Analytics, Banks, Direct Speech, Economics, Financial Services, GDP, Latvia

The third quarter was unique in recent times, posting a positive goods and services balance (1.5% of GDP), indicating an excess of goods and services exports over imports. On the one hand, such data are pleasing, but on the other hand, the positive balance has formed on the account of shrinking imports. This was not happening because imports had been replaced by goods produced in the domestic market but because of the stagnating oil prices, weak demand for raw materials, which reflects a weak foreign demand and insufficient investments in production. The formation of the surplus was also fostered by the increasing services exports.

In the third quarter of this year, the deficit in the goods balance dropped year-on-year, and was at 390.1 mln euro (6.1% of GDP). This development resulted from the increase in goods exports by 0.6%, which was substantially exceeded by the drop in imports by 5.1%. Imports continue to shrink for such categories of goods as mineral products, mechanisms, electrical equipment and optical equipment and mechanisms. This development is an illustration for the above mentioned factors: stagnation in oil prices, slow economic development in foreign markets, which has a negative effect on domestic production and thus the demand for raw materials imports and investment, for instance, in production equipment. Even though goods exports have remained close to the level of the previous year, positive performers were, for instance, grain and vegetable products, chemical industry products and food industry products.

The positive balance of services was 485.9 mln euro (7.6% of GDP), and year-on-year, it has increased. The changes resulted from an increase in telecom and computer services granted to non-residents and an increase in construction services.

A negative contribution was continued to be made by the drop in rail and transport by sea services, for which the increase in automobile transport services failed to compensate. Revenue from foreign visitor stays in Latvia has dropped. This could be explained by the base effect from the higher expenditures by foreign visitors last year, when a number of events took place around this time in Riga in relation to Latvia's presidency of the European Union (EU).

According to the Central Statistical Bureau data, the number of foreign guests and the length of their stay in Latvian tourist accommodations in the third quarter were on the rise. This was mostly on the account of the influx of visitors from the United Kingdom, the United States and Spain. The number of visitors from Russia has remained at the level of the previous year. Tourism industry representatives evaluate this dynamic as very positive, given that no events of international significance that would match the ones during the previous two years, which fostered an increase both in the number of visitors and revenue, have taken place in Latvia this year.

In the third quarter of 2016,  the primary income account balance was -24.8 mln euro or 0.4% of GDP. The inflows of EU funds were lesser than in previous quarters (28.4 mln euro or 0.4% of GDP). The secondary income surplus was 22.5 mln euro or 0.4% of GDP. The influx of EU funds was 19.6 mln euro or 0.3% of GDP.

The capital account in the third quarter was at  -2.4 mln euro or 0.04% of GDP. This resulted from the negligible influx of EU funds during this quarter.

The cross-border flows of finances in the financial account in the third quarter of 2016 were affected by decisions both in the private and public sectors. In total, assets abroad shrank by 718.9 mln euro (11.2% of GDP) and liabilities to non-residents diminished by 769.5 mln euro (12.0% of GDP).

The largest cross-border financial flows in the private sector were the drop in credit institution deposits with foreign banks (1.3 bln. euro or 19.7% of GDP in all) and the decrease in credit institution portfolio investments abroad (301.6 mln euro or 4.7% of GDP). This resulted from the drop in non-resident deposits in Latvia in the amount of 822.7 mln euro (12.8% of GDP). This development was fostered by such factors as the stricter demands for the prevention of legalization of funds obtained through criminal activity in Latvia and the weak economic growth in Russia. The drop in credit institution deposits is also an illustration for the regular interbank transactions, which are affected by decisions by groups of banks on liquidity placement within the group.

The financial flows determined by the public sector decisions were related to the participation of Latvijas Banka in the asset purchase programme within the Eurosystem framework. In implementing the government bond purchase programme, the most important transactions on the assets side were the investments by Latvijas Banka in debt securities (392.5 mln euro or 6.1% of GDP).

Financial transactions in euro within the TARGET2 payment system framework are registered accordingly also on the liabilities side of the financial account and, since the incoming influx of money in euro (for instance, the drop in credit institution deposits and portfolio investments abroad) slightly exceeded the outgoing foreign payments in euro (the largest ones of those in this period were related, for example, with the investments of the central bank in debt securities), the foreign liabilities dropped in the amount of 30.5 mln euro (0.5% of GDP).

Foreign direct investment (FDI) flowed into Latvia in the amount of 233.3 mln euro (3.6% of GDP). The most substantial FDI inflows were in the financial and insurance activities and in retail trade, construction and information and communication service activities. By country, the largest FDI inflows came from Austria, Estonia, Sweden and Lithuania.