Report Summary
The breakneck pace of Latvian economic growth is discussed at length later in this report The Latvian economy is expected to remain among the fastest-growing in the world this year. However, government efforts to restrain domestic demand coupled with rising interest rates should begin to impact output growth going into 2008. But there is a growing risk that policy and behaviour will not change sufficiently fast to prevent a protracted slowdown in Latvia's increasingly unbalanced economy.
Latvia's economy slowed in Q107, but not by nearly enough to assuage fears that it could be headed for a fall. Real GDP grew by 10.7% y-o-y, according to a flash estimate from the Central Statistical Bureau, compared to 11.7% in Q406 and an average of 11.9% last year. Quarterly national accounts are not yet available but growth was probably driven by private consumption and fixed investment spending. Retail sales rose by an inflation-adjusted 28% y-o-y in Q1, with car sales jumping 73%. Industrial output increased by just 1.3%.
Consumer spending continues to be supported by strong wage growth, rising employment and easy access to cheap money. Net of taxes and inflation, wages rose by 20% y-o-y in Q406, while the number in work increased by a record high 4.6% last year. The appetite of households to borrow and spend remains enormous. The annual rate of change in mortgage lending stood at 87% in March 2007 while consumer credit increased by 60%, but from a much lower base. Having seen aggregate profits rise by 44% y-o-y in Q1 (to EUR127mn), the banking sector's willingness to supply credit is unlikely to weaken much in the near term.
The Commercial Banking Sector As at the end of 2006, total assets, loans and deposits amounted to US$29.4bn, US$16.5bn and US$8.2bn, respectively. By all three measures, Latvia certainly has a small banking sector relative to those in most countries in Central and Eastern Europe and, of course, in the Middle East and Africa. The deposit level in particular is small and this helps to explain why the loan/deposit ratio is so high in Latvia.
It also may suggest that Latvians are reluctant to deposit their cash with banks (although per capita deposits are not particularly low by regional standards). This is a concern as the growth of Latvian banks is not funded by a deposit base to the same extent as banks in other countries. This also reflects something that BMI has previously remarked upon: namely, Latvia's development as an offshore financial services centre, specialising in servicing Russian clients. With other assets and liabilities being very large relative to everything else, it would appear that Latvia's banks are borrowing money from foreign (Russian) banks and recycling these as loans to the non-bank public (who are not necessarily in Latvia). The obvious conclusion to draw is that Latvia's commercial banks have been growing as a result of the oilboom in Russia, combined with the Central Bank of Russia's tightening of bank regulations - which has forced some banking activity offshore.
Latvia Commercial Banking Report Q3 2007 Business Monitor International Ltd Page 10 A significant risk to future growth is further stimulus to the economy from tax cuts. Earlier in 2006, the government agreed in principle to reduce the rate of personal income tax from 25% to 22% in 2007, 19% in 2008 and 15% in 2009. Prime Minister Aigars Kalvitis had remarked that while he supports raising the tax-free income threshold, tax cuts should wait until the finances of the central and local governments are stronger. Postponing tax cuts would please the central bank and International Monetary Fund (IMF), which agree that a boost to household disposable income is the last thing an economy on the brink of overheating needs. Although, after recently winning re-election, the government's policy programme remains broadly unchanged and envisions a gradual reduction in the standard rate of income tax, an increase in the minimum wage, a higher state pension, the reform of real estate taxation, the introduction of medium-term budgetary planning, the implementation of the national Lisbon strategy (to improve education, encourage innovation and facilitate the absorption of new technologies)
Latvia has been running both a current account and a budget deficit. The combined deficit is at more than 18%, while nominal GDP growth has been running at about 18%. Latvia has a managed currency regime.
In the year to December 31 2006, growth in total lending by the banks declined considerably from over 60% in March to only 4.8% The Loan/Deposit Ratio is 200.6% and rising. To date Latvia continues to have the highest Loan/Deposit ratio of the 59 countries we surveyed.
In local currency terms, asset growth was 45% over the preceding year; by this measure, Latvia was ranked 5th among the 59 countries for which we have compiled information this quarter. Loan growth was 63%; by this measure, Latvia recorded the 3rd highest growth in our survey. Deposit growth was a high 41%.; by this measure, Latvia was the 4th largest country in our survey.
As at the end of 2006, the loan/deposit, loan/asset and loan/GDP ratios were 201%, 56% and 82% respectively. Relative to the corresponding ratios in other countries, the loan/deposit ratio is exceptionally high; the others only moderately so. Latvia's banks appear, collectively, to hold bonds worth US$0.2 billion. BMI considers that in an international context, the banks are very lightly exposed to bonds.
Press Reports There is speculation that the Swedish Bank Svenska Handelsbanken could open a branch in Latvia in as soon as a year's time, making its next step toward the development of a pan-Baltic network of bank branches.
The Latvian Commerical Banks Association has released figures showing that at the end of February, the aggregate share of Latvia's three largest banks by assets - Hansabanka, SEB Latvijas Unibanka and Parex Bank - in Latvia's total banking assets remained unchanged from the previous month at 54.7%.
The rate of mortgage lending growth in Latvia is expected to slow down, Jan Linden, the president of Swedish bank Swedbank, the owner of Latvia's Hansabanka, said. 'Firstly, we should remember that the growth of lending begun from a very low starting level. I believe therefore that the growth of mortgage lending will slow down in percentage terms and will stabilise. If rules are changed, speculative deals will decrease,' the Swebank head said in the interview with Latvia's Dienas Bizness newspaper.
A recent study has shown that Latvia's banks are currently dominated by Scandinavian capital, with foreigners owning nearly 70% of the total share capital of Latvian banks.
Contents
Executive Summary
Key Issues
Changes To The Commercial Banking Forecast
Latvian Commercial Banking SWOT
Latest Developments - Q307
International Context
Lending Trends And External Accounts
Total Assets, Loans And Deposits
Year-On-Year Growth Rates
Per-Capita Deposits
Macroeconomic Trends And Developments
Economics: BMI Core Scenario
Politics: BMI Core Scenario
Business Environment:
Economic Activity
Industry Forecast Scenario
Comment On Forecasts
Comment On Trends
Banks' Bond Portfolios
Competitive Landscape
Market Protagonists
Methodology
“Latvia Commercial Banking Report Q3 2007” is available from Report Buyer. For more information go to: http://www.reportbuyer.com/
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