Latvia’s current account demonstrated recovery in Q4 2015 and throughout the year as a whole, which was mostly influenced by the dynamics in the balance of goods. This serves to reflect a decline in the imports of goods due to weak internal investment activity, slow export development and decline of global prices.
Under conditions of weak external demand, exports of goods retained positive growth rates. In Q4 2015, Latvia’s payment balance’s current account demonstrated a surplus of EUR 90.6 million or 1.4% of GDP; in Q3 there was a deficit of 2.9% of GDP. Current account deficit had declined to EUR 299.5 million or 1.2% of GDP in 2015. With that, the goods and services trade balance in 2015 has improved in comparison with 2014. Its deficit was EUR 347.2 million or 1.4% of GDP, notes Bank of Latvia economist Linda Vecgaile.
As the goods balance deficit continued to decline in Q4 2015 (to EUR 379.9 million or 5.9% of GDP) and demonstrating a more rapid quaternary decline in the last five years, 2015 demonstrated improvements in the overall balance of goods (deficit had declined to EUR 2.1 billion or 8.7% of GDP; this index was 9.6% of GDP in 2014). This development in exports of goods was dictated by the presence of slight positive growth (1.0% in comparison with 2014). The decline of imports of goods was dictated by the decline in the majority of import goods, which is mostly tied to the decline of prices of raw materials in the world, weak export development and weak investment activity. The largest decline in imports was noted in the mineral products, textile materials and metal goods. The growth of exports of goods was contributed by development in export goods groups like mechanical devices and mechanisms, plant products, chemical products and wood. Data of the World Trade Organization points towards the share of Latvia’s export market in the world and its continued growth. It is also worth mentioning accomplishments in the development of innovative products, including AirDog UAV. Among the factors that benefit exports of goods are the recent record-large harvest of grains and last year’s realized strategy in the woodworking industry, comments the economist.
The balance of services in Q4 2015 remained on the level of the previous year (EUR 452.7 million or 7.0% of GDP in Q4 and EUR 1.76 billion or 7.2% of GDP in 2015; EUR 1.74 billion or 7.4% of GDP in 2014). In 2015, exports of services demonstrated 4.9% increase. Over the course of the year, positive dynamic was demonstrated by travel, financial services, telecommunications and IT services.
Although there was a reduction in the number of tourists from Russia in 2015, it was compensated with the increase in the number of tourists from European countries.
Railway services declined because of the decline of cargoes carried to and from Russia. Automobile transport services demonstrated an increase; prices of services, on the other hand, declined. The decline in the export of construction services was mainly due to the weakening in the main partner states, including Lithuania, UK and Finland, according to the bank’s expert.
The deficit of the initial income account declined in Q4 in comparison with the previous quarter and formed EUR 29.2 million or 0.5% of GDP. Nevertheless, the negative balance of initial income had increased slightly, reaching EUR 69.9 million or 0.3% of GDP. Compared with 2014, the influx of subsidies from EU funds had increased in the initial income account. Government interest payments had reduced as well.
The surplus of secondary income had declined slightly in Q4, forming EUR 47.0 million or 0.7% of GDP. A slight improvement was noted last year and reached EUR 117.3 million or 0.5%.
In Q4, there was a slight reduction in the volume of money flowing into Latvia’s capital economy (positive balance of EUR 105.7 million or 1.6% of GDP). In 2015, the capital account’s positive balance was also lower than that of 2014 (EUR 684.0 million or 2.8% of GDP in comparison with EUR 753.7 million or 3.2% of GDP in 2014).
In 2015, direct foreign investments in Latvia increased by EUR 577.9 million or 2.4% of GDP (growth in Q4 was 1.0% of GDP and 1.9% of GDP in 2014). The most significant investments of 2015 came from Cyprus, Russia, Norway and Netherlands. Most of the money was invested into the finance, trade and transport sectors, explains the bank’s expert.