Fulfilling top foreign policy goals, Latvia joined both NATO and the EU in the spring of 2004. Four years later, Latvia’s second largest bank required a state bailout and the country turned to a group led by the European Commission and the IMF to secure a €7.5 billion loan. Under the conditions of the loan, the Latvian government has strict budget deficit targets to reach for 2012, but these may just aid the country in its long-term plan to adopt the euro.
- Official country name:
- Republic of Latvia
- Lats (LVL)
- Latvian (sometimes referred to as Lettish)
- Capital city and financial centre:
- Other major cities:
- Daugavplis, Liepaja, Jelvgava
- Time zone:
- UTC +2
- 2,204,708 (July 2011 est)
- Population growth rate:
- 0.597% (2011 est)
- GDP per capita (US dollar equivalent):
- $14,700 (2010 est)
- GDP real growth rate:
- 0.3% (2010 est)
- Government type:
- Parliamentary democracy
- Head of State:
- President Andris Berzinš (since 7th July 2011)
- Political leader:
- Prime Minister Valdis Dombrovskis
- Top export partners:
- Lithuania, Estonia, Russia, Germany and Sweden
- Top import partners:
- Lithuania, Germany, Russia, Poland and Estonia
With its independence regained in 1991, Latvia embraced the free market and sought to distance itself from its heavy reliance on trade with Russia (the then USSR). Exploiting its coastline along the Baltic Sea, Latvia established additional export partnerships with countries such as Germany and Sweden, as well as its Baltic neighbours.
In the early 2000s, Latvia’s open economy began to attract significant attention from international investors and many Nordic banks established subsidiaries in the country. The influx of capital into the country was largely directed into the property sector, however, resulting in a real estate boom. Latvia’s economy expanded by 50% between 2004 and 2007.
After such good times, the financial crisis hit the country hard and in 2008 the country’s GDP plummeted by 18%. Social unrest ensued and in February 2009, the government led by Ivars Godmanis collapsed. Valdis Dombrovskis took over as Prime Minister but tough times still lay ahead as 2010 saw unemployment rise to 18.7%. The government also implemented major spending cuts in order to reduce the country’s deficit, but concerns were voiced over the severity of the cuts putting social infrastructure in danger.
By the end of 2010, the budget deficit had dropped to 7.7%, down from 9.7% the previous year. The 2011 figure is expected to be 4.5%, but by the end of 2012, this must be just 2.5% in order to comply with the conditions of the bailout loan the country received. Achieving this target, along with a reduction in inflation, would also bring the country in line with the Maastricht criteria for entry into the Eurozone.
Latvia aims to become a member of the single currency area in 2014. At the end of June 2011, the country’s Finance Minister, Andris Vilks, announced that he is confident that Latvia will meet the 2014 goal for euro adoption.
The banking sector
Latvia is considered to have one of the most highly developed banking systems within eastern Europe. The commercial banking sector is controlled by The Bank of Latvia (Latvijas Banka), Latvia’s independent central bank, which is a participant in the European System of Central Banks. Its main functions are to establish and execute monetary policy, manage emit cash currency, and compile financial statistics to allow monitoring of the functioning of the payment and settlement systems.
“Latvia is considered to have one of the most highly developed banking systems within eastern Europe.”
According to figures from the Association of Latvian Commercial Banks, there are currently 31 banks operating in the country, ten of which are branches of foreign banks. Certain Nordic banks have a strong presence in Latvia and although most of these will offer a full suite of cash management products, some banks only work in specialised areas of the market. Leaders in the commercial banking space include: Swedbank, SEB, Nordea and DnB NORD1. UniCredit and Danske Bank also have a strong presence in the country.
The Nordic banks provided liquidity and capital support to their subsidiaries during the recent turmoil, which helped to limit the systemic crisis.
Payments and clearing
||High-value and urgent payments in EUR
||Settlement in real-time with immediate finality
Cut-off for customer payments = 18:00 EET
Cut-off for interbank payments = 19:00 EET
||High-value (above LVL 50,000) and urgent payments
||Settlement in real-time with immediate finality
Cut-off for customer payments = 16:00 EET
Cut-off for interbank payments = 16:30 EET
|EKS (SEPA compliant)
||Multilateral net settlement
||Non-urgent, low value payments in LVL and EUR with a maximum value of LVL 50,000 and EUR 50,000 respectively
||Settlement on same day basis with end-of day finality
Cut-off for LVL payments = 15:00 EET
Cut-off for EUR payments = 15:00 EET
These are the predominant method of making payments, in terms of volume and value, in particular for corporate payments. Both electronic and paper-based transfers are used. Normal value dates are the same day, if the payment is received before 13.30.
In terms of volume, there has been a rapid increase in the use of payment cards, notably in the retail sector. Cards are the second most popular payment instrument in Latvia. Debit cards are far more popular than credit cards.
These are mostly used for public utilities and service settlements, but are not terribly common, representing under 5% of the country’s total transactions.
The application of electronic invoicing is still under development, however, some large enterprises in the public sector are pioneering its usage.
The use of cheques is fairly non-existent, with less than 1% of transactions being carried out by cheque.
These are the most popular short-term investment instrument in Latvia. Time deposits are readily available across a range of maturities (from one day to 12 months and over).
Certificates of deposit.
CDs are usually issued with maturities from one month to one year.
Latvia stopped selling government bonds after the bailout in 2008. However, in June 2011, Latvia returned to the international bond market with a successful sale of $500m in government debt. Further issues are planned for early 2012.
This is issued with maturities ranging from overnight to 12 months.
Money market funds.
As in the other Baltic states, these have increased in popularity in recent years.
There is a Latvian repo market.
Tax and legal considerations
There are no foreign exchange controls in place in Latvia.
Transactions over LVL 5,000 (or equivalent in foreign currency) between residents and non-residents must be reported to central bank.
Corporation tax is levied at 15% (2011 figure).
Until 1st July 2013, the Latvian authorities can continue to apply a 5% withholding tax on interest payments and royalties to EU member states. For non-resident related parties, the withholding tax levied on interest paid is 10% and for a commercial bank is 5%. For royalties paid to a non-resident, 5% applies to license fees/industrial property rights and 15% for royalties paid for the use of artistic works. Dividends are subject to 10% withholding tax unless the recipient is located in an EEA member state, or there is a tax treaty in place.
Market prices and OECD guidelines are required for transactions in Latvia but no specific documentation is needed.
Restrictions apply to the deduction of interest on loans from non-financial institutions. A debt-to-equity of 4:1 is also required in Latvia for thin capitalisation but these rules do not apply to institutions of countries under a double tax treaty with Latvia. Interest payments made to EEZ credit institutions are also exempt.