Current account positive as imports surge

  • 2011-09-07
  • From wire reports

RIGA - Latvia’s current account, a measure of money flowing into and out of a country, recorded a surplus of 0.9 percent of gross domestic product in the second quarter as exports of goods and services increased, reports Bloomberg. The surplus totaled 31.8 million lats (45.4 million euros) in the April-June period, the Riga-based central bank said on Sept. 2 in an e-mailed statement. It was 3.6 percent of GDP in 2010.

The Baltic nation’s current account swung from a deficit of 27.1 percent of GDP in the fourth quarter of 2006 to a surplus of 1.3 percent in the first quarter of 2009 as imports collapsed amid an economic meltdown of depression proportions.
Latvia’s economy, which contracted 18 percent in 2009, after a 5 percent drop in 2008, expanded a preliminary 5.3 percent from a year earlier in the second quarter this year, the quickest pace in 3 1/2 years, as exports and industrial production rose.

“Risks to the external economic outlook have amplified and testify to a potential deterioration in foreign demand in the upcoming quarters,” central bank spokesman Martins Gravitis warned last week. “It cannot be asserted, however, that the anticipated deterioration in foreign trade fundamentals would substantially alter the current account balance dynamics, as global developments are expected to impact it in the opposite direction as well.”

Analysis of the second quarter’s surplus shows that the foreign trade deficit for goods increased as imports grew faster than exports (in absolute terms), reports Nozare.lv. The predominance of goods imports over goods exports became more pronounced in June, when some companies engaged in purchasing capital goods.
Exports of services reached an all-time high, with the trade surplus for services reaching 235.7 million lats. They were significantly spurred by a higher value of transport services to non-residents, with exports of travel (due to seasonal factors), financial and other business services expanding as well.

The deficit in the income account amounted to 85.9 million lats, primarily on account of dividends often paid out by companies in the second quarter of each year following the submission of annual reports, the Bank of Latvia says.
In the current transfers account, the surplus reached 140.4 million lats. With subsidies and other financing from the EU funds remaining broadly unchanged, the improvement of the current transfers account balance was the result of an increase in other private transfers.

In the financial account, the deficit contracted notably (to 7.7 million lats) in the second quarter. As international rating agencies upgraded Latvia’s credit rating, the government has been able to borrow, for the first time since the first quarter of 2008, from the international financial market by issuing debt securities worth 500 million U.S. dollars. The growth of the overall external debt, on the other hand, was slowed by a certain reduction in short-term and long-term liabilities of credit institutions.
The Bank of Latvia points out that in the second quarter, the net inflow of foreign direct investment grew by 186.1 million lats, i.e. on a par with the previous period. Quarter-on-quarter, the structure of net foreign direct investment inflows has changed: the FDI share inflowing into equity increased. The largest second quarter net foreign direct investment inflows were recorded for financial intermediation (mainly reinvested earnings), real estate activities, trade (mainly other capital as liabilities to direct investor), and manufacturing (mainly investment in equity).

Risks to the external economic outlook have amplified and testify to a potential deterioration in foreign demand in the upcoming quarters, most likely to adversely affect exports. Meanwhile, the information available on large infrastructure projects (often related to the drawdown of financing from the Cohesion Fund for the period up to 2015) suggests that imports of construction materials and transport vehicles are to be expected at a robust level over the medium term.

Returning to the possibility of a negative impact from a renewed global economic slowdown, slower growth can reduce the pace of consumption domestically, thus restricting both imports of consumer goods and profits of foreign investor companies in Latvia. As a result, the deficit in the income account is unlikely to increase, the Bank of Latvia points out.