In the latest years, Latvian economy showed a steady positive trend, strengthened after the accession to the EU. According to World Bank data, Latvia is ranked 27th among the most advantageous countries for establishing and developing business.
GDP at constant prices grew during September 2005 up to 10,07% compared to the same period in 2004. Latvian GDP (7.428 mln. Lat or 10.611 mln Euro in 2004) grew thanks to the increase in services sector (73%) and production (27%): analyzing the composition of GDP, we can observe a clear prevalence of the tertiary (services) sector, due to the lack of natural resources and climate that negatively affects the development of agriculture industry.
It is a rather common notion among the economists that this situation will become more marked in the future, especially in the services sector. In 2005 the Ministry of Economy expected GDP to grow by 10 %. According to statistical data, over the period 2000 - 2005 Latvian economy saw a steady growth of GDP, which increased by 9,5 % in the first six months of 2005 compared to the same period of 2004, while the export increased by 33,7%.
In 2006 the growth of GDP is expected to reach 7-8% thanks to the implementation of structural reforms. The inflation rate is expected to be quite high. The production sector achieved very good results, thanks to an increased demand in several European markets: this sector benefits from new markets found for Latvian export (in particularly Lithuania and Estonia), regaining at the same time a market share in Russia. The strong and constant private consumption increase, combined with a relatively strong export demand, helped achieve a real growth.
The resident population purchasing power is still very low: GDP per capita (2,600 Lat or 3,830 Euro in 2004) was around 2,990 Lats in November, 2005 (4,270 Euro with a fixed change of 1 Lat=0,70 Euro) with an increase of 10,33% compared to the same period of 2004. The Latvian government aims to increase it to 52% of the EU average in 10 years. Actually Latvian income represents 43% of the EU average. Despite the significant growth registered in Latvia’s economy, the index of income growth is relatively low (only 2% annually) as compared to other new EU member states, which gained better results. According to the analysts, the slow pace of the process is affected by the pegging of the national currency (Lats) to the Euro and by the high inflation rate registered in 2005.
Meanwhile, balance sheet shows constant current account deficit (11,45 % of GDP in September 2005). The public debt amounted to 932,4 mln. Lats in the first quarter of 2005 and decreased to 908,1 mln. Lat in November.
Foreign direct investment (FDI) and other long-term capital flows keep on compensating this deficit. The total public debt decreased from 932.4 mln Lat (1st quarter of 2005) to 908.1 mln Lat (last quarter 2005), remaining around 14% of the GDP at current prices. The foreign debt (552 mln Lat at the end of 2004) reached 512.7 mln Lat in November 2005 (742.43 mln Euro), meanwhile the domestic debt (423 mln Lat at the end of 2004) decreased to 395.4 mln Lat (564.8 mln Euro).
Unemployment in Latvia is mainly a structural one. The most part of the population, especially adult people, graduated during the Soviet period and the education they received is no longer adequate and competitive, not matching the modern market requirements. The lowest unemployment rate has been registered in Riga, where there is also a shortage of labour force, partly compensated by workers from Ukraine and Belarus. The highest unemployment rates (around 27,3%) were registered in the districts of Ludza, Rezekne and Balve. Generally, the unemployment rate in the cities (except the capital) is higher than in the rural regions where people are mainly involved in the agricultural sector. The unemployment rate among young people amounts to 17,5%, while European average is 18%.
Unemployment rate slightly decreased during 2005, mainly because of the strong economical growth and the labour force migration towards other Countries. Experts predict that, in the next years, the lack of manpower will become more critical in fast-growing sectors, especially in construction. As a result of this paradoxical situation, caused by the slowness of workers' professional re-qualification, Latvia is ranked sixth among the EU Members with the highest inflation rate.
Since January 1st, 2005 (the date when Latvia joined the so-called ERM2 - Exchange Rate Mechanism – a preliminary phase towards the adoption of Euro) the official exchange rate has been 0.702804 Lats for 1 euro. The high inflation rate makes it very hard to meet the necessary criteria for the adoption of Euro, at least according to the foreseen timetable which envisages the adoption of the common European currency on January 1st, 2008. In the last years the banking sector has considerably strengthened, adding to the economic stability. Actually, there are 23 commercial banks operating in Latvia. No Italian banks are currently present in Latvia. The financial non-banking sector and the share market are experiencing a rapid growth but are not yet developed enough. The Latvian banking sector is characterised by the dominant presence of private players. The Latvian State share amounts to only 3,7 % of the total share capital. Leading banks like Parex, Unibanka, Hansabanka provide more than 50% of the banking services. Last summer, Parex bank took a loan with value 190 mln EUR (partly financed by the Italian bank Unicredit) in order to expand its banking activity on the new markets.
Latvian economy’s level of openness to international trade and foreign investments
In 2004, the import-export movements of Latvia reached the total amount of 5,898.9 mln. Lat (8,427 mln. €) and in September, 2005 they reached the amount of 5,480.2 mln. Lat (7,828.8 mln. €), i.e. +28.5% compared to the movements in the same period of 2004: in the period under exam, Germany proved to be the main trade partner of Latvia (12.27% of the total import-export movements), followed by Lithuania (12,26%), Estonia (8.79%), Russia (8.27%) and Sweden (6.41%).
The main export markets for Latvia are United Kingdom (10.63% of the total exports), Estonia (10.44%), Lithuania (10.23%), Germany (which moved from the 2nd to the 4th place, scoring 10.08%): the most important export products are wood and its by-products (26.55 of the total exports - September 2005).
The main import partners are Germany (13.61% of the total Latvian import), followed by Lithuania (13.51%), Russia (8.65%) and Estonia (7.78%): Latvia imports machines, mechanical and electrical equipment (19.39% of the total Latvian import - September 2005), mineral products (15.46%), transport vehicles (10.51%), metals and metal goods (9.34%), chemicals and by-products (8.54%). For both import and export, Lithuania and Estonia reached better positions, mainly to the detriment of Germany, Sweden and Russia.
Basically, the presence of raw materials imported from the CIS member states, consumer goods and investments with a significant value added, contribute to the Latvian foreign trade flows. Due to the macro-economic stability and a favourable environment, FDI play a fundamental role in the Latvian economy, compensating at the same time the heavy deficit of trade balance.
The main foreign investor, during the first nine months of 2005, was Sweden (14.04% of the total investments), followed by Estonia (12.13%), Germany (9.29%), Denmark (8.98%), Russia (7%) and the United States (5.66%): most of the foreign investments in Latvia were in the real estate sector (22.63% of the total), financial brokerage (22.37%), transport, warehousing and communications (14.82%), manufacturing industries (food, textile, wood, etc., 14.78%) and wholesale and retail (14.08%).
State of bilateral trade exchanges with Italy and FDI
In 2005 the bilateral trade trend registered a significant increase compared to the same period of 2004 (+15.01%), keeping Italy in the 12th place among other trade partners with Latvia (in 2003 it was in the 10th place).
Italy imported from Latvia (data of September 2005) textiles, wood and wooden articles, living animals and animal products, mineral products, stone, chalk, cement products for a total amount of 32.7 mln. Lat (46.52 mln. Euro). In terms of import, in the first nine months of 2005, Latvian imports from Italy increased by 16.2% compared to the same period of 2004. With a share of 3.23% on the total Latvian import volume, Italy is ranked in the 10th place, according to the official statistics.
The main import products from Italy (data of September 2005) are machines, mechanical and electrical equipment, textiles, metals, plastic and rubber products, food, for a total amount of 109.9 mln. Lat (157 mln. Euro). According to the latest available data, the Italian stock investments in Latvia recorded a slight increase. The principal sectors of Italian investments in Latvia include the non-mining industry (54.21%, mainly due to the purchase of the Latvian glass factory, AKD Logistik, by the Italian society Telma), followed by real estate sector (26.6%), travel agencies (10.98%), retail (8%), hotel and catering sector (0.14%).
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