Weak economy helps current account balance

RIGA - Initial data show that Latvia’s current account balance was in surplus for the full year last year, reaching 8.8 percent of GDP, reports news agency LETA. Bank of Latvia economic analyst Arturs Kanepajs emphasizes that for Latvia, as a small and open economy, this indicator clearly points to an on-going economic stabilization, and explains that the country is earning more foreign currency with its exports than it is spending on imports.

He says that a more detailed analysis confirms a continued overall upward trend in exports, while the volume of services exports is falling due to both strong cross-border competition in freight transportation and the weaker inflow of tourists and travel services resulting from weak external demand. Total import activity shows expanding imports of intermediate goods, whereas imports of services, travel services among them, are still decreasing due to weak domestic activity and declining personal consumption levels.

The surplus in the income account lagged behind the level of the previous quarters, as in December direct investment firms incurred relatively low losses and paid out dividends.
In the fourth quarter of last year, with private sector companies boosting their equity capital, foreign direct investment in Latvia reached 193 million lats (275.7 million euros), or 5.8 percent of GDP; at the same time, losses incurred by foreign investors in Latvia decreased. In December and in the fourth quarter overall, banks attracted funding from both domestic and foreign households and corporations. Liabilities to foreign banks contracted, short-term foreign assets increased, while domestic lending continued its downward trend.

For 2010, the Bank of Latvia projects a somewhat larger current account surplus - 11.3 percent of GDP - and an excess of exports over imports - 4.8 percent of GDP.

Kanepejs says that recently, several downward risks have surfaced in relation to the overall annual dynamics: the pace of recovery in trade partner imports has decelerated, the competition for freight transportation has toughened, and the direct investment companies’ losses (with their potential decreasing impact on the income account) have diminished. “The other data suggest that in the environment of free capital flows it is important for investors to be convinced that unwelcome economic-policy-related shocks are not threatening. Hence, the already perceptible signs of economic stabilization need to be supported by clear indications that no changes, either unpredictable or drastic, e.g. in the tax policy, can unexpectedly emerge,” emphasized Kanepajs.