China has always been an important partner for Latvia. Both of these countries share common objectives not only in the sustainability and welfare sector but also in the promotion of entrepreneurship and the implementation of investment projects. It is important to note that China was one of the first countries to recognize the renewal of Latvia’s independence, which has led to close cooperation between the two countries over the last 25 years.

The trade activities between Latvia and China are increasing year after year and China is currently one of the largest trade partners of Latvia outside the European Union. As a result of close cooperation between the two countries over the last 10 years, the value of exported and imported goods has increased repeatedly. Exports to China during January- October 2019 reached 131.37 million EUR, which is 5.25 times more than in 2010. Imported goods from China amounted to 434,25 million EUR during January-October in 2019, which is 2 times more than in 2010.[1]

The main export goods from Latvia to China in 2019 were: wood and its products (52.86%, mainly raw timber); mineral products (13,61%); machinery; electrical equipment (9.35%, mainly electronic integrated circuits); metals (4.49%); vegetable products (6.72%, mainly fruits and nuts).

The main import goods in Latvia from China in 2019 were: machinery; electrical equipment (50.76%, mainly mobile communication devices); various industrial goods (9.86%, mainly lamps and lighting accessories, furniture); plastics; rubber and rubber products (8.15%, mainly tires); metals  (6,83).%, mainly metal structures); textiles  (5.59%); products of the chemical industry (4.99%, mainly ready-to-use binders for ingots and cores) .

Cooperation between Latvia and China takes place both bilaterally and within the framework of EU-China relations and in various multilateral formats, such as in the format of cooperation between Central and Eastern European countries and China (17 +1) and the framework of the “Belt and Road” initiative.

Latvia’s priorities in these projects are cooperation in the transport and logistics sector, attracting investments in infrastructure and production projects, promoting trade links and tourism, and exchanging students and teaching staff.

On 4 November 2016, Latvia signed a Memorandum of Understanding between the Government of the Republic of Latvia and the Government of the People’s Republic of China on cooperation in the economic bands of Silk Road. The memorandum was signed based on the traditional friendship between the people of Latvia and China, great cooperation between the two governments and efforts to work together to promote the economic bands of the Silk Road. The two countries undertook to work together in the “Belt and Road” initiative to pursue the objective of joint development and to turn their strengths – political dialogue, complementarity in the economic field and people-to-people contacts – into practical cooperation and sustainable development. In this way, promoting political relations, economic links and people-to-people contacts between the two countries.

As part of this initiative, the first container train from the Chinese city of Yiwu entered Riga in November 2016, which drove more than 11,000 km in only 12 days. Yiwu’s commercial platform “Yiwu Timex Industrial Investment Co.” has included Riga as one of the routes of the global movement of goods on its map, and rail transport is considered to be the most forward-looking way of transporting goods to Europe. [2]It cannot be denied that although this New Silk Road initiative is more focused on the development of the logistics and transport sector, it would also have a positive impact on trade volumes in Latvia.

Since the first successful container train pilot trip, Latvian businessmen and producers have increased interest in export opportunities in China. Following the successful shipment of the first train, interest in the Latvian corridor has also increased in China and more entrepreneurs are now interested in the possibility of cooperation. Yiwu representatives are convinced that the Yiwu – Latvia route has potential, but there is a need for closer interaction between shippers, consignors, railways, terminals, and customs, which would contribute significantly not only to transport but also to trade relations between the two countries.[3]

The “Belt and Road” project is very important for the Latvian government and the representatives of the state institutions make a major contribution to the promotion of international cooperation. For this reason, Latvia was invited for the second time to the “Belt and Road” forum in Beijing, which took place in 2019 from 25 to 27 April. During the first forum held in Beijing in 2017, the Ministry of Transport highlighted four priorities for cooperation with China: aviation, rail, maritime, industrial parks, and proposed six measures to deepen cooperation with the countries involved in the initiative.

Since then, transport and logistics companies from Latvia and China have been actively cooperating and have achieved significant results in both bilateral and multilateral cooperation.

In particular, the National Latvia’s Post and International Airport Riga are cooperating successfully with Chinese companies, providing effective solutions for the delivery of e-commerce messages to customers in Europe and third countries through Latvia. Latvia’s railway representatives, along with the Chinese railway, continues to successfully develop new container train services by connecting Asia and Europe through the Latvian multimodal maritime and rail corridor. Also, in maritime cooperation, Latvia has been successfully involved in the development of China’s 21. Century Maritime Silk Road, since the end of 2017, China and the world’s largest shipping company have included the port of Riga in the regular Northern European container shipping route.[4] These results in transport and logistics have strengthened confidence, increased market opportunities and created a historical basis for the sustainable development of economic cooperation between China and Latvia.[5]

In March 2019, the Latvian Investment and Development Agency received a delegation from the commerce department of the city of Ningbo (China), as well as the Chinese-based trading company “China-Base Ningbo group Co. Representatives of Ltd” to discuss the creation of a Chinese-Latvian e-commerce center in Riga. The capital of Latvia has been designated as the best place through which the supply of goods to other European countries would be ensured according to the “17 +1” cooperation format. The logistics of goods is planned to be coordinated through Riga’s Port, which would have a positive impact on Latvia’s economic growth.[6]

Chinese businessmen have also showed an active interest in expanding their activities in Latvia. Company “MGI” has officially launched new research, development, and production center in Riga to create a Chinese-European life science innovation center. The company has already set up three research, development, and production centers in China — Sheng, Shaun, and Qingdao — and San Jose, U.S. The new 7000 m² large “MGI” center is located at the airport park in Riga.

At the premises of “MGI Latvia” in Riga, a product production center, a high-throughput sequencing center, training, as well as a logistics center will be provided. The company’s role here is to strengthen innovation-related cooperation between China and Europe in the fields of life sciences research, industrial use, and technical standards. This means that cooperation on transnational genomics projects, as well as the exchange of experience and information between companies in China and Europe, will continue through this center.[7]

“Given current biotechnology bases in Latvia, “MGI” feels safe when creating a gene-based life-sciences innovation platform in Europe. Here we will be using the company’s main products and technologies. This will help to advance the equipment needed to research higher-level life sciences in China on the global market by creating a system of technical support and a product supply chain that would meet customers’ needs and allow a deeper understanding of the European market, says “MGI” President Duncan Yu.

There is also close cooperation between Latvia and China in the field of science. Bilateral cooperation with China and the Ministry of Education and Science of the Republic of Latvia is based on the agreement between the Government of Latvia and China on education cooperation signed on 22 November 2017. This agreement gives students opportunities such as going on exchange trips, as well as students can receive scholarships for studies and participate in different summer schools. Besides, China and Latvia have agreed on mutual recognition of higher education qualifications and degrees, thereby providing growth opportunities for both Latvian and Chinese citizens. During the 2019/2018 school year there was a total of 45 Chinese students in Latvia. [8]

As well as in 2018, President of Latvia Raimonds Vejonis (2015-2019) closed an agreement with China on cooperation in science and technology, thereby promoting innovation.

Two academic partnership centers have been created as a result of cooperation to strengthen partnership of the both countries in the field of education and science – the University of Latvia in cooperation with North China Institute of Science and Technology both founded academical partnership centers in their premises. As a result, Chinese students have the opportunity to learn Latvian and its culture, while Latvian students have the opportunity to learn Chinese as well as understand Chinese culture, thereby extending the possibilities of cooperation between the two countries.

[1] https://eksports.csb.gov.lv/en/countries-selected/export/2019/TOTAL/CN

[2] http://www.sam.gov.lv/sm/content/?lng=lv&cat=112

[3] https://www.mfa.gov.lv/component/content/article/56316-latvija-un-kina-viena-josla-viens-cels-satiksmes-ministrija

[4] https://www.mfa.gov.lv/component/content/article/56316-latvija-un-kina-viena-josla-viens-cels-satiksmes-ministrija

[5] http://www.sam.gov.lv/?cat=8&art_id=8885

[6] http://www.la.lv/kinas-uznemeji-velas-latvija-izveidot-verienigu-e-komercijas-un-logistikas-centru

[7] https://labsoflatvia.com/aktuali/mgi-centrs-riga

[8] The Ministry of Education and Science of the Republic of Latvia “Report on Latvia’s higher education in 2018”

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute

During the last years, Latvia has been experiencing stable economic growth annually.  Currently, this has been the longest period of economic development after the renewal of the independence of the Republic of Latvia. However, it has been forecasted that because of the global trends, the pace of Latvia’s economic growth will experience a slowdown in 2020. Data from the Bank of Latvia shows that in 2020 the Gross domestic product (GDP) will grow for around 2.6 percent. Even though the percentage of increase in GDP is more significant than the average in the European Union[1],  there is still room to grow for Latvia in order to balance out the inequality level of welfare in comparison to the European Union.

The possible slowdown of economics in Latvia in 2020 can be explained due to several reasons. The main factor in the decrease in GDP growth is the global market and external political events.   The development of Latvia’s Baltic trade partners – Lithuania and Estonia –  economy will experience a lower rise than in previous years. Since the predictions of the economic growth of the leading trade partners of Latvia are cut down, it can have a direct impact on the number of exports in Latvia, thus affecting the GPD growth in Latvia. Undoubtedly, since Latvia is a small economy, the unpredictable global political situations such as Brexit, China-USA trade policy, etc. play a significant role in the further economic development of Latvia. The growth of exports in Latvia is predicted to be relatively low in 2020. However, it is foreseen that during the second half of the year the total exports will deliver better results.

In the latest years, lack of labor has been one of the main issues for entrepreneurs in Latvia. There have been massive debates over the attraction of the workforce from neighbor countries. However, in the latest months, Latvian enterprises have noted that it is no longer a limiting factor for the development of businesses as it used to be. Therefore, the import of foreign labor will not be as pressing in 2020 as it was previously. Since the level of unemployment among people of working age are higher in some regions in Latvia, there is a possibility to optimize current human resources in Latvia.

The hourly wage in 2020 will experience growth. However, because of the decrement on the pace of economic growth, it has been forecasted that the salaries would not increase as fast as they used to in the previous years. In the main trade fields of Latvia, the average rise in salaries is predicted to be around 6%.[2] The growth of price levels is expected to be 2.4% in 2020. [3] Since the earnings of labor will increase more than the average price levels, it has been foreseen that customers will experience the growth of purchasing power and will be able to purchase more as they used to therefore promoting the level of welfare in Latvia.

It is expected that consumers will have to spend a larger amount of money on such items as fuel, public transport tickets, post services, and administrative services. The main reason for the price increase is new excise duties that will come in force in 2020. However, consumers will have to pay less money on services such as gas and electricity.

In the year 2020, some of the major participants in the field of Latvia’s economy will experience challenges others – success. Because of the planned investments in fields of transport infrastructure as well as regional natural gas, it is predicted to have a positive impact on the economics of Latvia. The investments would allow using tools such as storage and transport infrastructure of natural gas in a more efficient way. By that, it is expected that the enterprises of the industry will have a higher turnover than in the previous years. The development of the construction industry is expected in 2020 as well. However, at the same time, there are still too many unpredictable variables in the transport industry, particularly regarding the implementation of the Rail Baltic project. Rail Baltica is a rail transport infrastructure project with a goal to integrate the Baltic States in the European rail network. The project includes five European Union countries – Poland, Lithuania, Latvia, Estonia, and, indirectly, also Finland. It will connect Helsinki, Tallinn, Pärnu, Riga, Panevežys, Kaunas, Vilnius, Warsaw. Rail Baltic is currently the most significant project in the transport industry in Baltics. The implementation of Rail Baltic project will bring many benefits for the Baltic countries. Firstly, Rail Baltica will be a powerful catalyst for sustainable economic growth in the Baltic States contributing to each countries GDP in various ways. Secondly, the Rail Baltica project will provide with environmentally friendly sustainable infrastructure by reducing the environmental footprint on human mobility. And Third, Rail Baltica will create new opportunities for multimodal freight logistics development. Because of the many benefits of Rail Baltica and its impact on Baltic countries, Rail Baltic is one of the most significant projects in the Baltic States.

It is also expected that the manufacturing sector will deliver lower results as previously. For example, the current price levels of timber interfere with the development woodworking field, which has a significant role in the economics of Latvia since timber and other related products are the primary goods of export in Latvia. Because of the high competition for customers and downgrade of revenue level in the banking sector, it is expected that for the finance sector, the Year 2020 can be seen as challenging. However, not all industries are expected to face difficult times. The increase in investments in the food processing industry in Latvia might open a new direction for exports in Latvia.

In the upcoming months, the total development of investments is predicted to shrink. The peak of investments from the European Union was reached in the previous decade, and there are no expectations on new significant investments from the European Union. However, there will be further investment projects regarding Rail Baltic that will improve the investment environment in Latvia.

Because of the use of European Union funds and the lack of substantial private construction projects, it can be possible that the construction industry will be affected negatively. It has been foreseen that the total turnover levels of the construction sector will remain the same as in 2019. The construction field in Latvia has reached its top both in Latvia and as well in Eurozone. It is worth noting that there is no reason to expect a crisis in the sector. The demand still exists. However, the question of whether the construction sector will adapt to the new costs remains open.  In all, the construction industry could experience a 1-3% fall. That is mainly explainable due to the government’s policy to cut the total amount of investments.

The analytical division of the Ministry of Economics of Latvia stressed that in 2020 the exports of the service sector industry are expected to grow in particular accommodation services and the Information Technology sector.  Besides, a steady rise is expected as well in sectors regarding private expenses and inner market-oriented fields as retail and commercial services. However, because of the global economic situation, it will be harder for those industries which are more focused on exports of goods. It is worth noting that the development of trade will continue. However, it is expected to be at a slower pace than previously in 2020, and in some sectors, the overall demand may fall. In some economic fields in Latvia, lack of demand is foreseen to be one of the primary limiting factors. Mainly the reduction of demand will be seen in the woodworking sector. Despite that, it is expected that the strength and importance of the woodworking industry will remain and it will continue to be the leading commercial industry in Latvia.

Conclusion 

Despite the forecast that in 2020 Latvia will experience economic growth, the development of various industries will be different. In some fields, entrepreneurs and politicians will have to face challenges and come up with new strategies. However, since currently, Latvia’s economy can be described as stable and balanced, and because of that Latvia will be able to avoid potential risks the global economic trends may have caused.  The total growth of GDP is expected to reach around 2.6%. It is foreseen that the pace of exports and in-flow of investments such as European Union funds will slow down. At the same time, the worker-friendly labor market, as well as the moderate inflation will show steady growth in private consumption and will be one of the main factors that will contribute to the economic and welfare growth of Latvia. As for the latest years the Information and Technology industry will keep expanding and have a bigger share on the total GDP.

[1] https://ec.europa.eu/eurostat/databrowser/view/tec00115/default/table?lang=en

[2] Bank of Latvia

[3] Bank of Latvia

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute

The information and communication technology sector have seen a significant upturn and development over the past 10 years. This is confirmed not only by the increasement of companies in the field but also by the produced amount of a variety of innovations in the information and communication technology sector. In recent years, the information and communication sector has seen around 10% growth annually.^[1] Over the last decade, the share of information and technology in total exports has increased, thus changing Latvia’s economic course.

In 2019 around 6950 companies have identified their core activities in telecommunications, computer programming, counseling, and related activities, as well as in the information services sector. About one in five of them there have been made foreign investments.^[2]

Electronics and electrotechnics are commonly viewed together as related high-tech industries focused mainly on exports since both of the segments mostly export their production.

The data show that export in the information and communications technology sector has been seen as increasing in the last couple of years.

The fact that the information and communication technology sector is expanding for several years also shows the industry’s profits and total turnover. The total annual turnover of the information and communication technology industry is growing on average by 10%.[3] If the sector turned over €1.27 billion in 2014, then it was already €1.74 billion in 2017, while in 2018 the information and communication sector formed 4% of the total turnover in Latvia.

Continuing this even growth path for the sector is expected to lead to an increasing share of exports. Although the information and communication sector is growing, according to export figures, it still remains well away from the leading export sectors of Latvia, ranking at only 10^thplace last year.

Although information and communication technologies’ services are not yet at the top of Latvian export products, experts point out that with such development rates, the sector could become the main export product in a few years’ time. Some experts also reveal that the biggest challenge in the field could possibly be expected in terms of employment.

In terms of the challenges for the future of the sectors, it is worth looking into what the business-limiting factors are indicated by entrepreneurs and what capacity pressures there potentially are. It is no secret that the manufacturing industry is currently characterized by two supply-side under-capacity factors: lack of employees and historically high capacity workload.

For computer and electronics manufacturers, capacity loads reached 74% in Q4 2018, a few percentage points below the historic peak (77%). In the production of electrical equipment, capacity was only 65% (the maximum historical capacity was 76%).[4] Thus, unlike many other sub-sectors of the manufacturing industry, where capacity pressures are very high (up to 90%), electronics and electrical engineering producers could still increase production without the need for new investments. This proves that electronics and electrical engineering producers still have an opportunity to expand even more.  On the other hand, in the matter of restrictive factors, the responses of the representatives of the electronics and electrotechnology industry show that these sectors are similar to the overall situation in the manufacturing industry: more and more producers indicate that they do not see any restrictions on development, the overall demand is annually increasing. However, since mid-2017 there has been an increasing number of labor shortages. Moreover, this is a problem that is much more difficult to solve since the necessary skills and level of education cannot be learned and achieved in a few months’ training courses. Many years of investment in human capital or attracting skilled labor from abroad are needed.

The information and communication technology sector are constantly entering the leading position between sectors with the highest average wage outperforming both the financial and insurance industry and as well as the energetics sector.

Data published by the Central Statistical Bureau showed that while the average gross national salary was EUR 1004 in 2018, the average earnings in the information and communication industry were EUR 58.57% higher meaning around EUR 1592 in gross monthly.

The level of salaries is also reflected in the data on the amount of personal income tax paid per worker. In the field of information and communication technology, the average amount of personal income tax paid per employee reached EUR 3.07 thousand in 2018, while per employee the amount of personal income tax paid to all companies registered in Latvia was almost as half lower.[5]

This industry’s growth success story was made to a large extent thanks to a Latvian company “MicroTik”, which overall produces and focuses on computer network equipment, mainly wireless equipment and routers.

One of the most successful information and communication technology leaders in Latvia is the company “MicroTik”, which has seen a major breakthrough in its sector in recent years. The production of “MicroTik” computers, electronic and optical equipment has developed relatively gradually since 2000. However, since the year 2014, the company has experienced rapid growth, increasing production several times and in the last ten years. In the year 2008 “MicroTik” formed around 1.5% of the total share of the manufacturing industry. However, in 2018 it was already made up approximately 4.5% of the total share in the manufacturing industry

In 2017, the company’s gross profit per employee of “MicroTik” reached to 365 thousand. Over the last five years, the company’s productivity increased by EUR 105 thousand per employee. In addition, such a result has been achieved despite a drop in profits in 2017 due to fluctuations in exchange rates. Comparing to competitors, the average salary in the company is also high – €2.6 thousand per month, which is about 2.6 more than the average in Latvia.[6] It marks the path of the development of the economy in Latvia: knowledge-intensive and well-rewarded jobs that are sustained by productivity growth. The company employs more than 200 employees and that number has nearly doubled in the past five years.[7]

Over the past 10 years, Latvia has witnessed the replacement of 2 generations of wireless mobile telecommunications technology. In 2019, a 5G network was introduced in Latvia. As a result, Latvia became one of the first countries in Europe[8], with 5G network coverage being introduced, thereby outperforming some European countries in the field of the Internet coverage sector. The deployment of 5G is currently developing an information and communication technology environment in Latvia, which will contribute to a higher level of exports, thereby allowing Latvia to compete on a global scale. The development and use of 5G have been one of the priorities at both Latvian and European Union level. Implementation of the 5^th generation wireless technology for digital cellular networks has not only made improvements in speeds and coverage but also created a series of new additional functions in the information and communication technology industry. 5G was introduced in Latvia in 2019 by the experienced information technology company “Latvijas Mobilais Telefons”.

Education and information and communication technologies have a common future in Latvia. With the introduction of the new education reform in Latvia, emphasis will be placed on the acquisition of information technologies, promoting computer skills for pupils. The number of students in the information and communication technology sector has also increased in recent years.^[9] It is therefore important that future professionals in this sector are being provided with an environment that is competitive with the global market, an environment for improving their knowledge in the field of information and technology. Developing 5G specifically in Latvia will allow students to operate with “big” data, create innovation in the information and communication technology sector.

Currently, the company Printful, which was originally based and founded in Latvia, has become one of the fastest-growing companies in the United States of America. In 2019, “Printful”, a subsidiary company of “Draugiem Group”, entered the “Inc.com” list of 5000 US fastest-growing companies, ranking at the 564^th place.

The company offers services of integration with e-commerce platforms, automating product creation and order receipt and execution, as well their partners have the option to set delivery costs online. Printful provides integration with a variety of e-commerce platforms and services for companies such as “Shopify”, “eBay”, “Amazon”, “WooCommerce”, “Etsy”, “Weebly”.

“Printful Inc.” and corporation “Printful Latvia” had a total turnover of $77 million (67.66 million EUR) in 2018, while in 2017 they were $46 million (40.42 million EUR).

“Printful Inc.” works for the North American market with departments in the U.S. (Los Angeles, California, and Charlotte, North Carolina) and Mexico (Tijuana). European orders are provided by the subsidiary company “Printful Latvia” in Latvia. In order to expand more rapidly in Spanish-speaking countries, the “Printful” office in Barcelona has been opened this summer.

The Printful central office and the European production unit, employing more than 250 people, is located in Latvia. During the year 2019, at least 100 new, talented specialists have joined the Printful Latvian team and the number continues to grow rapidly. Together, Printful employs over 600 people worldwide.

[1]Lursoft Data Bases: https://www.lursoft.lv/?l=en

[2]Lursoft Data Bases: https://www.lursoft.lv/?l=en

[3]Lursoft Data Bases: https://www.lursoft.lv/?l=en

[4]Data from the European Commission

[5]CSB data: https://www.csb.gov.lv/en/sakums

[6]CSB data: https://www.csb.gov.lv/en/sakums

[7]Lursoft Data Bases: https://www.lursoft.lv/?l=en

[8] https://www.speedtest.net/ookla-5g-map

[9]www.izm.gov.lv.

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute

In the recent months Latvia’s credit rating was upgraded twice by international credit rating agency S&P Global Rating, in 2019 the credit rating raised from “A- “level to “A” level and for the second time the rating was upgraded to “A+” level therefore reaching historically highest level ever since the Year 1997, when Latvia was first assigned with a credit rating. The improvement of the credit rating is mainly explainable due the successful national fiscal policies.

In the latest years, the government of Latvia has paid a lot of focus to raise the credit rating of the country due to various reasons. Credit rating is an independent opinion of the rating agency on the solvency by that meaning the ability to meet financial obligations at a specified time and in the full amount of a State or another entity. In addition, in recent years the credit rating has become an internationally recognized indicator describing the level of investment risk. Because of that, the credit rating is often used by investors for evaluation and comparison purposes prior to investment. To create attracting investment environment Latvia has worked on the improvements of more stable economic, finance and governance indicators of the State since it has a direct impact on the credit rating of the country. As a result of the improvement of the credit rating Latvia and the companies based in Latvia will be able to attract investments on more favorable terms.

In the report regarding credit rating, S&P Global has stated that stricter regulations for commercial banks and that the measures taken to reduce non-resident deposits in the Latvian banking system do not pose a threat to the stability of Latvia’s financial sector and has no significant impact on the Latvian economy.[1] The S&P Global agency had additionally noted that the reduction of non-residents deposits in the Latvian banking sector also reduces external risks, such as short-term external debt amount.  The mentioned measures which were taken by the government of Latvia served as a cause for the upgrade of the credit rating of Latvia in the Year 2019.

   Because of the continuous improvements on the flaws in governance, economy and fiscal policies in 2020 the credit rating agency S&P Global Ratings raised the credit rating of Latvia from “A” level to “A+” level maintaining a stable outlook for the future of economic development of Latvia. In its assessment, S&P Global Ratings agency highlighted two major factors which contributed to the upgrade of rating. Since Latvia has determined stricter fiscal policy which, despite moderate economic growth in medium term, it will allow to reduce the country’s current public debt, the S&P Global Agency concluded that the vulnerability of the Latvian financial system is limited. [2]

“This is a historical moment. For the first time in Latvian financial history we have been rated with such high credit rating. This is a clear international confirmation of Latvia’s public finance management policy. An increase in the national credit rating is the basis for further attraction of investments to our country as a reliable and secure cooperation partner” emphasized Minister of Finance Janis Reirs.

At the same time the Agency recognized that despite the current fragmentation of political parties in Latvia, the progress regarding the implementation of Moneyval recommendations over the past 2 years has been significant. The input of government regarding the creation of appropriate framework for preventing money laundering and financial crime and restoring the reputation of the public financial system has been valuable. Furthermore, the credit rating agency had stated that both in good times and times of crisis, the government of Latvia has been able to demonstrate its ability to implement effective policies.

In the Year 2018 Moneyval published a report regarding the effectiveness of the Latvian system of money laundering and terrorism financing, analyzing 11 efficiency indicators which concluded that series of improvements are required to ensure transparent financial system. At that time only one indicator regarding international cooperation was marked as high, the other 10 indicators showed inconsistencies from which two of the indicators – “Legal persons and entities” and “Targeted financial sanctions to prevent proliferation financing” – were marked as low.[3] It was concluded that the system of identifying the true beneficiaries and system of prevention for the financing of proliferation of weapons of mass destruction was ineffective. Because of that Moneyval established a supervisory status for Latvia in 2018.

The restauration process of financial sector in Latvia was necessary to strengthen the ability to prevent money laundering and terrorist financing and to meet international standards in this area. In the latest years both government and banks have made a significant input to sort the financial sector of Latvia and implement the tools for financial crime prevention. To ensure sustainable and safe financial system in Latvia, there were introduced and passed draft laws, which provided law amendments to both to the Financial and Capital Market Law and the Law on Credit Institutions.

To strengthen the supervision over money laundering activities and both prevention of terrorist finance and proliferation financing activities the responsible institutions of Latvia have focused their attention especially in the latest years to ensure safer financial system. The changes to the regulatory framework have strengthened the risk-based approach to supervision in all supervisory and control authorities, and the resources of all those authorities have also been increased. With the amendments of Law regarding financial system the supervisory authorities now use specific risk identification and profiling to identify the highest risks in the sectors. In order to carry out targeted monitoring, the number of on-site inspections have been increased.[4]

A significant part of the strategy for strengthening the supervision over money laundering activities and both prevention of terrorist finance and proliferation financing activities was decrement of the risk of banking sector and consolidation. The current amendments to the Law prohibit enterprises to cooperate with shell companies that do not have a legal entity associated with their actual economic activities, and is incorporated in a country where statutory requirements do not include the preparation and submission of financial statements. Additional measures that were taken specifically to prevent both importation and exportation of undeclared or criminally acquired cash from Latvia were the amendments to the law on declaration cash at the State border.

Following the evaluation report of the 5th round of Moneyval, Latvia has taken various actions and steps to improve the system of strengthening the supervision over money laundering activities and both prevention of terrorist finance and proliferation financing activities and in particular has raised the awareness of risks and the comprehension of the subject of law. The report of Moneyval stated that additional resources and effective supervision have let to improve the adequacy of the subject of law about the risks and the effectiveness of the application of preventive measures.[5]

During the previous plenary session Moneyval had inspected technical compliance progress report of Latvia providing the information and expert assessment of Latvia’s progress in developing its regulatory framework to meet the 40 recommendations of Financial Action Task Force. Because the implementation of these recommendations in each country’s regulatory framework provides a basis for effective anti-money laundering and terrorist financing prevention system the recommendations became a crucial importance to the government of Latvia and in the last two years the responsible institutions has been working on implementing a regulatory that would meet the recommendations. Following the evaluation of the progress report, 7 out of 40 recommendations are currently rated as fully compliant and 33 as mostly compliant. [6]

The implementation of the Law amendments can be considered as one of the most ambitious finance sector reforms programs in Europe and has proved that Latvia is willing to ensure stable and transparent financial system as a basis of sustainable growth and welfare for all Latvian citizens.

The upcoming challenges for Latvia to an even further upgrade of credit rating would be the contribution to the economy of Latvia by the improvement of balance of payments rates above the ones forecasted by the credit rating agency. Additional challenges will be caused by the relatively low-income rate and long-term demographic difficulties, which currently limits the upgrade of credit rating. However, the credit rating of Latvia could be downgraded if there will be a significant change in the current strict fiscal policy that could cause increment of the national net debt or would affect the stability or economic growth of the financial sector.[7]

Summary 

The work of government of Latvia on financial sector regulation in the last two years to strengthen the supervision over money laundering activities, prevention of terrorist and proliferation financing activities has resulted in an upgrade of the credit rating of Latvia reaching historically highest level. Since the Moneyval report in 2018 on effectiveness of the Latvian system of money laundering and terrorism financing the government of Latvia has been paying a lot of focus to international finance institution recommendations regarding improvement of financial system of Latvia. The statement of S&P Global Ratings both in 2019 and 2020 certifies that the implementation on stricter regulations regarding banking system and financial supervisions for illegal financing activities has contributed to minimization of threats to the economy and sustainability of Latvia.

[1] https://www.lsm.lv/raksts/zinas/ekonomika/sp-paaugstina-latvijas-kreditreitingu-vesturiski-augstakaja-limeni.a349294/

[2] https://fm.gov.lv/lv/aktualitates/jaunumi/kreditreitings/61710-latvijas-kreditreitingu-paaugstina-vesturiski-visaugstakaja-limeni

[3] http://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/Moneyval-Mutual-Evaluation-Report-Latvia-2018.pdf

[4] https://www.fid.gov.lv/images/Downloads/useful/Pasakumu_plans_Moneyval.pdf

[5] https://www.la.lv/makoni-atkapjas-latviju-neieklauj-pelekaja-saraksta

[6]https://www.mk.gov.lv/sites/default/files/editor/Finansu_sektors/financial_sector_update_no_21.pdf

[7] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-upgrades-latvia-to-a-on-expected-sustained-fall-in-public-debt-57232086

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute

In the last months, the economics of Latvia has been facing various challenges due to the global pandemic. Taking into account the negative impact of Covid-19 on Latvia’s economic growth and the support measures introduced by the Latvian government to reduce the impact of the crisis the report from the Ministry of Finance states that the economics of Latvia could experience approximately 7% reduction of gross domestic product in 2020. ^[1] For this reason, the main priority for the Latvian government regarding economics is to focus on the development of a short-term economic development to reduce the effects of the fall of gross domestic product. 

The economic prognosis of the Year 2020

The current economic prognosis of the Year 2020 shows that the economy of Latvia will be facing numerous of difficulties. Besides the decrement of gross domestic product, it is seen that the average salary will experience 3% reduction.[2]  Additionally, the employment levels for the Year 2020 are quite alarming and is proceeded to increase from 6.3% in 2019 to 11.2% in the Year 2020 reaching the level of unemployment rates in 2014.[3] And it is foreseen that with the support measures introduced by the government of Latvia to reduce the impact on crisis the unemployment levels could gradually fall for 2.6% reaching 8.6% in the Year 2023.  It is forecasted that the exports will decrease by 9% in 2020 comparatively to 2019 and the overall import levels will experience fall by 10%. Although it is seen that in the Year 2020 the economics of Latvia will face recession currently it is prognosed that by the end of the Year 2021 the growth of gross domestic product will reach 2.4 % therefore overcoming the economic recession.  Latvia prioritizes short-term economic development      To assimilate the consequences of the Covid-19 crisis the government of Latvia has prioritized the short-term economic development activities.  During the April 2020, the Economic Development Work Division accepted the plan of action to reduce the economic consequences of Covid-19 crisis.   The current strategy of the Ministry of Economics is to make structural changes in the economy focused on productivity and export of knowledge-intensive goods and services. Priority directions of the strategy are to stabilize the economy, to change the structure of the economy and to develop companies with high export capacity. Entrepreneurs already have several support programs available both for attracting working capital and retaining the workforce. However, in order to ensure stability in the internal sector, the proactive involvement of not only state institutions, but also local governments are currently important, purposefully ensuring the implementation of public procurement, for example, in improving the quality of infrastructure and housing and energy efficiency of buildings. These types of activities will contribute to the recovery of both domestic consumption and production and service provision. Although there have been already made some enforcements to stimulate the development of economics on a regional level such as increasing the municipal borrowing limit by 150 million euros for local investment projects it is seen that in the upcoming months new support policies will be enforced.

Currently the government of Latvia has prioritized the development of a short-term economic development program so that it would be clear to entrepreneurs how, taking into account all safety measures, they can continue working now or resume as soon as possible and what support instruments the state can currently offer and what support is needed so that after overcoming the Covid-19 crisis the capacity of the enterprises of Latvia would be strengthened.

Renovation of apartment buildings – an effective support mechanism for rapid mitigation of the economic consequences of Covid-19

To continue to stimulate the economics, Latvia has developed new projects to solve the increasing unemployment rates and other issues. Measures to promote the energy efficiency of buildings can become an effective tool for restoring economic activity, helping entrepreneurs and the Latvian economy to overcome the effects of the Covid-19 pandemic, as well as helping residents to manage their housing stock and reduce heating costs. Therefore, in order to facilitate the overcoming of the crisis caused by the Covid-19 pandemic as soon as possible and the resumption of Latvia’s economic activity, the Ministry of Economics offered the Cabinet of Ministers to decide on the allocation of additional funding of 75 million Euros for the implementation of measures to promote the energy efficiency of buildings.       Renovation of apartment buildings is an effective support mechanism for rapid mitigation of Covid-19 consequences, as it will allow solving several problems simultaneously: at least 150 million euros will flow into the Latvian economy and construction sector, which will create new jobs, 67% of house renovation money remains in Latvia.[4] Investments in housing insulation are also an important source of support for Latvian building material producers. In addition, by reducing the consumption of natural gas in heat supply, Latvia’s trade balance will be improved. The house renovation program is especially important because it will promote economic activity in the regions, as so far, the most active projects in the program for housing renovation have been submitted from the regions of Latvia.

Travel industry has been deeply affected by the Covid-19 crisis

Although mostly all the private sector fields have been deeply affected by the Covid-19 crisis, the travel industry has experienced massive drop in income levels. The crisis caused by the Covid-19 virus in the industry has now caused almost a 100% drop in turnover in all tourism sectors, to the detriment of both travel agents and operators and the accommodation and catering sectors. All this has directly affected more than 3,000 small and medium-sized enterprises, as well as created a catastrophic situation in the workforce – more than 25 thousand employees have been affected.^[5] At the end of March and April, there is an almost 100% drop in turnover in all tourism sectors, causing losses of 10 million Euros per month. It is important to note that there are a large number of small and micro enterprises in the sector, which are often a source of livelihood for one family.       To prevent the ongoing crisis in tourism industry various solutions have been looked at. During April 2020, the Ministry of Economics prepared various solutions for special support mechanisms for the enterprises in tourism industry such as to introduce a reduced value added tax rate of 5% for the catering and tourist accommodation sectors, to evaluate and implement a balanced voucher system for solving the situation of complex tourism services of tour operators and agencies, support measures for the development of local tourism in order to receive special support for local tourism companies and stimulate local demand within the coming season, including implementing an information campaign for the development of local tourism, attracting new foreign tourists after the Covid-19 crisis, providing support especially for the development of business tourism, in addition, specific health safety guidelines for tourism service providers and travelers are planned.

Latvia, Lithuania, Estonia, and Finland agree on a roadmap for regional gas market integration

The process of regional gas market integration began at the political level in December 2015, when the Prime Ministers of the Baltic States approved an action plan for the development of the regional gas market and invited Finland to participate in this process. The aim of this agreement is to create a single regional gas market in Estonia, Finland, Latvia and Lithuania in order to improve market liquidity, integration and competition by providing affordable gas prices and high-quality services, thus ensuring the attractiveness of existing and new entrants. During April 2020, all partner countries agreed on a roadmap for regional gas market integration. The common regional gas market will be the first of its kind, with the merger of four countries’ cross-border gas markets into the European Union. This will strengthen security of supply in the region, increase market liquidity and foster competition, thus ensuring affordable gas prices and high-quality services for all consumers in these countries.

Conclusion

It is forecasted that during the Year 2020 the fall of import and exports levels and all the safety precautions taken will impact the decrement of employment levels by 4,9% and fall of gross domestic product by 7%. Because of the Covid-19 crisis the government of Latvia has prioritized short-term economic development prioritizing stabilization and restructuring of the economy and to develop companies with high export capacity. To stimulate the economy the Ministry of Economics offered the Cabinet of Ministers to decide on the allocation of additional funding of 75 million Euros for the implementation of measures to promote the energy efficiency of buildings, which will not only ensure new finance sources for construction field but will also allow to save the money of Latvian citizens since the  consumption of natural gas in heat supply will be reduced. During April 2020 more focused has been paid on travel industry as majority of travel related enterprises are facing financial difficulties and as there are a large number of small and micro enterprises in the sector, which are often a source of livelihood for one family.

[1]https://www.fm.gov.lv/lv/sadalas/tautsaimniecibas_analize/tautsaimniecibas_analize/galvenie_makroekonomiskie_raditaji_un_prognozes/

[2]https://www.fm.gov.lv/lv/sadalas/tautsaimniecibas_analize/tautsaimniecibas_analize/galvenie_makroekonomiskie_raditaji_un_prognozes/

[3]https://data1.csb.gov.lv/pxweb/lv/sociala/sociala__nodarb__aktivitate__ikgad/NBG040.px/table/tableViewLayout1/

[4] https://em.gov.lv/lv/jaunumi/27825-daudzdzivoklu-maju-renovacija-efektivs-atbalsta-mehanisms-atrai-covid-19-radito-ekonomisko-seku-mazinasanai

[5] https://em.gov.lv/lv/jaunumi/27833-vitenbergs-jarod-specifiski-atbalsta-risinajumi-visiem-turisma-nozares-uznemumiem

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute

The current macroeconomic development scenario of the economics of Latvia assumes that the pandemic will be contained in the first half of 2020 and that economic activity will gradually recover thereafter. During May 2020 more attention has been put on currently the weakest point of economics – tourism and as well the formation of the future of the economics of Latvia. 

The parliament of Latvia offers a two-tier support mechanism for companies in the hospitality and accommodation sectors to be reopen

The losses of the tourism sector since the middle of March have amounted to at least 77 million Euros. One of the biggest challenges since the pandemic declaration is the lack of capital turnover. In both sectors of hospitality and accommodation – around 4,000 small and medium-sized enterprises have been directly affected, creating a catastrophic situation in the workforce, with around 40,000 workers affected.[1] The general situation in the country currently and the epidemiological improvements with the virus containment allows local tourism service providers to resume work, following the necessary health and safety requirements.  The ministry of Economics together with the tourism industry have discussed and reviewed all possible options for support mechanisms so that the industry can recover from the virus-induced forced stopping of operation, continue to provide jobs and be ready to start the tourist season. In addition, comprehensive advertising campaigns for local tourism and neighboring countries will be launched to stimulate local demand. Currently, by providing direct and real support, the Latvian tourism companies will be supported, providing employment opportunities for the residents, and achieve an economic breakthrough in the tourism sector, especially in the regions. The Ministry of Economics has developed a special support mechanism for the accommodation and catering sectors, which had practically stopped operating due to the declaration of a state of emergency in the country. In order to promote the resumption of business during the tourist season, a two-stage support mechanism is offered – to promote employment in both the accommodation and catering sectors, and tour operator service providers are offered to introduce a 3-month grant to maintain the company’s economic activity. In turn, a mechanism for receiving interest-free loans will be developed for businesses to resume economic activity and increase capacity. The two-stage support mechanism for the resumption of activities in the tourism sector will offer a grant for the operation, as well as an interest-free unsecured working capital loan. Grants to promote employment for entrepreneurs will promote the services of accommodation, hospitality, or tour operators. The aid can be used by the entrepreneur to cover various operating costs, including staff salaries, rent of premises, purchase of goods, etc. The aid is expected to be granted within a period of 3 months after payment of current salary and taxes. In turn, the interest-free unsecured working capital loan is intended for the resumption of economic activity.

In the Covid-19 crisis, the Latvian media is deeply affected by the decline in advertising revenue

In addition to many industries in Latvia, the media also has been alarming about their future – both broadcasters and print media, which work in rather tense conditions in the state of emergency declared in the country. The biggest concern in the media is the sharp decline in advertising revenue. Advertising revenue for some media has decreased even by 80%.^[2] Although even prior the Latvian media had been facing difficulties the Covid-19 crisis has cultivated to even broader problems that has led to decrease in salaries, redundancies and even some platforms are considering closing printed publications. Because of that it is foreseen that in the future of the media of Latvia the share of paid content will increase.

To ensure the continuous operation of Latvian manufacturing companies, borders will be opened for the flow of labor

The continuous operation of Latvian manufacturing, exporting and national security companies is vital for the recovery of the Latvian economy in the near future. Moreover, during these challenging times, these companies continue to maintain stable jobs. It is therefore important to ensure that investment projects are not affected, and that the operation of these companies is not hampered by the operation of equipment, the receipt of the necessary certificates or the recruitment of qualified specialists. Because of that during May 2020, the order came into force, stipulating that foreigner workers will not have to observe self-isolation (home quarantine) upon arrival in Latvia if they do not show any signs of an acute respiratory infection.[3] The order from the Ministry of Economics stipulates that a foreign employee will be able to work in Latvia for no longer than five days, but in some cases not longer than a month. At the same time, a Latvian company whose obligations to a foreigner have arrived in Latvia will have to certify that the foreigner meets the criteria specified in the order, that it is not infected with Covid-19 infection and will comply with all Latvian restrictions related to the emergency, including personal protective equipment and will measure body temperature twice a day.

The impact of Covid-19 on the labor market is mitigated by state aid measures

The decline in economic activity, which has been affected by the introduction of Covid-19 restrictive measures both in the world and in Latvia, has a significant impact on the labor market as a whole. As labor-intensive sectors are primarily affected – transport services / passenger transport, travel agency and tour operator reservation services, accommodation and catering services, arts and various cultural fields, sports centers and other sectors directly related to population movement and assembly. The number of jobs in the directly affected sectors in 2019 alone amounted to about 60 thousand jobs, which is about 7% of the total number of jobs in the economy.

At the same time, it should be noted that the support measures introduced so far have generally mitigated the negative effects of Covid-19 on the labor market. By 18 May this year, more than 45,000 workers and the self-employed had received a downtime allowance, which has partly ensured the preservation of jobs and income during the emergency period. [4]

Meanwhile, both the registered unemployment rates and the dynamics of registered vacancies in general show that the situation in the labor market is gradually stabilizing. According to the State Employment Agency, the growth in the number of registered jobseekers in May has been almost three times slower than in April. However, starting from the beginning of May, the number of registered vacancies has stabilized and resumed growing – from this year. From 5 May to 21 May, the number of vacancies has increased by more than 2,000.

Although the labor market situation has gradually stabilized, it should be borne in mind that with economic activity remaining low for a long period of time and without appropriate state support measures, the situation may change rapidly. Despite the fact that, in general, state aid has ensured the preservation of jobs in the short term, which will allow companies to recover more quickly in the post-crisis period, as well as maintaining economic activity, most of the jobs measures, they can be lost quickly. Against this background, both the overall decline in real employment and the rise in unemployment are higher, partly due to the idle labor force.

According to the Ministry of Economics, the total real (including idle) reduction of the employed population in 2020 could reach 7.5% on average, but the unemployment rate could increase to about 11%.

Summary

To stimulate the tourism sector the parliament of Latvia has created two-tier support mechanisms for companies, which have been deeply affected by the Covid-19 crisis. As the current situation allows to reopen the tourism sector there have been discussed variety of options to ensure the financial recovery of the sector. The two-stage support mechanism for the resumption of activities in the tourism sector will offer a grant for the operation, as well as an interest-free unsecured working capital loan by that providing opportunity to cover salaries of workers, rent and other expenses.  Additionally, during May 2020 the topic on the future of the media of Latvia had been raised. The of revenue from advertisements has rapidly decreased, which has led to redundancies, cut in salaries in the sector. From that it is seen that the share of paid content could experience rise in Latvia. To ensure the continuation of the economy of Latvia the borders will be reopened for the flow of labor that foreigner workers will not have to observe self-isolation upon arrival in Latvia. Up until the middle of May this year, more than 45,000 workers and the self-employed had received a downtime allowance, which has partly ensured the preservation of jobs and income during the emergency period.  Additionally, both the registered unemployment rates and the dynamics of registered vacancies in general show that the situation in the labor market is gradually stabilizing.

[1] https://www.em.gov.lv/lv/jaunumi/27909-vitenbergs-viesmilibas-un-izmitinasanas-sektora-uznemumiem-darbibas-atsaksanai-piedavajam-divu-pakapju-atbalsta-mehanismu

[2] https://www.lsm.lv/raksts/zinas/arzemes/covid-19-krize-baltijas-medijus-vissmagak-skar-reklamas-ienemumu-kritums.a360549/

[3] https://www.em.gov.lv/lv/jaunumi/27888-vitenbergs-arkartejas-situacijas-laika-ir-butiski-nodrosinat-latvijas-razojoso-uznemumu-nepartrauktu-darbibu

[4] https://www.em.gov.lv/lv/jaunumi/27945-covid-19-ietekmi-uz-darba-tirgu-mazina-valsts-atbalsta-pasakumi

*This article has been made in cooperation with China-CEE institute and is the intelectual property of China-CEE institute