Managing the Crisis. The Case of Latvia Valdis Dombrovskis Prime Minister of Latvia

Liquidity of accounts of the State Treasury in 2009 was completely assured 2 Available Funding Resources at the End of the Period in (incl. resources reserved to ensure stability of the financial sector) 1st tranche of EC loan received 2nd tranche of IMF loan received 2nd tranche of EC loan received 1st tranche of WB loan received 3rd tranche of IMF loan received aizdevuma 3.daļa 3rd tranche of EC loan

Strong and Broad-Based International Support 3 ▌ Both the EU and the IMF have disbursed the third tranches of their respective loans following successful economic and other reform measures implemented by the government in the 2010 budget in accordance with these agreements ▌ EU/IMF review mission is planned in May 2010 ▌ Loan agreement with the World Bank on next EUR 100 mn has been signed ▌ Loan agreements with Poland, Czech Republic and Nordic lenders are being negotiated to include the possibility of credit line format Tough adjustment measures have earned international financial support for Latvia International Assistance Loans Planned and Disbursed (millions of EUR) Source: Treasury, 18 ReceivedPlanned years TOTAL Receive d till 29 April 2010 European Commission Nordics (SE, DK, FI, NO, EE) The World Bank Czech Republic EBRD 100 Poland 100 IMF Total

4 Promotion of national competitiveness Economic growth Measures of the Social Sector Efficiency of Public Administration Budget and structural reforms, incl. implementation of LOI and MOU

Economic trends at the time when the new Government took the office: dramatic fall in GDP 5

Export and import of goods LVL million, seasonally equalized 6 Datu avots: CSP

As a Result of Economic Crisis, the Unemployment Level has Inscreased Significantly 7

Above factors have contributed to current account surplus since the beginning of

Remuneration has been radically reduced in public administration... 9 Data source: Data aggregated by the Ministry of Finance Percentage decrease was calculated against the average index of 2008 Average salaryAverage salary of 2008Average salary of 2009 Average monthly salary (calculated by the MoF) in state budget institutions by month in 2009 and 2010 and compared with average indicators of 2008 and 2009, LVL and % The financing needed for funding of salaries in the state budget declined from LVL million in 2008 to LVL million in 2010 creating total economy of LVL million

... as well as the number of employees has been significantly reduced 10 Data source: Data aggregated by the Ministry of Finance Percentage decrease was calculated against the average index of 2008 In January 2010, employees were employed in the state financed institutions or 14.2 thousand less than in January 2009 Number of employees (calculated by MoF) in the state budget institutions by month in 2009 and 2010 and compared with average indicators of 2008 and 2009, thousands Number of employees Average number of employees in 2008 Average number of employees in 2009 Number of employees, thousands

Annual rate of change in credits issued during the year continues to decline, but the decline has slowed significantly 11

12 Return of Investor Confidence Recent demand for domestic debt and recovery in credit spreads underpins investors’ confidence in Latvia’s recovery Source: The Treasury. Regular and successful domestic debt auctions are evidencing the recovery in Latvia’s financial markets Since June 2009 the Treasury has steadily been increasing the average maturity of its domestic securities portfolio by issuing longer dated securities (2 and 3 year benchmarks) Average weighted yield rates have markedly decreased over the last quarter of 2009 and 1st quarter of 2010 Credit spreads on Latvia’s Eurobond have substantially rallied, tightening by around 240bps since their highs Eurobond 2018 Performance Source: Bloomberg 22 Average Weighted Yields Domestic T-bills Competitive Multiprice Auctions)

Cyclically adjusted budget balance of the consolidated state budget 13

Since middle of 2009 the capital outflow from Latvia has not been observed 14 Lats exchange rate and interventions of the BL

Improvement of macroeconomic indicators and reduction of government spending promote confidence in the financial system of Latvia 15 RIGIBID & RIGIBOR indexes

Conjuncture of the manufacturing sector continues to improve; the key development factor - exports 16 Industry Confidence Index (balance, in %) Real Changes in Manufacturing Turnover (%) Avots: CSP

Retail growth - a sign of economic recovery 17 In 2008, the statistics start consolidation of data according new NACE2 classification of economic activity. Starting from 2008, re-calculation was made in data chart according to new classification

18 External market update CDS levels have fallen significantly since their highs Latvia’s 10 year CDS level (April 29) Source: The Bloomberg. Latvia’s 10Y CDS level is 355 bp (April 29, 2010) Eurobonds outstanding in amount of €800mn (2 issues) as of 31 st Mar – €400mn due in April 2014 – €400mn due in March Source: The Bloomberg. 5 year CDS of Greece, Latvia, Portugal, Spain and Ireland

19 Achievements of the Government are recognized The rating of long-term committments performed by rating agency Standart&Poor’s and Moody’s remains unchanged, but the future outlook is becomming positive

▌..... agency "Standard&Poor’s“: ▌ has re-evaluated the future assessment of Latvia and increased the future assessment of credit ratings from negative to stable ▌... agency Moody’s: ▌ “The recent measures which Latvia implemented to reduce the budget deficit will help avoid the bankruptcy or currency crisis, as well as from deterioration of credit rating” ▌.... The Economist: ▌...Jörg Asmussen, a German minister, praised Latvia for its self-discipline... ▌... despite a fall in GDP last year of 17.5%, Latvia seems to have achieved something many thought impossible: an internal devaluation... ▌....European Commission:... we may conclude that Latvia has taken the appropriate steps to prevent excessive budget deficit. The Commission concluded that the Latvian authorities have acted effectively. In particular, it refers to general reduction in expenditure as planned... International organizations and authoritative financial publications have recognized the achievements of the Government in ensuring national solvency and prevention of bankruptcy... 20

21 Valdis Dombrovskis, Prime Minister of Latvia 36 Brīvības blvd., Rīga, LV Thank you for attention!