Analytics, Baltic, Banks, Financial Services, Shadow economy

The outgoing Bank of Latvia governor indicated that weak lending is also one of the reasons for Latvia's slowing economic growth. For a long time already, lending in Latvia has remained weaker than in the two Baltic neighbor countries, even though borrowers' purchasing power has been strengthening in recent years and the amount of outstanding debts has been reducing. 

Rimsevics noted that the domestic credit to private sector/GDP ratio has dropped to 40%, which is the lowest point in 15 years. The low level of loan obligations is an indication of an unused lending potential.

Lending to non-financial institutions declined in 2019. In October, their loan portfolio had grown 3.5 percent on year. The dynamic was mainly due to long-term loans issued to major investment projects, Rimsevics said, adding that when it came to lending to small and medium-sized non-financial enterprises, banks  remained cautious and included potential risks in higher interest rates. 

The portfolio of household loans grew by 0.8% on year in October, largely thanks to a 1.8% increase in housing loans. 

"One of the reasons why our neighbor countries are ahead of us in lending is companies' low capitalization. Although since 2015 it has grown by an estimated 1.5 percentage points, it is still significantly lower than in the neighbor countries," Rimsevics said.

Citing a study by the Stockholm School of Economics in Riga (SSE Riga), Rimsevics said that the share of Latvia's shadow economy has increased against GDP since 2016 and hit 24% of GDP in 2018, which means that in Latvia the shadow economy is much larger than in the neighbor countries.

"From creditors' perspective, a high proportion of shadow economy is a major obstacle to lending, as it directly affects the security of financial services," the Bank of Latvia governor said.

Legislative issues, which create legal uncertainties for financial services providers, are another obstacle hampering lending growth. Despite significant improvements made in recent years, there is still room for further improvement, Rimsevics said.

In the ranking measuring countries by the efficiency of their legal framework, Latvia has climbed from 120th spot to 93rd place, but is still lagging the neighbor countries, Rimsevics said. 

On Monday, outgoing Bank of Latvia president Rimsevics had his en-of-term press conference. His term in for office expires on December 21, when new president Martins Kazaks takes the office.

As reported, Rimsevics has been charged with two counts of graft, as well as money laundering. In the same criminal case, businessman Maris Martinsons has been charged with aiding and abetting bribery and aiding and abetting graft, as well as money laundering.