Seb Country Analysis Dec 2008 Latvia

Latvia SEB MERCHANT BANKING – COUNTRY RISK ANALYSIS

Dec 16, 2008

Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : [email protected]

The collapse of Parex Banka, Latvia’s second largest commercial bank, has aggravated the country’s already serious economic and financial situation. The government has called on the EU, IMF and governments of other countries to provide financing. IMF has reportedly accepted Latvia’s request not to touch the exchange rate of the Lat.

Country Risk Analysis ^Åíáîáíó=áë=ÅççäáåÖ=Ñ~ëíK==e~îáåÖ=ã~å~ÖÉÇ=íç=ëìëí~áå=éçëáíáîÉI=~äÄÉáí=íê~áäáåÖ=ÖêçïíÜ= íÜêçìÖÜ=íÜÉ=Ñáêëí=Ü~äÑ=çÑ=OMMUI=íÜÉ=PêÇ=èì~êíÉê=Çêçé=çÑ=dam=Äó=QISB=ÅçãÉë=~ë=~=ëí~êâ= êÉãáåÇÉê=çÑ=íÜÉ=ÅçìåíêóÛë=éêçÄäÉãëK=dêçïíÜ=áë=éäìåÖáåÖ=ÇìÉ=íç=ëäçïáåÖ=ÇçãÉëíáÅ= éêáî~íÉ=ÇÉã~åÇ=~ë=ëÉÉå=áå=êÉí~áä=ë~äÉë=Ñ~ääáåÖ=~äãçëí=TB=áå=íÜÉ=Ñáêëí=åáåÉ=ãçåíÜë=çÑ= íÜÉ=óÉ~ê=éêçÄ~Ääó=áåÇáÅ~íáåÖ=~=êÉ~ä=Çêçé=çÑ=ëçãÉ=OMJORB=í~âáåÖ=áåíç=~ÅÅçìåí=íÜ~í= áåÑä~íáçå=áå=íÜÉ=ë~ãÉ=éÉêáçÇ=~ÅÅÉäÉê~íÉÇ=íç=NSBK==^äíÜçìÖÜ=éêáÅÉ=éêÉëëìêÉ=áë=åçï= ÅççäáåÖ=Ñ~ëíI=íÜÉ=Åçìåíêó=áë=~í=íÜÉ=ãçãÉåí=Ñ~ÅáåÖ=~=ëÉîÉêÉ=Å~ëÉ=çÑ=ÅçãÄáåÉÇ=áåÑä~íáçå= ~åÇ=ÇÉéêÉëëáçåK==^ãçåÖ=ÇçãÉëíáÅ=ÇÉã~åÇ=Ñ~ÅíçêëI=çåäó=ÖçîÉêåãÉåí=ÉñéÉåÇáíìêÉë= ~êÉ=ëíáää=âÉÉéáåÖ=ìéI=ÇêáîáåÖ=íÜÉ=ÑáëÅ~ä=Ä~ä~åÅÉ=áåíç=~=ÇÉÑáÅáí=íÜáë=óÉ~ê=çÑ=~êçìåÇ=OB=çÑ= dam=~ë=êÉÅÉåí=ãçåíÜëÛ=í~ñ=í~âÉ=Ü~ë=íìêåÉÇ=ëÜ~êéäó=ëçìíÜK==bñéçêíë=çÑ=ÖççÇëI= ÜçïÉîÉêI=~êÉ=ëíáää=âÉÉéáåÖ=ìé=ëìêéêáëáåÖäó=ïÉää=ïáíÜ=~=ÖêçïíÜ=ê~íÉ=~í=~äãçëí=NQB=áå= íÜÉ=Ñáêëí=åáåÉ=ãçåíÜë=çÑ=íÜÉ=óÉ~êK=eçïÉîÉêI=~=ÖêçïáåÖ=é~êí=çÑ=íÜÉ=Éñéçêíë=~Åíáîáíó=Ó= ~äêÉ~Çó=êÉéêÉëÉåíáåÖ=~Äçìí=Ü~äÑ=çÑ=íÜÉ=íçí~ä=Éñéçêí=î~äìÉI=áë=êÉä~íÉÇ=íç=î~êáçìë=Ñçêãë= çÑ=íê~ÇáåÖI=áåÅäìÇáåÖ=ë~äÉë=çÑ=ëÉÅçåÇ=Ü~åÇ=Å~êë=Ñêçã=tÉëíÉêå=bìêçéÉ=íç=íÜÉ=`fp= ÅçìåíêáÉëK==tÉ=ÑÉ~ê=íÜÉó=ÅçìäÇ=éêçîÉ=ÉéÜÉãÉê~ä=~ÅíáîáíáÉë=íÜ~í=ã~ó=ãìëÜêççã=~åÇ= î~åáëÜ=çîÉêåáÖÜíK==kÉîÉêíÜÉäÉëëI=ÖêçïáåÖ=Éñéçêíë=~åÇ=ëäáÖÜíäó=Ñ~ääáåÖ=áãéçêíë=Ü~îÉ= åçï=~êêÉëíÉÇ=íÜÉ= ÇÉíÉêáçê~íáçå=çÑ= íÜÉ=ÉñíÉêå~ä= Ä~ä~åÅÉëK==qÜÉ= ÅìêêÉåí=~ÅÅçìåí= ÇÉÑáÅáí=ëÜçìäÇ= êÉÇìÅÉ=íç=NRB=çÑ= dam=áå=OMMUI=~= ïÉäÅçãÉ= áãéêçîÉãÉåí=íç= íÜÉ=OPBLdam= ÇÉÑáÅáí=çÑ=OMMTI=Äìí= ëíáää=~å= ìåëìëí~áå~Ääó= ÜáÖÜ=äÉîÉäK== = m~êÉñ=_~åâ~=Åçää~éëÉëW==få=ãáÇ=kçîÉãÄÉê=m~êÉñ=_~åâ~I=i~íîá~Ûë=ëÉÅçåÇ=ä~êÖÉëí= ÅçããÉêÅá~ä=Ä~åâ=ïáíÜ=~Äçìí=NTB=çÑ=íçí~ä=Ä~åâ=~ëëÉíëI=Åçää~éëÉÇ=~ÑíÉê=Ü~îáåÖ=ëìÑÑÉêÉÇ=

15% 10% 5%

0% -5% 2003 -10%

GDP

2005

2007

important your attention is drawn to the statement on the back cover of this report which affects your rights.

2009

SEB Merchant Banking Country Risk Analysis Dec. 18, 2008

ìåìëì~ä=ä~êÖÉ=ÇÉéçëáí=ïáíÜÇê~ï~äëK=qÜÉêÉ=Ü~Ç=~äêÉ~Çó=ÄÉÉå=êìãçìêë=çÑ=íÜÉ=Ä~åâ= Ü~îáåÖ=íêçìÄäÉ=áå=êÉÑáå~åÅáåÖ=ÑçêÉáÖå=ã~êâÉí=äç~åë=ê~áëÉÇ=áå=ïÉëíÉêå=ÅçìåíêáÉëK== fåíÉêÄ~åâ=ê~íÉë=Ü~Ç=êáëÉå=íç=ÜáÖÜ=äÉîÉäë=ïáíÜ=êÉéçêíë=çÑ=ëçãÉ=ÇçãÉëíáÅ=Ä~åâë=ïáääáåÖ= íç=é~ó=ìé=íç=RMB=Ñçê=ëÜçêí=íÉêã=äáèìáÇáíó=Ñêçã=çíÜÉê=Ä~åâëK==få=é~êíáÅìä~ê=åçåJ êÉëáÇÉåí=ÇÉéçëáíçêë=ïÜáÅÜ=êÉéêÉëÉåíÉÇ=m~êÉñ=_~åâ~Ûë=ã~áå=ÑìåÇáåÖ=ëçìêÅÉI=éêçîÉÇ= íÜÉ=ãçëí=~ÅíáîÉ=áå=ïáíÜÇê~ïáåÖ=ãçåÉó=Ñêçã=íÜÉ=Ä~åâK== = qÜÉ=ÖçîÉêåãÉåí=ÅçãÉë=íç=íÜÉ=êÉëÅìÉW==qç=ë~îÉ=~=ëóëíÉãáÅ~ääó=áãéçêí~åí=Ä~åâ=íÜÉ= ÖçîÉêåãÉåí=Å~ãÉ=íç=íÜÉ=êÉëÅìÉ=áå=ãáÇJkçîÉãÄÉêK==fí=ÄçìÖÜí=çìí=íÜÉ=Ä~åâÛë=ÑçêÉáÖå= çïåÉêë=Ñçê=~=íçâÉå=ëìã=~åÇ=íÜÉå=ÉñíÉåÇÉÇ=äáèìáÇáíó=íç=íÜÉ=Ä~åâ=Ñçê=ãçêÉ=íÜ~å= isiMIQ=ÄáääKI=Ñçê=~Äçìí=NMB=çÑ==ÅÉåíê~ä=Ä~åâ=êÉëÉêîÉëK==^í=íÜÉ=ë~ãÉ=íáãÉ=áí=~äëç= äçïÉêÉÇ=Ä~åâëÛ=êÉëÉêîÉ=êÉèìáêÉãÉåíë=íç=ÜÉäé=êÉëíçêÉ=äáèìáÇáíó=áå=íÜÉ=Ä~åâáåÖ=ëóëíÉã= ~í=ä~êÖÉK===råÑçêíìå~íÉäóI=íÜ~í=éêçîÉÇ=íç=äáííäÉ=~î~áä=~ë=íÜÉ=ÇÉéäÉíáçå=çÑ=íÜÉ=ÅÉåíê~ä= Ä~åâÛë=ÑçêÉáÖå=ÉñÅÜ~åÖÉ=êÉëÉêîÉë=åçí=çåäó=ÅçåíáåìÉÇ=ìå~Ä~íÉÇI=Äìí=ÉîÉå=~ÅÅÉäÉê~íÉÇ= íÜÉêÉÄó=Çê~áåáåÖ=íÜÉ=ãçåÉó=ã~êâÉí=ÉîÉå=Ñ~ëíÉêK=fí=Ü~ë=ëç=Ñ~ê=äçëí=ãçêÉ=íÜ~å=isiN= ÄáääKI=~Äçìí=~=èì~êíÉê=çÑ=íÜÉ=íçí~äK==tÜ~í=áí=Ü~ë=åçí=ÇçåÉI=ÜçïÉîÉêI=áë=íç=ê~áëÉ=éçäáÅó= ê~íÉë=~Åêçëë=íÜÉ=Äç~êÇK=bÑÑÉÅíáîÉ=çÑ=aÉÅÉãÄÉê=VI=íÜÉ=ÅÉåíê~ä=Ä~åâ=ê~áëÉÇ=íÜÉ=áåíÉêÉëí=çå= áíë=ã~êÖáå~ä=ÑìåÇáåÖ=Ñ~Åáäáíó=Ñçê=Ä~åâë=çå=çîÉêÇê~Ñíë=ÄÉóçåÇ=R=Ä~åâ=Ç~óë=áå=~åó= Å~äÉåÇ~ê=ãçåíÜ=íç=íÜÉ=TJNRB=é~K=äÉîÉä=EÇÉéÉåÇáåÖ=çÑ=íÜÉ=ÉñíÉåí=çÑ=ÉñÅÉëëáîÉ= ÄçêêçïáåÖFK==fí=âÉéí=I=ÜçïÉîÉêI=çíÜÉê=éçäáÅó=ê~íÉëI=áåÅäìÇáåÖ=íÜÉ=êÉÑáå~åÅáåÖ=ê~íÉ=~í= SB=é~K=ëçãÉ=NM=éÉêÅÉåí~ÖÉ= Exchange rate and interbank mar éçáåíë=ÄÉäçï=íÜÉ=ê~íÉ=çÑ= 0,72 ÅçåëìãÉê=éêáÅÉ=áåÑä~íáçåK== 0,72 14 kÉÖ~íáîÉ=áåíÉêÉëí=ê~íÉ=Ö~éë= 0,71 Interbank rate 0,71 12 çÑ=íÜáë=çêÇÉê=çÑ=ã~ÖåáíìÇÉ= 0,71 êáëâ=ê~áëáåÖ=áåîÉëíçê= 0,71 10 ãçíáî~íáçå=íç=ÅÜ~ååÉä= 0,70 0,70 8 Exchange rate ë~îáåÖë=Ñêçã=Ä~åâ=~ÅÅçìåíë= 0,70 áåíç=çíÜÉê=éä~ÅÉãÉåíë= 0,70 6 Policy rate áåÅäìÇáåÖ=áå=Ä~åâë=~Äêç~ÇI= 0,69 0,69 ïÜáÅÜ=ÅêÉ~íÉë=Å~éáí~ä=ÑäáÖÜíK== 4 ECB Bid rate 0,69 = 0,69 2 fjc=àçáåë=áåW=få=çêÇÉê=íç= 05 06 07 08 ÄçäëíÉê=êÉëÉêîÉë=~åÇ=íç=Å~äã= ã~êâÉíëI=íÜÉ=ÖçîÉêåãÉåí= Ñáå~ääó=óáÉäÇÉÇ=íç=Å~ääë=íÜ~í=íÜÉ=ÖçîÉêåãÉåí=~ëâ=Ñçê=~ëëáëí~åÅÉ=Ñêçã=íÜÉ=brI=ïÜáÅÜ= ëìÄëÉèìÉåíäó=Ñçêï~êÇÉÇ=íÜÉ=êÉèìÉëí=íç=íÜÉ=fjc=EfåíÉêå~íáçå~ä=jçåÉí~êó=cìåÇFK==qÜÉ= ä~ííÉê=éêçîÉÇ=èìáÅâ=áå=çéÉåáåÖ=åÉÖçíá~íáçåë=ÇÉëéáíÉ=íÜÉ=ä~Åâ=çÑ=~å=ìéÇ~íÉÇ= Åçåëìäí~íáçå=êÉéçêí=ìåÇÉê=íÜÉ=^êíáÅäÉ=fs=çÑ=íÜÉ=fjc=ÅÜ~êíÉêI=ïÜáÅÜ=åÉ~êäó=~ää= ÅçìåíêáÉë=~êÉ=çÄäáÖÉÇ=íç=ìåÇÉêí~âÉ=ÉîÉêó=óÉ~êI=~åÇ=ïÜáÅÜ=~êÉ=ëâáééÉÇ=çåäó=ïÜÉå=íÜÉ= ~ìíÜçêáíáÉë=Å~ååçí=~ÖêÉÉ=ïáíÜ=íÜÉ=fjc=ëí~ÑÑ=çîÉê=~=êÉ~ëçå~ÄäÉ=ÇÉëÅêáéíáçå=çÑ=íÜÉ=ëí~íÉ= çÑ=~ÑÑ~áêë=~åÇ=éçäáÅó=êÉÅçããÉåÇ~íáçåëK= N =kÉÖçíá~íáçåë=ïáíÜ=íÜÉ=fjc=~êÉ=ëíáää=çåÖçáåÖK== tÜ~í=Ü~ë=íê~åëéáêÉÇ=ëç=Ñ~ê=áë=íÜ~í=íÜÉ=fjc=ã~ó=ÄÉ=ïáääáåÖ=íç=ÉñíÉåÇ=~=ëí~åÇÄó=Ñ~Åáäáíó= ïçêíÜ=ãçêÉ=íÜ~å=AO=ÄáääK=çê=~Äçìí=NM=íáãÉë=i~íîá~Ûë=fjc=èìçí~I=áå=äáåÉ=ïáíÜ=íÜÉ=êÉÅÉåí= fjc=ëìééçêí=íç=fÅÉä~åÇK==fjc=Ü~ë=~äëç=~ååçìåÅÉÇ=íÜ~í=áí=áë=ïçêâáåÖ=çå=~=éêçÖê~ã= íÜ~í=ã~áåí~áåë=íÜÉ=i~íîá~å=ÅìêêÉåí=ÉñÅÜ~åÖÉ=ê~íÉ=é~êáíó=~åÇ=Ä~åÇ=íÜÉêÉÄó=ãÉÉíáåÖ= íÜÉ=~ìíÜçêáíáÉëÛ=ëíêçåÖ=êÉèìÉëí=åçí=íç=íçìÅÜ=íÜÉ=ÉñÅÜ~åÖÉ=ê~íÉ=çÑ=íÜÉ=ä~íKK==qÜ~í=Ü~ë= ëìêéêáëÉÇ=ëçãÉ=çÄëÉêîÉêëI=~ë=ÇÉî~äì~íáçå=çê=~=åÉï=ÉñÅÜ~åÖÉ=ê~íÉ=éçäáÅó=Ü~Ç=ÄÉÉå= ÉñéÉÅíÉÇ=íç=ÄÉÅçãÉ=~=âÉó=ÅçåÇáíáçå=çÑ=íÜÉ=fjc=é~Åâ~ÖÉI=åçí=çåäó=ÄÉÅ~ìëÉ=çÑ=fjcÛë= Latvia, Policy Rates, Refinancing Rate, LVL

Source: Reuters EcoWin

1

Latvia is on a normal 12 month consultation cycle, but the IMF issued its latest regular consultation report on Latvia in October 2006. That report has been considered by a number of analysts as unusually critical. 2

SEB Merchant Banking Country Risk Analysis Dec. 18, 2008

éêÉîáçìë=éççê=ÉñéÉêáÉåÅÉ=áå=ÜÉäéáåÖ=ÅçìåíêáÉë=ÇÉÑÉåÇ=ÅìêêÉåÅó=éÉÖëI=áKÉK=íÜÉ=Å~ëÉ=çÑ= ^êÖÉåíáå~=áå=OMMNI=Äìí=~äëç=ÄÉÅ~ìëÉ=çÑ=íÜÉ=ã~åó=áåÇáÅ~íáçåë=çÑ=ê~éáÇäó=ÉêçÇáåÖ= i~íîá~å=ÅçãéÉíáíáîÉåÉëëK==E`çåÑK=Äçñ==ÄÉäçïFK=== = cáëÅ~ä=ÅçêêÉÅíáçåW=få=êÉíìêå=íÜÉ=fjc=áë=ÉñéÉÅíÉÇ=íç=ÇÉã~åÇ=~=ëíêçåÖ=ÑáëÅ~ä=ÅçêêÉÅíáçåK= få=êÉëéçåëÉ=íÜÉ=ÖçîÉêåãÉåí=êÉÅÉåíäó=éêÉé~êÉÇ=~=êÉîáëÉÇ=OMMV=ÄìÇÖÉíI=ïÜáÅÜ=áåÅäìÇÉë= ëÉîÉê~ä=í~ñ=ãÉ~ëìêÉë=~åÇ=~=êÉÇìÅíáçå=çÑ=íÜÉ=ë~ä~êó=äÉîÉä=çÑ=ÖçîÉêåãÉåí=ÉãéäçóÉÉëI= ~ååçìåÅÉÇ=~í=~=NRB=ÅìíK==qÜÉ=ä~ííÉê=ãçëí=äáâÉäó=êÉÑÉêë=íç=íÜÉ=çêáÖáå~ä=OMMV=ÄìÇÖÉíI= éêÉé~êÉÇ=ÄÉÑçêÉ=íÜÉ=Åêáëáë=Ü~Ç=óÉí=ÇÉîÉäçéÉÇ=íç=áíë=éêÉëÉåí=ëí~ÖÉI=~åÇ=áí=áë=ëíáää=åçí= ÅäÉ~ê=Üçï=ä~êÖÉ=íÜÉ=Åìí=ïáää=ÄÉ=Åçãé~êÉÇ=íç=íÜÉ=éêÉëÉåí=äÉîÉäK==qÜÉ=ä~íÉëí=êÉîáëáçåë= êÉéçêíÉÇäó=é~ëëÉÇ=m~êäá~ãÉåí=ä~ëí=ïÉÉâK==_ÉÑçêÉ=íÜ~í=íÜÉ=ÖçîÉêåãÉåí=ÇÉÑáÅáí=Ü~Ç=ÄÉÉå= Éëíáã~íÉÇ=~í=OB=çÑ=dam=áå=OMMU=~åÇ=ìé=íç=SB=çÑ=dam=áå=OMMVK=== = fåíÉêå~ä=çê=ÉñíÉêå~ä=ÇÉî~äì~íáçå\== Measures of competitivenes mêçîáÇÉÇ=çåÉ=~ÅÅÉéíë=íÜÉ=~êÖìãÉåí= íÜ~í=íÜÉ=ä~í=Ü~ë=ÄÉÅçãÉ=çîÉêî~äìÉÇI= 160 íÜÉ=èìÉëíáçå=~êáëÉë=Üçï=íç=êÉëíçêÉ= ÅçãéÉíáíáîÉåÉëëK=qÜ~í=áë=åçêã~ääó= 140 ~ÅÅçãéäáëÜÉÇ=Äó=ëçãÉ=Ñçêã=çÑ= ÇÉî~äì~íáçåI=ïÜáÅÜ=ã~ó=ÄÉ=~å=çéÉåI= 120 åçãáå~äI=ÇÉî~äì~íáçå=çê=~å=áåíÉêå~ä= ÇÉî~äì~íáçåI=ãÉ~åáåÖ=~=ëáãáä~ê= 100 1996 2000 2004 2008 êÉÇìÅíáçå=çÑ=éêçÇìÅíáçå=Åçëíë=~ë=~= åçãáå~ä=ÇÉî~äì~íáçå=ïçìäÇ=Ü~îÉ= REER_PP REER_CP óáÉäÇÉÇK O ==qÜÉçêÉíáÅ~ääó=íÜÉ=ëÉÅçåÇ=áë= NEER íÜÉ=éêÉÑÉêêÉÇ=ÅÜçáÅÉ=~ë=áí=~îçáÇë=íÜÉ= éêçÄäÉã=çÑ=ÄêáåÖáåÖ=ÑáêÉïççÇ=íç=~å= Two statistical time series are frequently used to çåÖçáåÖ=áåÑä~íáçå=éêçÅÉëëI=Äìí=áå= analyze competitiveness of a country, the éê~ÅíáÅ~ä=íÉêãë=íÜÉ=Ñáêëí=áë=åçêã~ääó= nominal and the real effective exchange rate (NEER and REER). The first calculates the êÉÖ~êÇÉÇ=~ë=íÜÉ=çåäó=çéíáçå=êÉ~ääó= exchange rate against a basket of currencies ÉñÉÅìí~ÄäÉK=qÜÉ=éêçÄäÉã=ïáíÜ=íÜÉ= weighed together with trade weights. The REER, áåíÉêå~ä=ÇÉî~äì~íáçå=áë=íç=ÉåëìêÉ=áíë= in contrast, also weighs in the inflation rates of all countries in the basket. Therefore, if any Ñìää=áãéäÉãÉåí~íáçå=áå=~=Åçìåíêó= country has a higher inflation rate than other ïáíÜ=~å=çéÉå=ÇÉãçÅê~íáÅ=éçäáíáÅ~ä= countries that is not compensated by a weakening éêçÅÉëëK==táíÜ=íÜÉ=m~êäá~ãÉåí= of its exchange rate, the REER will show the country appreciating its currency in “real terms” é~ëëáåÖ=íÜÉ=ÖçîÉêåãÉåíÛë=êÉîáëÉÇ= and therefore likely loosing competitiveness. ÄìÇÖÉíI=áí=ã~ó=Ü~îÉ=ã~ÇÉ=~=ÖççÇ= The question is then which measure of inflation ëí~êí=íç=~=ëìÅÅÉëëÑìä=áåíÉêå~ä= to choose, the consumer price index (REER_CP) or the producer price index (REER_PP). In the ÇÉî~äì~íáçå=áå=é~êíáÅìä~ê=áÑ=íÜÉ=NRB= case of Latvia the graph shows that the choice ï~ÖÉ=Åìíë=~Åíì~ääó=áãéäó=~=Åìí=Ñêçã= does not make a big difference: In recent years, ÉñáëíáåÖ=äÉîÉäë=çÑ=íÜÉ=ë~ãÉ=çêÇÉê=çÑ= they have both moved in parallel sharply up indicating a possible big loss of competitiveness ã~ÖåáíìÇÉK=^åóíÜáåÖ=ãìÅÜ=ëÜçêí=çÑ= since 2005. That has been offset only partly by íÜ~íI=ÜçïÉîÉêI=ãáÖÜí=åçí=ÄÉ=~ÅÅÉéíÉÇ= higher productivity. The NEER, by contrast, has Äó=ã~êâÉíë=ÖçáåÖ=Ñçêï~êÇ=~ë=áí= remained fairly stable reflecting the peg to the Euro, the currency of Latvia’s main trading ïçìäÇ=äáâÉäó=Ñ~áä=íç=ÖáîÉ=~=éêçéÉê= partner. ëáÖå~ä=íç=íÜÉ=êÉëí=çÑ=íÜÉ=ÉÅçåçãó=çÑ= íÜÉ=åÉÉÇ=Ñçê=ëíêçåÖ=ï~ÖÉ=ãçÇÉê~íáçå=áå=ÅçãáåÖ=óÉ~êëK==^ë=~=êÉëìäíI=Å~éáí~ä=ÑäáÖÜí=ã~ó= çåÅÉ=~Ö~áå=éáÅâ=ìé=áåÅêÉ~ëáåÖ=íÜÉ=êáëâ=çÑ=~=åçãáå~ä=ÇÉî~äì~íáçå=ÄÉáåÖ=ÑçêÅÉÇ=ìéçå= íÜÉ=~ìíÜçêáíáÉëI=~åÇ=íÜÉå=éêçÄ~Ääó=áå=~å=ìåÅçåíêçääÉÇ=ã~ååÉêK==JJ=tÉ=Ü~îÉ=ÅçåëìäíÉÇ= äçÅ~ä=ÉñéÉêíë=ïÜç=ÅçåÑáêã=íÜ~í=íÜÉ=äÉîÉä=çÑ=ëéÉÅáÑáÅ~íáçå=áå=íÜÉ=ÖçîÉêåãÉåí=ÄìÇÖÉí= 2

Pls. Confer ”three points about the Baltics” at www.seb.se/MB under “Country analysis” for a more comprehensive discussion of the issue. 3

SEB Merchant Banking Country Risk Analysis Dec. 18, 2008

éêÉëÉåí~íáçå=ã~âÉë=áí=Ü~êÇ=íç=ã~âÉ=~=Ñìää=~ëëÉëëãÉåí=çÑ=íÜÉ=êÉ~ä=ëáòÉ=çÑ=íÜÉ=ï~ÖÉ=Åìí= Åçãé~êÉÇ=íç=íÜÉ=éêÉëÉåí=äÉîÉä=~åÇ=ïÉ=Ü~îÉ=íç=êÉëí=çìê=àìÇÖÉãÉåí=íáää=ëãçâÉ=ÅäÉ~êëK===== = lìíäççâW==qÜÉ=ÑìêíÜÉê=ÇÉîÉäçéãÉåí=êÉëíë=ãìÅÜ=çå=íÜÉ=çìíÅçãÉ=çÑ=íÜÉ=Ñáå~ä=fjc= é~Åâ~ÖÉ=~åÇ=Üçï=íÜ~í=ïáää=ÄÉ=áãéäÉãÉåíÉÇK==lìê=ÄÉëí=ÖìÉëë=áë=íÜ~í=íÜÉ=Åçìåíêó=Ü~ë= ~ÅÜáÉîÉÇ=~=êÉëéáíÉ=Ñçê=åçïI=ïÜáÅÜ=ëÜçìäÇ=ÜÉäé=êÉëíçêÉ=ëçãÉ=ëí~Äáäáíó=áå=íÜÉ=Ñáå~åÅá~ä= ã~êâÉíëK==jçêÉ=éÉçéäÉ=ïáää=åçï=äáâÉäó=âÉÉé=ãçåÉó=áå=ä~í=~ÅÅçìåíë=åçï=íÜ~í=íÜÉ=êáëâ= çÑ=~å=áããÉÇá~íÉ=åçãáå~ä=ÇÉî~äì~íáçå=Ü~ë=ëçãÉïÜ~í=Ñ~ÇÉÇI=ÉîÉå=íÜçìÖÜ=~í=íÜÉ= éêÉëÉåí=áåíÉêÉëí=ê~íÉë=íÜÉó=äççëÉ=ãçåÉó=Äó=íÜÉ=Ç~ó=áå=êÉ~ä=íÉêãëK==jçêÉ=ìåÅÉêí~áåI= ÜçïÉîÉêI=áë=íÜÉ=ëí~Äáäáíó=çÑ=éÉçéäÉÛë=ãçêíÖ~ÖÉë=~åÇ=çíÜÉê=Ä~åâ=äç~åëK=lîÉê=íÜÉ=êÉÅÉåí= íïç=óÉ~êë=ä~í=äç~åë=Ü~îÉ=ÖçåÉ=ÅçãéäÉíÉäó=çìí=çÑ=Ñ~ëÜáçåI=~åÇ=ÉîÉå=ÉñáëíáåÖ=ä~í=äç~åë= Ü~îÉ=ÄÉÉå=ÅçåîÉêíÉÇ=íç=ÑçêÉáÖå=ÅìêêÉåÅó=ÇÉåçãáå~íáçåëI=~ííê~ÅíÉÇ=Äó=ëçãÉïÜ~í= äçïÉê=áåíÉêÉëí=ê~íÉëK==^í=íÜÉ=éêÉëÉåíI=çåäó=OMB=çÑ=íçí~ä=Ä~åâ=äç~åë=êÉã~áå=áå=ä~íK=dáîÉå= ëçãÉ=äáåÖÉêáåÖ=ìåÅÉêí~áåíó=çîÉê=íÜÉ=ÉñÅÜ~åÖÉ=ê~íÉ=ïÉ=êÉÖ~êÇ=íÜ~í=~ë=~å=~åçã~äóI= ~åÇ=ïçìäÇ=åçí=ÄÉ=ëìêéêáëÉÇ=áÑ=ëçãÉ=ÇÉÄíçêë=ÄÉÖ~å=íç=ÅçåîÉêí=íÜÉáê=äç~åë=Ä~Åâ=íç=äçÅ~ä= ÅìêêÉåÅáÉëI=ÉîÉå=íÜçìÖÜ=íÜÉ=áåíÉêÉëí=ê~íÉ=ÇáÑÑÉêÉåíá~ä=~í=íÜÉ=éêÉëÉåí=ã~ó=~ééÉ~ê= ìå~ííê~ÅíáîÉK==qÜ~í=ïçìäÇ=äÉ~îÉ=Ä~åâë=ïáíÜ=íÜÉ=ÅÜçáÅÉ=íç=ÉáíÜÉê=Å~êêó=íÜÉ=ÅìêêÉåÅó= ÉñéçëìêÉ=íÜÉãëÉäîÉëI=çê=ÜÉÇÖÉ=áíK==få=íÜ~í=Å~ëÉ=íÜÉ=äáâÉäó=êÉëìäí=ïáää=ÄÉ=Å~éáí~ä= çìíÑäçïë=çÑ=íÜÉ=ë~ãÉ=ëáòÉI=ïÜáÅÜ=ïáää=ÑçêÅÉ=íÜÉ=ÅÉåíê~ä=Ä~åâ=íç=ëÉää=ÑçêÉáÖå=ÅìêêÉåÅáÉë= Ñêçã=áíë=êÉëÉêîÉë=íç=~îçáÇ=éêÉëëìêÉ=çå=íÜÉ=ä~íK= = JGJ= = qÜÉ=Åçää~éëÉ=çÑ=i~íîá~Ûë=ëÉÅçåÇ=ä~êÖÉëí=Ä~åâ=áå=ãáÇ=kçîÉãÄÉê=Ü~ë=ìëÜÉêÉÇ=áå=åÉï= êÉ~äáëã=íç=íÜÉ=éçäáíáÅ~ä=ÇÉÄ~íÉ=~åÇ=éêçãéíÉÇ=íÜÉ=ÖçîÉêåãÉåí=íç=ëÉÉâ=áåíÉêå~íáçå~ä= ~ëëáëí~åÅÉ=áåÅäìÇáåÖ=Ñêçã=íÜÉ=fjc=íç=ÅçîÉê=íÜÉ=ÅçåÅçãáí~åí=äçëë=çÑ=êÉëÉêîÉë=~åÇ= Å~äã=Ñáå~åÅá~ä=ã~êâÉíëK==qÜ~í=ã~ó=åçï=~ééÉ~ê=~ë=íÜÉ=ä~ëí=ÜçéÉ=Ñçê=~å=ÉÅçåçãó=íÜ~í= áë=~äêÉ~Çó=Ä~ííÉêÉÇ=Äó=~=ëÉîÉêÉ=ÇÉÅÉäÉê~íáçå=ÑçääçïáåÖ=óÉ~êë=çÑ=ìåëìëí~áå~ÄäÉ=çîÉêJ éÉêÑçêã~åÅÉK==tÜáäÉ=áí=áë=ëíáää=íçç=É~êäó=íç=àìÇÖÉ=íÜÉ=áåáíá~íáîÉ=åçí=âåçïáåÖ=íÜÉ=Ñáå~ä= êÉëìäíI=ëçãÉ=ã~ó=ÑáåÇ=áí=ëìêéêáëáåÖ=íÜ~í=íÜÉ=fjc=êÉéçêíÉÇäó=Ü~ë=~äêÉ~Çó=~ÅÅÉéíÉÇ=íÜÉ= ÖçîÉêåãÉåíÛë=êÉèìÉëí=Ñçê=~å=áåíÉêå~ä=ê~íÜÉê=íÜ~å=~å=ÉñíÉêå~ä=ÇÉî~äì~íáçåK=qÜ~í=áë= ÉîÉå=ãçêÉ=ëç=áÑ=áí=ëÜçìäÇ=~ééÉ~ê=íÜÉ=ÄìÇÖÉí=íáÖÜíÉåáåÖ=ïáää=åçí=Öç=~=îÉêó=Ñ~ê=ï~ó=áå= ãÉÉíáåÖ=íÜÉ=åÉÉÇ=Ñçê=Åçëí=êÉÇìÅíáçåë=áå=íÜÉ=ÉÅçåçãó=íç=êÉÖ~áå=ÅçãéÉíáíáîÉåÉëëK= eçïÉîÉêI=Ü~îáåÖ=ÅçåÑáÇÉåÅÉ=áå=íÜÉ=åÉÖçíá~íçêëI=ïÉ=ÖáîÉ=íÜÉ=Ñáå~ä=çìíÅçãÉ=çìê=ÄÉåÉÑáí= çÑ=íÜÉ=ÇçìÄíK==^Ö~áåëí=íÜ~í=ã~ó=ÄÉ=åçíÉÇ=ÅçåíáåìÉÇ=ÜáÖÜ=ÉîÉåí=êáëâ=~ë=êÉÑäÉÅíÉÇ=áå= çåÖçáåÖ=íìêÄìäÉåÅÉ=áå=íÜÉ=ÇçãÉëíáÅ=ã~êâÉíë= K=== hÉó=ÑáÖìêÉë

OMMU

mçéìä~íáçå=Eã áääáçåëF

OIP

damLÅ~éáí~=EAF

How to read the chart? M oving out from the center reduces risk.

Resilience 14 12 10 8

NQTTQ

M acro balance

6 4

Liquidity

2

dam=EÅÜ~åÖÉF

JOB

fåÑä~íáçå=

NSB

`ìêêK^ÅÅK=Ä~ä~åÅÉLdam

0

Absence of event risk

JNRB

oÉëÉêîÉëLáã éçêíë=Eã çåíÜëF

Q

_ìÇÖÉí=Ä~ä~åÅÉLdam

JOB

Latvia

dçîÉêåã Éåí=ÇÉÄíLdam

NMB

Hungary

bñíÉêå~ä=ê~íáåÖëW= cáíÅÜW===___JLåÉÖ= pCmW==___JLåÉÖ=

mÉÉêëW e ìåÖ~êó= bëíçåá~= iáíÜì~åá~

Inform ation

Average EM

Graph: The risk profile of Latvia is narrow on the top, reflecting the country's strength on resilience which is important for an investment grade country. However, that is now being over-powered by a dangerous mix of weakening liquidity combined with event and info risk.

4

=

SEB Merchant Banking Country Risk Analysis Dec. 18, 2008

= Key data: 2003 2004 GDP (mill. US$) 11,2 13,8 GDP/capita (US$) 4801 5945 GDP (change) 7,2% 8,7% Investments/GDP 28% 32% Budget balance/GDP -1,4% -1,1% Govt debt/GDP 14% 14% CPI inflation (%) 2,9% 6,2% Money demand (%) 19,3% 20,4% Stock prices 288 414 Interest rates 2,9% 3,3% Exch. Rate ($) 0,57 0,54 Trade/GDP (%) 97% 104% Oil price (Brent) $29 $38 Billions US $ Export of goods 4,7 6,0 Imports of goods 6,1 8,2 Other: 0,5 0,4 -0,9 -1,8 Current account (% of GDP) -8% -13% FDI 0,3 0,6 Loan repayments -0,8 -1,1 Net other capital flows 1,6 2,7 0,2 0,5 Balance of payments NIQ NIV Reserves Total debt 8,8 12,7 o/w short term debt 5,6 7,7 Sources: Oxford Economics and SEB estimates Rating history Fitch (eoy) S&P (eoy) Type of government: Next elections Other: Latest PC deal Latest IMF arrangements

Health, education

2005 16,0 6969 10,6% 35% -1,1% 15% 6,7% 31,6% 676 2,5% 0,56 110% $54

2006 19,9 8709 12,2% 37% -0,9% 12% 6,6% 32,2% 656 3,3% 0,56 111% $65

2007 27,2 11930 10,3% 36% 0,7% 11% 10,1% 3,5% 595 5,2% 0,51 109% $73

2008 33,5 14774 -1,8% 34% -2,1% 10% 15,5% 19,6%

2009 30,1 13354 -6,0% 33% -6,0% 16% 7,8% 6,7%

2010 31,5 14036 -4,7% 31% -6,0% 21% 4,4% 7,3%

3,7% 0,48 100% $96

2,4% 0,56 112% $50

2,2% 0,56 110% $53

7,7 10,0 0,3 -2,0 -12% 0,7 -2,7 4,3 0,3 OIO 14,5 7,5

8,9 13,2 -0,2 -4,5 -23% 1,7 -2,5 7,5 2,1 QIQ 22,8 10,5

12,1 17,6 -1,0 -6,5 -24% 2,2 -5,7 11,2 1,2 RIS 38,0 16,5

14,7 18,8 -1,0 -5,2 -15% 2,7 -6,5 10,1 1,1 SIS 43,6 17,9

15,4 18,2 1,2 -1,5 -5% 2,4 -7,0 6,7 0,5 TIO 46,6 18,6

16,3 18,2 1,0 -0,9 -3% 2,5 -7,4 6,2 0,5 TIS 49,0 19,6

BBB+ AAAAAAAParliamentary Democracy 2010 - Parliamentary, 2011 - Presidential

BBB+ BBB+

BBBBBB-

None 1992 SBA

Other

BBank ank C r e d its Credits

FDI 2002-06

90

80 80 70

Percent

Transport Utilities, hotels, constr

Percent

Finance, real estate

Agricult., mining Wholesale & retail

H o u s e h o ld s

70 60

60

50

50

40

40

30

30

20

20

Manufactur ing

A n n u a l g r o w th r a te s

90

C o m p a n ie s

10 00

01

02

03

04

05

10 00

01 02 0 3 [ar 12 0 4months] 05 private enterprises persons [ar 12 months]

p ri v a te e n t e r p r i s e s [a r 1 2 m o n t h s ]

06

07

08

p e r s o n s [ a r 1 2 m o n th s ]

S o uReuters rc e : R eEcoWin u te rs E c o W i n Source:

E x c h a n g e r a t e a n d in t e r b a n k m a r

8

E x c h a n g e r a te

6

P o lic y r a te

4

E C B B id r a t e

2

05

06

07

6 0 600 0

Index

% p.a.

10

7 0 700 0

Index

In t e r b a n k r a t e

12

8 0 800 0

EUR/LVL

14

O M Index, X R i g a Total In d e xreturn OMX Riga 0 ,7 2 0 ,7 2 0 ,7 1 0 ,7 1 0 ,7 1 0 ,7 1 0 ,7 0 0 ,7 0 0 ,7 0 0 ,7 0 0 ,6 9 0 ,6 9 0 ,6 9 0 ,6 9

5 0 500 0 4 0 400 0 3 0 300 0 2 0 200 0 1 0 100 0 3 99 000

08

04 01

02 0 5

03 0 6

04

0 7 05

006 8

L a tvia , P o lic y R a te s , R e fin a nc in g R a te , L V L S o u rc e : R e u te r s E c o W in

S ou rc e : R e EcoWin u t e rs E c o W i n Source: Reuters

5

=

SEB Merchant Banking Country Risk Analysis Dec. 18, 2008

=

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6