in 2012, as the quality of the banks’ loan portfolio increases steadily since the mid of 2010 — The banking sector has reached an 12.6% ROE in the end-September

2015(1)

● While total loan portfolio continues to shrink, the most recent Euro area bank lending survey indicates increasing demand for loans from both household and business sector in the near future(2)

● The three largest banks, including the largest bank focused on non-resident deposit business, were subject to ECB’s comprehensive assessment in 2014, and successfully passed the asset quality review and the forward looking stress tests— Since November 2014 the three largest banks are subject to the Single

Supervisory Mechanism led by the ECB.

Key highlights Assets and Profits of the Banking system

Source: (1) - Financial and Capital Markets Commission; (2) – Bank of Latvia Source: Financial and Capital Market Commission

2011 2012 2013 2014

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Mortgage loans (EUR million) Other loans to households (EUR million)

Rising new household loans point to a credit recovery

Source: Financial and Capital Market Commission

Loans to residents (annual change, %) and contribution to the change (pp)

Source: Bank of Latvia; Note: *Lending data are corrected to exclude one-off effects due to withdrawal of credit institution’s licences (for the period March 2012–May 2013 Parex banka and Krājbanka effects; for the period 2013 June-2014 May GE Money Bank, Mortgage and Land bank and UniCredit Bank effects)

Growth in loan portfolio hasn’t recovered fully, as newly granted loans do not offset amortization of loans issued in pre-crisis years and write offs

New Loans granted to households 2011-2014 (EUR million)

2008 2009 2010 2011 2012 2013 2014 2015 IX*

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-1,500

-1,000

-500

0

500

1,00033.130.8 31.3

29.8 28.8 29.230.8 31.6

85

-1,100

-513

-254

174 246311 419

Total Assets (EUR billion) Profit (EUR million, rhs)

I2006

IIIIIIVVVIVIIVIIIIXXXIXIII2007









IIIIIIVVVIVIIVIIIIX

-20-10

010203040506070

-3.4

Government Financial institutions Non-financial corporations HouseholdsTotal

Stable and Well Capitalised Banking Sector (2/2)

21

Capital Adequacy (%)

Latvia’s banking sector capitalisation is well above regulatory requirements(1)

Source: Financial and Capital Markets Commission Note: *Capital adequacy has been calculated in accordance with the Capital requirements regulation as from Q1 2014 and is not directly comparable to the previous calculations due to methodology differences.** Tier 1 ratio equals CET 1 ratio.

Note: (1) The regulatory minimum capital adequacy comprises 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer Source: Financial and Capital Market Commission

Composition of FCMC liquidity ratio (EUR billion)

● The banking sector is in position to satisfy anticipated increase in demand for loans and restore credit growth, as sector’s capitalisation is high with Tier 1 ratio comprising 18.8% and liquidity ratio amounting to 67% at the end of September 2015, well in excess of regulatory requirements

● At the end-September 2015, around 62%(1) of banking capital, about 48%(2) of assets and nearly 80% of total resident loan portfolio were held by subsidiaries and/or branches of banks from European Economic Area, mostly Nordics, which have maintained their commitment to local subsidiaries, reducing contingent liability risk to government

● In April 2015 Latvia concluded sale of its shareholdings in AS Citadele bank, marking a successful exit from a successor of Parex bank, which was taken over by the Government of Latvia in November 2008

Key highlights

Liquidity remains at high level

Source: (1) - Financial and Capital Markets Commission; (2) - Association of Commercial Banks of Latvia

Latvia’s banking sector consists primarily of foreign owned institutions that have shown commitment to their local subsidiaries and branches, reducing contingent liability risk to the government

Source: Financial and Capital Market Commission

Capital ownership of the Banking system (3Q 2015)

Foreign owned banks

86%

Domestically owned banks

14%

Nordic Banks 62%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-24

-20

-16

-12

-8

-4

0

4

8

12

16

30

35

40

45

50

55

60

65

70

75Other liabilities with residual maturity up to 30 days

Deposits with residual matu-rity up to 30 days

Liabilities to MFIs with residual maturity up to 30 days

Liquid securities

Claims on MFIs with residual maturity up to 30 daysClaims on the BoL with residual maturity up to 30 days

Vault cash

FCMC liquidity ratio (rhs)

%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

02468

10121416182022

14.2 14.215.2 14.6 15.2 15.1

17 17.4 18.117.2 17.7 17.6 18.2 18.5 18.8 18.9

20.7 20.8 20.6 20.9 20.7 21.3 21.6

11.1 11.212 11.5 12 12

14 1414.9 14.9 15.2 15.2

16.3 16.6 17 17.318 18.1 17.9 18.1 18 18.4 18.4

Total capital ratio (%) CET1 ratio (%) CET ratio (%)

22

Households (EUR million)

Assets of Banks (EUR billion)

Source: Financial and Capital Market Commission. Data on 3Q 2015 Note: *The credit institution’ s license of Parex banka was withdrawn in 2012 Q1 and that of Latvijas Krājbanka – in 2012 Q2

Source: Bank of Latviia

Source: Financial and Capital Market Commission. Data on 3Q 2015 Note: *The credit institution’ s license of Parex banka was withdrawn in 2012 Q1 and that of Latvijas Krājbanka – in 2012 Q2

Non-financial Corporations (EUR million)

Liabilities of Banks (EUR billion)


Quality of Loan Portfolio Improves Steadily

Loan-to-deposit ratio has fallen below 70% on a back of growing deposits base and shrinking loan portfolio

A contraction of the banks’ loan portfolio, which replicates deleveraging of the real sector, has stabilized in 2014

Still decreasing loan portfolio reflects deleveraging of the real sector

1Q2008

2Q2008

3Q

4Q

1Q2009

2Q2009

3Q

4Q

1Q2010

2Q2010

3Q

4Q

1Q2011

2Q2011

3Q

4Q

1Q*2012

2Q*2012

3Q

4Q

1Q2013

2Q2013

3Q

4. 1Q2014

2Q2014

3Q

4Q

1Q2015

2Q

3Q

0

500

1,000

1,500

2,000

2,500

0

5

10

15

20

25

5.3

Loan loss pro-visions

Loans over 90 days past due

Share of loan loss provisions in outstanding loans (rhs)

Share of loans over 90 days past due in outstanding loans (rhs)

%

1Q2008

2Q2008

3Q

4Q

1Q2009

2Q2009

3Q

4Q

1Q2010

2Q2010

3Q

4Q

1Q2011

2Q2011

3Q

4Q

1Q*2012

2Q*2012

3Q

4Q

1Q2013

2Q2013

3Q

4Q

1Q2014

2Q2014

3Q

4Q

1Q2015

2Q

3Q

0

500

1,000

1,500

2,000

2,500

0

5

10

15

20

25

8.6

Loan loss pro-visions

Loans over 90 days past due

Share of loan loss provisions in out-standing loans (rhs)

Share of loans over 90 days past due in outstanding loans (rhs)

%

I2009

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2010

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2011

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2012

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2013

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2014

IIIII

IVVV

IVII

VIII

IXXX

IXII

I2015

IIIII

IVVV

IVII

VIII

IX

0

5

10

15

20

25

30

35

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Liabilities to parent MFI Liabilities to other MFI DepositsProvisions Equity Other liabilitiesLoan-to deposit ratio

I2009

IIIII

IVVVIVII

VIII

IXXXIXII

I2010

IIIII

IVVVIVII

VIII

IXXXIXII

I2011

IIIII

IVVVIVII

VIII

IXXXIXII

I2012

IIIII

IVVVIVII

VIII

IXXXIXII

I2013

IIIII

IVVVIVII

VIII

IXXXIXII

I2014

IIIII

IVVVIVII

VIII

IXXXIXII

I2015

IIIII

IVVVIVII

VIII

IX

0

5

10

15

20

25

30

35

Other assets

Securities

Loans

Claims to MFI

Vault cash and claims to BoL

Banks Engaged in Non-resident Deposits (NRD) Business are Subject to Much Stricter Capital and Liquidity Requirements

Total banking sector non-resident deposits to assets and GDP (%)


FCMC liquidity ratio (%)

Source: Bank of Latvia; Note: * Banks which grant more than 50% of loans to residents and receive more than 50% of deposits from residents ** Other banks

;

Additional liquidity requirements for non-resident servicing banks provide significant liquidity buffers to counter potential liquidity outflows

The FCMC requires NRD focused banks to hold an additional capital buffer ranging from 0.4 to 9.5 percent of risk-weighted assets since mid-2011

Relative amount of NRD has grown since the 2nd half of 2014 and till 1Q of 2015, mainly due to strengthening of USD against EUR

Source: Bank of Latvia, Financial and Capital Market Commission; ¹ - as of 31 December 2014

Growth rates of resident and non-resident deposits (%)


Growth rate of non-resident deposits has stabilized, and has been in line with a growth rate of resident deposits in recent years

23

Banks assets (with foreign branches) at the end of September 2015 (%)

Banks which are focused on actively engaging in NRD business have little domestic operations

Source: Bank of Latvia; Note: * Credit institutions which grant more than 50% of loans to residents and receive more than 50% of deposits from residents ** Other banks

Total lending to residents

Total resident deposits

9,5

I 2011

II III

IV

V VI

VII

VIII

IX

X XI

XII

I 2012

II III

IV

V VI

VII

VIII

IX

X XI

XII

I 2013

II III

IV

V VI

VII

VIII

IX

X XI

XII

I 2014

II III

IV

V VI

VII

VIII

IX

X XI

XII

I 2015

II III

IV

V VI

VII

VIII

IX

-15-10-505

101520253035

Anual growth rate of non-resident deposits (corrected for exchange rate fluctuation)Anual growth rate of resident deposits

1Q2011

2Q 3Q 4Q 1Q2012

2Q 3Q 4Q 1Q2013

2Q 3Q 4Q 1Q2014

2Q 3Q 4Q 1Q2015

2Q

20

25

30

35

40

45

50

55

20.421.9

23.8 25.026.9

29.1 29.8 30.231.7 31.5 32.1 31.6

33.5 34.135.6

37.239.1 38.1

33.5 34.135.7 36.6 37.1

38.8 38.9 39.340.7 39.8 39.6 39.6 39.7 40.9

43.9

47.650.5

49.0

NRD to Assets NRD to GDP

56

44

Residents servicing banks*

Banks focused on NRD business**

13.3

1Q2008

2Q3Q4Q1Q2009

2Q3Q4Q1Q2010

2Q3Q4Q1Q2011

2Q3Q4Q1Q2012

2Q3Q4Q1Q2013

2Q3Q4Q1Q2014

2Q3Q4Q1Q2015

2Q3Q

0

20

40

60

80

100

67.0

53.5

78.3

Total banking sector Resident servicing banks*Non-resident servicing banks** Minimum requirement for liquidity ratio

Outstanding Track-record of Fiscal Consolidation and Structural Reforms

Latvia is Committed to Policy Implementation and Reforms

25

Latvia’s macroeconomic adjustment programme achieved its goals, but further reforms remain as permanent component of the Government’s policy

Successful implementation of adjustment programme (2008-2011)

Correction of budgetary imbalance achieved through fiscal consolidation

Fiscal targets constantly exceeded, public finance on sound foundations

Investor and consumer confidence restored

Further Key Policy Goals

Fiscal DisciplineContinue implementation of fiscal discipline framework and

conduct fiscal policy in sustainable manner

Absorption of EU fundsEfficient use of EU funds to stimulate economic growth and

promote competitiveness

Structural ReformsEnsure long-term stability and sustainability of financial and social

systems

Public Sector EfficiencyEnhance management of state-owned assets, improve tax

compliance and reduce informal economy

Bank supervision improved

0

2

4

6

8

10

12

Latvia is Determined to Ensure Fiscal Sustainability

26

Conduct policies in a fiscally responsible way equally renewing quality and amount of public services and addressing potential risks

Recent results and fiscal forecast

Source: Ministry of Finance

● In 2015 the deficit is planned to be at 1.4% of GDP which is in line with EU fiscal discipline rules;

● Draft Medium-term Budgetary Framework Law 2016 – 2018 was elaborated by implementing substantial net deficit-reducing measures:

─ A number of revenue-increasing measures (2016 – 0,8%, 2017 – 1,2%, 2018 – 1,6% of GDP), which include cancellation of planned Personal income tax cut and introduction of Solidarity tax

─ Revision of State budget base expenditure for 2016 with horizontal expenditure reduction of 3%

─ Additional financing for priority sectors – external and internal security, healthcare and education.

● Aforementioned measures ensure that Draft Medium-term Budgetary Framework Law is not only in compliance with national and EU fiscal discipline rules, but also addresses (I) deterioration in regional security situation, (II) income inequality, shadow economy and provision of financing for other government priority sectors.

General target of fiscal policy in Latvia

0

2

4

6

8

10

12

Budget Balance – 2014 (% of GDP)

Prudent fiscal management with one of the lowest deficits in EU

Source: Eurostat

EU-28 -3%

Source: Ministry of Finance

General Government nominal balance (% GDP)

Draft Medium-term Budgetary Framework Law 2016 – 2018(* - assessment; ** - target)

Ensure responsible and sustainable fiscal policy, respecting fiscal discipline

Specific targets 2016 – 2018 Course of actions

Legal framework (FDL) and institutions (Fiscal council) have been created. Alterations are not foreseen. Implementation is crucial

Facilitate improvements in quality of life of citizens;

Foster favourable environment for economic development

Provide adequate capacity for internal/ external security given geopolitical risks

Tax policy measures;

Rational distribution of public resources towards medium term budget priorities

Increase of defence expenditure on faster pace

2011 2012 2013 2014 2015* 2016** 2017** 2018**

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

-3.3

-0.8 -0.7

-1.5 -1.4

-1 -1-0.8

Cyp

rus

Por

tuga

l

Spa

in

Bul

garia

Uni

ted

Kin

gdom

Cro

atia

Slo

veni

a

Irel

and

Fran

ce

Gre

ece

Pol

and

Finl

and

Bel

gium

Ital

y

Slo

vaki

a

Aus

tria

Hun

gary

Net

herla

nds

Mal

ta

Cze

ch R

epub

lic

Sw

eden

Latv

ia

Rom

ania

Lith

uani

a

Ger

man

y

Est

onia

Luxe

mbo

urg

Den

mar

k

-10

-8

-6

-4

-2

0

2

-1,5

0

2

4

6

8

10

12

Long Term Sustainability of Public Finances

27

Recent measures taken by Latvia address sustainability of the age-related expenditure in the long term

Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia

Source: The State Social Insurance Agency

● Since 2001 Latvia maintains a reformed pension system consisting of three tiers, whereby state compulsory unfunded pension scheme (the 1st tier) is complemented with a state funded pension scheme (the 2nd tier) and private voluntary pension scheme (the 3rd tier)

● In 2012 a number of progressive measures were introduced to address long term sustainability of the pension system:— starting with 2014 retirement age is gradually increased by 3 months each

year until it reaches 65 years in 2025;— minimum contribution period to secure full pension was increased from 10 to

15 years starting from 2014 and up to 20 years starting from 2025;— contributions to the funded, e.g. 2nd tier, pension scheme increased from 2%

to 4% in 2013, and to 5% in 2015, and are planned to rise further to 6% in 2016.

Latvia’s Pension System and recent reforms Age-related spending, projected change in percentage points of GDP, 2013-2060

Latvia is well positioned to withstand fiscal challenges arising from the aging population

Source: European Commission Ageing Report, May 2015

Croat

ia

Gre

ece

Denm

ark

Italy

Eston

iaSpa

in

Portu

gal

EU28

Lithu

ania

Irelan

d

Austri

a

Slovak

ia

Ger

man

y

Luxe

mbu

rg

Sloven

ia

-3.0

-1.0

1.0

3.0

5.0

7.0

-1.6

EU-28 1.8%

2nd tier pension scheme will gradually take over part of the pension obligations from the public, e.g. 1st tier, pension scheme

Source: European Commission Ageing Report, May 2015

0

2

4

6

8

10

12

Age-related spending, in percentage points of GDP, 2013

Latvia’s age-related spending is one the lowest in the EU

10.0

15.0

20.0

25.0

30.0

16.7

EU-28 24.6%

The 2nd Tier Pension Net Assets under Management (EUR billion and as % of GDP)

2007 2008 2009 2010 2011 2012 2013 20140.0

0.5

1.0

1.5

2.0

2.5

0.0%

2.5%

5.0%

7.5%

10.0%

0.3

0.7

1.01.2 1.2

1.51.7

2.0

1.5%

2.7%

5.3%

6.5% 6.1%6.6%

7.2%

8.3%

2nd tier pension net assets (EUR billion) 2nd tier pension net assets (% of GDP)

Practical Actions and Strong Commitments are in Place to Continue Structural Reforms Aiming to Improve Public Finances

28

Structural reforms to ensure efficient use of budgetary and public resources is contributing to fiscal sustainability

Financial System Banking system recapitalised, role of regulator strengthened, deposit guarantee laws

streamlined

Public Administration Making public administration more efficient, unified public wage grid to keep wages under

control, optimization of public services

Reforming management of state-owned enterprises

Source: Ministry of Economy, Ministry of Finance; OECD Review of the corporate governance of state-owned enterprises Latvia

Improving tax compliance and combating shadow economy

Source: Ministry of Finance, Ministry of Economy; (1) - The overall tax burden is estimated at 28% of GDP in 2014;

● The Tax Policy Strategy aims to increase the overall tax burden to 1/3 of GDP(1) mainly through increasing the tax compliance.

● Recently introduced measures include

— Since 2015 under certain criteria in order to avoid tax fraud and tax avoidance, company board members may become personally responsible for tax debts of their companies;

— Improvements of the exchange of information between Financial Investigation Unit and Tax administration to improve business environment and fair tax collection is on the political agenda.

● January 2015 increase in the national minimum wage from EUR 320 to EUR 360 shall have a positive effect on tax collection because it reduces the prevalence of envelope, e.g. underreported, wages.

● Moreover, changes to the public procurement law to be introduced in 2015 will require the main contractors and sub-contractors to have no tax debts and to have wage levels comparable to an industry’s average.

● In 2014 Latvia established a conceptual model (based on OECD guidelines) and adopted a legislation to reform the management of state-owned enterprises.

● The aim of the reform is to increase the efficiency and corporate governance of capital companies owned by the public sector— Latvian state fully owned 66 enterprises and had a decisive influence

in 5 companies at the end of 2014;

— an aggregate value of the state participation in the capital of the state-owned enterprises amounted to 18.2% of GDP.

● The reform envisages appointment of institution responsible for monitoring financial performance and implementation of corporate governance principles to increase the accountability, transparency, and return on capital (e.g., dividends) of state-owned companies— dividend income from state-owned enterprises amounted to 1.6% of

general government budget revenues in 2014 and the budget planned for 2015 totals 1.4% of general government budget revenues.

Government Policy Measures Building Foundation for the Sustained Growth

29

Structural reforms in education, employment and judicial environment help improving labour market and business conditions, while efficient use of EU funds will promote competitiveness

and stimulate economic growth

Education & Social Sector Education and healthcare system reforms aimed to increase efficiency

Business Environment Addressing labour market issues through education and employment policies

Source: National Reform Programme 2015; European Commission, Country Report Latvia 2015

Allocation of EU funds for 2014-2020 by priority axes

26%

13%

12%11%

11%

10%

7%

4%3%

4%

Promoting sustainable transport and removing bottlenecks in key network infrastructuresProtecting the environment and promoting resource efficiencyInvesting in education, skills and lifelong learn-ingSupporting the shift towards a low-carbon economy in all sectorsStrengthening research, technological de-velopment and innovationPromoting social inclusion and combating povertyEnhancing the competitiveness of small and medium-sized enterprisesEnhancing access to, and use and quality of, information and communication technologiesPromoting employment and supporting labour mobilityOther areas

Source: Ministry of FinanceSource: Ministry of Finance

EU cohesion policy accompanies structural reforms

● Latvian economy and the goals envisaged by the National Development Plan are strongly supported by implementation of EU cohesion policy and effective utilization of EU structural funds

● EUR 4.4 billion were allocated to Latvia in EU structural assistance for the 2014 - 2020 programming period. During 2007 - 2013 programming period Latvia has absorbed EUR 4.5 billion of structural funds

● The funds were allocated and will be utilised across major nine priority areas with an aim to enhance competitiveness of Latvia’s economy, and to build foundation for the sustained growth

Legal Environment

Improving judicial system by strenghtening role of Judicial Council, strenghtening competence of courts and law enforcement authorities and reorganising the position of insolvency administrators

Labour Market SME access to financing, export oriented programmes, reduction of administrative burden

Structural Reforms and High Institutional Strength Facilitate Favorable Business Environment and Encourage Investments

30

World Bank Worldwide Governance Rankings

Strong Governance supports the Economy and Business

Source: World Bank, 2013 Rankings

Latvia is consistently ranked as a top 2 CEE country

Source: World Bank, Doing Business 2015

Voice and Accountability

Political Stability and Absence of Violence

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

70

65

76

80

73

64

66

63

68

69

66

63

61

75

76

75

75

76

Income Group Average Regional Average Latvia

Denmark

United Kingdom

Sweden

Germany

Austria

Lithuania

Netherlands

Poland

Slovak Republic

Belgium

Romania

Hungary

46

89

1113

1417

2123

2425

2723

3233

3738

4244

4851

5456

Adjusted Top Statutory Tax Rate on Corporate Income (2014), %

Bulgaria

Cypru

s

Lithuania

Slove

nia

Poland

Finla

nd

Estonia

Slova

kia

Denmark

Austria

Luxem

bourg

Germ

any

Portugal

Malta

1013 13

15 15 16 1719 19 20 20 21 21 21 22 22

25 25 25 26

29 30 3031 32

34 35

38Latvia has one of the lowest corporate Income tax rates in the EU

Source: Eurostat, Taxation trends in the European Union 2014

Implicit tax rate on capital (2012), %

Source: Eurostat, Taxation trends in the European Union 2014

EstoniaLithuania

LatviaIreland

NetherlandsSlovakia

Czech RepublicPoland

SloveniaHungary

GermanyAustria

SpainCyprus

PortugalFinland

SwedenBelgium

United KingdomItaly

France

8.19.89.9

13.013.7

16.718.0

19.019.6

21.422.2

25.025.3

26.029.529.9

30.635.535.7

37.046.9

Light taxation of capital provides stimulus to business investments

World Bank ‘Ease of Doing Business’ Ranking

Government Debt and Funding Strategy

Public Debt Remains at Moderate Levels

32

Latvia remains committed to keeping government debt at moderate levels

● Fiscal consolidation and reduction of the deficit along with economic growth has helped stabilise levels of government debt

● General government debt is amongst the lowest in the EU at 41% of GDP at the end 2014— General government debt increased slightly in 2014 due to pre-

funding for 2015, but has fallen sharply with a repayment of EUR 1.2 billion to European Commission in January 2015

— Latvia enjoys one of the lowest debt servicing costs across the region, significantly lower than the EU and Eurozone averages

● Since March 2014 Latvia participates in the European Stability Mechanism, which provides additional financial stability to its members

Key Characteristics of Latvia’s Government Debt

Interest costs (% GDP)

NB: General government debt includes that of central government, local government and social security funds. The debt ratio is calculated in accordance with European System of Accounts (ESA) standards, a methodology which differs from that used to calculate the cash flow based budget deficit numbers

Source: Eurostat, The Treasury; Forecasts: 2015 – 2017 General Government Debt as % of GDP are the Treasury forecasts

General Government Debt (EUR million; Year End, % of GDP, ESA methodology)

General Government Debt – 2014 (% GDP)

Conservative debt position

Source: Eurostat

Eston

ia

Bulgar

ia

Latv

ia

Czech

Rep

ublic

Denm

ark

Slovak

ia

Nethe

rland

s

Ger

man

y

Sloven

ia

Croat

ia

Franc

e

Belgium

Cypru

sIta

ly

0

50

100

150

200

41%

Conservative debt position

EU-28 86.8%

2010 2011 2012 2013 2014 2015 (f) 2016 (f) 2017 (f)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

5,000

10,000

15,000

8,418 8,700 9,079 8,8769,861 9,137

10,126 9,965

46%43%

41%38%

41%

36%38%

35%

2011 2012 2013 2014 2015(F) 2016(F)1.00

1.50

2.00

2.50

3.00

3.50

Latvia Lithuania EU-28 Eurozone

Source: European Economic Forecast, Autumn 2015, European Commission

Central Government Debt Profile

33

International Loan Programme has been largely refinanced in international capital markets, while government debt redemptions remain moderate in the short-term

Source: The Treasury, as of the end of September 2015Source: The Treasury

Debt Redemption Profile (30 September 2015, EUR million)

Source: The Treasury; Note: Total borrowing requirement 2016-2018 is estimated at EUR 3.5 billion.

Debt redemptions and borrowings (EUR billion)

Debt structure by instruments (EUR million)

Total foreign debt82%

Total domes-tic debt

18%

Eurobonds63%

Foreign loans from financial

institutions (incl. EC)

20%

Domestic securities

14%

Other domes-tic debt

4%

Source: The Treasury

Composition of Central Government Debt (as of September 2015)

2011 2012 2013 2014

-2

-1

0

1

2

3

0.3

1.7 2.00.6

0.4

0.4

0.4

-0.7 -0.4 -0.4-0.4

-1.2-1.0

-0.4

Eurobond issues Domestic securities issuesEurobond redemption Domestic securities redemptionRepayment of IFI's loans Net borrowings

Debt redemption for 2015 was largely pre-funded in 2014

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

Sep-1

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Other

Loans from financial institutions (incl.IMF and EC loans)

Eurobonds

Domestic T-bonds

Domestic T-bills

Oct - Dec 2017 2019 2021 2023 2025 2027 >=2029

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800Domestic debt redemption

Other external debt liabili-ties

World Bank loan (Program)

EC loan (Program)

Eurobonds

Conservative Borrowing Strategy, Based on Pre-funding

34

Source: The Treasury; (1) - This parameter is measured annually as of the end of year - outstanding amount of domestic debt securities as of 31 December 2013 was EUR 967 million; (2) - Fixed rate debt with a maturity in excess of one year; (3)- central government debt at the end of the period less the liquid assets that are not classified as risky, and increased by guarantees classified as risky, and derivative financial instrument liabilities not classified as risky

● Goal:

— To ensure continuous borrowing opportunities in the international and domestic financial markets on optimal terms and conditions

● Principles:

— Flexibility (towards timing, maturities and currencies)

— Achieve balance between risks and costs

— Consistency and transparency to markets

● Tasks:

— Foster development of the domestic financial market in order to promote its gradual integration into the single financial market of the euro area

— Broaden the investor base with borrowings in the international financial markets, maintain regular communication with the investor community

Medium-term Borrowing Strategy


Parameters Strategy 30 Sep 2015 31 Dec 2014

Domestic debt securities at the end of year

Not less than at the end of preceding year

EUR 1,189 million(1)

EUR 1,047 million

Maturity profile (%)

— up to 1 year ≤ 25% 10,1% 21%

— up to 3 year ≤ 50% 30,6% 36%

Share of fixed rate(2) ≥ 60% 93,2% 82%

Macaulay duration (years)

3.65 - 5.15 4.54 4.16

Net debt(3) currency composition

100% EUR with a deviation of +/- 5%

100% 100%

Debt portfolio management


Outstanding Benchmark issues

Curr Issue Date Maturity Date Issue Size Cpn (%)

EUR

05/03/2008 05/03/2018 EUR 400m 5.500

21/01/2014 21/01/2021 EUR 1,000m 2.625

30/04/2014 30/04/2024 EUR 1,000m 2.875

USD

22/02/2012 22/02/2017 USD 1,000m 5.25

12/12/2012 12/01/2020 USD 1,250m 2.75

16/06/2011 16/06/2021 USD 500m 5.25

In 2014 Latvia has successfully extended its EUR curve with 7 and 10 year benchmark issues


Broadening of investor base (allocation of Latvia’s 2024s)

● In both of its 2014 EUR benchmark offerings Latvia achieved a broad distribution in terms of investor centres as well as investor types, with a high share of allocations going to the real money institutional investors

47%

18%

17%

16%

1% 1%

Germany/Austria

CEE

Switzerland

UK

Asia/ME

Other

46%

27%

18%

6%

3%

Fund Manager

Insurance/Pension funds

Banks/Private banks

Central banks

Hedge funds

Latvia has prudent debt management strategy

35Source: The Treasury

Achievements in the domestic market

● Primary dealer system in Latvia is operating since 11 February 2013● The outstanding amount of domestic T-bonds and T-bills constituted

EUR 1.2 billion as of September 2015● The Treasury maintains regular domestic debt securities auctions by

offering T-bills and T-bonds— In 2014 a new long-5-year T-bond programme was opened, and

in January 2015 a new 3-year and in June 2015 a new 5-year T-bond programmes were opened

— In 2014 a positive net issuance amounted to EUR 80 millions— For the first time in history Latvia achieved a negative yield

(-0.012%) on its 6 months T-bills benchmark auction in April 2015 ● In 2014 Savings Bonds were introduced to target retail investors

— EUR 5 million were outstanding as of the end of September 2015

Domestic securities outstanding by original maturity (as of 30 September 2015)

Domestic Market Continues to Perform Strongly

Demand is steady and average yields remain low

20

13

/01

20

13

/03

20

13

/05

20

13

/07

20

13

/09

20

13

/11

20

14

/01

20

14

/03

20

14

/05

20

14

/07

20

14

/09

20

14

/11

20

15

/01

20

15

/03

20

15

/05

20

15

/07

20

15

/09

20

15

/11

-0.1

0.4

0.9

1.4

1.9

2.4

0.020.045

0.201

0.863

6 months* 12 months 3 years 5 years

Source: The Treasury Bid-to-Cover ratio: Bid Amount to State Treasury offered amount* - Note: Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9

months.

Domestic T-Bill and T-Bond Competitive Multi-Price Auctions

Weighted Average Yields on Domestic securities auctions (%)

Source: The Treasury; * Note - Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9 months.

Low yields reflect continued investor confidence

Savings bonds <1%12 months T-bills 7%

3 years bonds 27%

5 years bonds 42%

10 years bonds 21%

11 years bonds 2%

12

-m 5-y

5-y

6-m

*

3-y

3-y

3-y

6-m

*

3-y

3-y

5-y

3-y

5-y

12

-m 5-y

3-y

6-m

*

November Jan-Feb Mar-Apr May

June July Sept-Oct

Nov

2014 2015

05

1015202530354045

123456789

Amount sold, million EUR (LHS) Bid-cover Ratio (RHS)

Credit Positioning of Latvia

Latvia’s Strong Credit Fundamentals vs. its Peer Group Inside and Outside of the Eurozone

37

Latvia Lithuania Poland Slovakia Czech Republic

Belgium EU-28(3)

Credit Ratings and outlook (M/S&P/F)

A3/A-/A-(st/st/st)

A3/A-/A-(st/st/st)

A2/A-/A-(st/pos/st)

A2/A+/A+(st/st/st)

A1/AA-/A+(st/st/st)

Aa3/AA/AA(st/st/neg)

Debt/GDP(1)

2013 2014 2015(F)

Deficit/GDP(1)

2013 2014 2015(F)

GDP growth(1)

2013 2014 2015(F)

GDP per capita(2) (EU-28=100) 2012 2013 2014

CA/GDP(1)

2013 2014 2015(F)

39.1 38.854 54.6 45.2

105.187.3

40.6 40.755.9 53.5 42.7

106.788.6

38.3 42.9 50.4 52.7 41

106.787.8

-0.9

-2.6

-4

-2.6

-1.3

-2.9-3.3

-1.5-0.7

-3.3-2.8

-1.9

-3.1 -3

-1.5 -1.1

-2.8 -2.7-1.9

-2.7 -2.5

33.5

1.3 1.4

-0.5 0 0.2

2.43 3.3

2.52

1.3 1.42.4

1.7

3.5 3.2

4.3

1.31.9

60 69 66 74 82

120

64 73 67 75 82

119

64 74 68 76 84

119

-2.1

1.4

-0.9

0.7

-1.1

1 1.5

-2

3.9

-1.1 -0.8-2

0.81.6

-1.8-0.8 -0.5

0

-2.5

1.8 2.2

Source: (1) - European Commission, Autum Forecast 2015(2) - Eurostat(3) - European Commission in the forecast years 2015-16 publishes aggregates for general government debt on a non-consolidated basis (i.e. not corrected for intergovernmental loans). To ensure consistency in the time series, historical data are also published on the same basis. For 2014, this implies 1.8 percentage points higher debt-to- GDP ratio in the EU-28 than the consolidated general government debt ratio published by Eurostat.

Conclusion

39

Strong and Sustainable Economic Growth

(3,9% average in the last 4 years)(1), Decreasing Unemployment and

Increasing FDI

Resilient Export Growth has improved the Balance of Payments

and led to a Sustainable Current Account Balance, while rapidly

Declining External Debt reduced vulnerability to external risks

Well Capitalised Banking Sector is in Position to Restore Credit Growth

and to Promote Economic Development

Latvia’s Economy remains Competitive and is supported

by the Tradable sector

Strong Governance Indicators and Institutional Strengths increased

by joining the Eurozone

Long Term Growth is reinforced by Predictable Public Policies as the

Government has established a Track Record of Successful Structural

Reforms

Sustainable Debt Levels accompanied by Prudent Fiscal

Management

Latvia recovered from the economic recession and managed to build-up an outstanding fiscal position, together with a sustained growth, based on an increased competitiveness and

strengthening domestic demand

Latvia is benefiting from Eurozone Membership since 1 January 2014

Source: (1) - Central Statistical Bureau of Latvia

Latvia Investment Highlights

40

Thank You

Republic of Latvia A Performing Eurozone Economy Presentation November/December 2015.

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Transcript of Republic of Latvia A Performing Eurozone Economy Presentation November/December 2015.