changing latvia in the changing euro area
DESCRIPTION
Presentation by Zoja Razmusa, Member of Council, Bank of Latvia. Euro Conference Latvia 2013.TRANSCRIPT
Changing Latvia in the Changing Euro Area
Zoja Razmusa
12 September 2013
CHANGES FROM THE LATVIAN PERSPECTIVE
Economy is dominated by micro enterprises while large enterprises contribute around one third of the total value-added created by businesses
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2005
20
11
Micro Small Medium Large
Economically active market sector statistical units (%)
Source: Central Statistical Bureau of Latvia; Eurostat
19
23
26
32
Micro Small Medium Large
Value added by enterprise size class, non-financial business economy (available
information for 2010, %)
During crisis the economy re-adjusted towards a more export-oriented model
125.5%
0
20
40
60
80
100
120
140
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
F
2014
F
2015
F
Exports Imports
Exports and imports to GDP ratio (%)
Sources: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast.
With euro area countries becoming more important trading partners for Latvia, euro is a major currency in foreign trade settlements
Currency structure of foreign trade turnover in Latvia (%)
Source: Central Statistical Bureau of Latvia.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012
Other currencies (services) Other currencies (goods) USD (services)
USD (goods)
EUR (services)
EUR (goods)
Merchandise export breakdown by country (mln LVL)
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
2000 2005 2008 2012
Other
Other EU
Scandinavia(ex Finland) +UK CIS
Baltics*
Euro area
* Estonia included in the euro area since 2011
Latvia’s export has undergone a significant diversification, diminishing the vulnerability to asymmetric shocks
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2005 2008 2013 1H
Others
Textiles
Transport vehicles
Mineral products
Chemical
Machinery and electrical equipment
Base metals
Food products
Wood
Structure of exports (%)
Sources: Central Statistical Bureau of Latvia, Bank of Latvia..
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2005 2008 2013 H1
Government services, n.i.e. Personal, cultural and recreational services Other bussiness services
Royalties and licence fees
Computer and information services Financial services
Insurance services
Construction services
Communication services
Travel
Other transportation services Pipeline transport
Auto transport
Railway transport
Air transport
Sea transport
Services Goods
Latvian economy being sufficiently flexible has undergone a significant adjustment and regained competitiveness: wage-productivity gap has been closed
Real hourly wage and labour productivity per hour in manufacturing (s.a., 2005 Q1
= 100)
Sources: Central Statistical Bureau of Latvia;; Bank of Latvia staff calculations.
90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1H
Bulgaria
Czech Republic Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Republic Slovenia
Merchandise export shares in world import (2002=100)
100
120
140
160
180
Q1
2005
Q
3 Q
1 20
06
Q3
Q1
2007
Q
3 Q
1 20
08
Q3
Q1
2009
Q
3 Q
1 20
10
Q3
Q1
2011
Q
3 Q
1 20
12
Q3
Q1
2013
Labour productivity Real wage
Macroeconomic challenges
• No ailing macroeconomic imbalances are evident as external and internal balance has been restored and competitiveness has been regained.
• Challenges ahead are rather of structural nature • Labour market: long-term unemployment; quality of
education • Product market: export sophistication; innovations,
R&D; business environment
Changes in monetary policy framework (I)
ESCB Bank of Latvia until 2014 Main channel of monetary transmission
Interest rate channel Exchange rate channel
Main source of liquidity for the banking system
Central bank liquidity providing -open market operations
Central bank liquidity providing - foreign exchange operations Liquidity obtained from the mother companies, external financing
Excess liquidity in the banking system
~250 bln. EUR (2.6% of GDP) ~ 700 mln. LVL (~4.3% of GDP)
Role of exchange rate
Flexible exchange rate, FX interventions only in exceptional circumstances
Tightly fixed exchange rate, automatic FX interventions
Increasing role of interest rate channel will be determined by currency structure of private sector borrowing from banks
non-financial corporations
0
1
2
3
4
5
6
7
8 Bln. LVL
Volume in lats Volume in euro Volume in other currencies
0
1
2
3
4
5
6
7
8 Bln. LVL
Outstanding bank loans to
households
Source: Bank of Latvia.
Changes in monetary policy framework (II)
Eurosystem Bank of Latvia
Main refinancing operations
0.5% 2%
Marginal lending facility
1% 2.5%–7%
Deposit facility 0% 0.05%–0.075%
Minimum reserve requirement ratio
0–1% 0–2%–4%
Non-traditional monetary policy operations
Long-Term Refinancing Operations Outright Monetary Transactions Securities Markets Programme
None
Money market rates in Latvia have historically been higher and more volatile than in the euro area
3 month money market rates in Latvia vs the euro area
0
1
2
3
4
5
6
7
jan.2010 jan.2011 jan.2012 jan.2013
RIGIBOR 3M EURIBOR 3M
12 month money market rates in Latvia vs the euro area
0
1
2
3
4
5
6
7
8
9
10
jan.2010 jan.2011 jan.2012 jan.2013
RIGIBOR 1Y EURIBOR 1Y
% %
RECENT POLICY CHANGES IN THE EURO AREA
Euro area's policy response to crisis
POLICY AREA BEFORE THE CRISIS NOW
Economic and fiscal policy
Stability and Growth Pact (SGP)
Enhanced EU economic governance under the European semester; A reinforced fiscal surveillance (SGP; Fiscal Compact) A new initiative – macroeconomic surveillance (Macroeconomic Imbalances Procedure (MIP)) Monitoring of structural reforms (Europe 2020 Strategy)
Structural budget balance, general government (% of GDP), 2003-2007 average
-7 -6 -5 -4 -3 -2 -1 0 1 2 3
Greece Portugal
Italy Malta
France Cyprus
Slovakia Euro area average
Slovenia Latvia
Germany Austria
Belgium Netherlands
Estonia Luxembourg
Spain Ireland Finland
Source: European Comission.
New threshold
Countries that tightened fiscal policy during the boom can relax during the dowturn. Countries that did not, cannot
FIDKSE
BG
LU
ES
NE
IE
EEBE
CY
AU
DE
SKSI
CZLV
LTFRPL
IT
UK
RO
MT
PT
GR
HU
-1
0
1
2
3
4
5
6
7
-8 -6 -4 -2 0 2 4Chan
ges
in s
truc
tura
l bal
ance
201
1-20
13
(% o
f GD
P)
Average structural balance 2004-2008 (% of GDP)Source: European Comission.
Sovereign risk assessments by markets in the euro area
2008
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0.0 25.0 50.0 75.0 100.0 125.0
Gov
ernm
ent b
ond
yiel
ds (%
)
Government debt (% of GDP)
2012/2013
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0 25 50 75 100 125
Gov
ernm
ent 1
0Y b
ond
yiel
ds Ju
ly 2
013
(%)
Government debt in 2012 (% of GDP)
Source: Eurostat.
Permanent vs temporary changes in policy framework
• Extraordinary loose monetary policy and non-standard monetary policy measures are temporary o should and will be withdrawn when economic conditions in
the euro area normalize
• Moreover, these measures cannot replace the necessary structural reforms and fiscal discipline, going forward
• Changes to the euro area's fiscal and financial frameworks, on the other hand, are permanent
78,7%
82,7%
86,1%
87,3%
91,2%
10,4%
8,7%
3,6%
5,4%
4,5%
10,8%
8,6%
10,3%
7,3%
4,3%
0% 25% 50% 75% 100%
Latvia must show solidarity with other European countries because in the long run it will be beneficial also for us
In the economic sphere, Latvia should activelly collaborate with the core partners
Low interest rates on loans are important for the development of the country and for individual borrowers
In the coming years, the national debt and debt service burden should be reduced
The Government should not spend more than it earns
To what extent do you agree with the following statements?
Fully + more agree Fully+ more disagree Don't know/NA
Population in Latvia generally shares euro area's main working principles
Source: Latvijas Fakti.
