COUNTRY ESSENTIALS. The Coface Country Essentials offer a concise and clearly structured

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1 COUNTRY ESSENTIALS LATVIA Summer 2015 TABLE OF CONTENTS / 02 / 03 / 05 / 05 General Information Risk Assessment Foreign Trade Economic Key Data / 06 Insolvency / 07 / 08 Checklist for Business Operations Contacts Coface / 09 References Overview The Coface Country Essentials offer a concise and clearly structured overview of country economic facts. The most important facts for 18 countries in Central and Eastern Europe include the most recent risk overview and our Coface country risk assessment. You receive a general information on the country ranging from major cities to natural resources and most important sectors. This is followed by our risk assessment giving a general overview on the economic and political situation and the strength and weaknesses of the country. The next chapter focuses on the key facts: top trading partners and economic data like GDP growth, inflation or public debt. The insolvency part shows you the top and flop sectors, information on the development of insolvencies and the procedure. Last but not least we provide you with a checklist for business operations and the latest corruption and doing business index data. If you need further information your will find a list of our contacts in the region.

2 GENERAL INFORMATION Latvia, officially Republic of Latvia, is a country in the Baltic region. It is bordered by Lithuania, Estonia, Russia and Belarus. Latvia is a member of European Union. There are five planning regions: Courland (Kurzeme), Latgalia (Latgale), Riga (Rīga), Vidzeme and Zemgale. The Republic of Latvia was founded on November 18, Latvia joined the European Union in 2004 and the eurozone on 1 January Form of government: Parliamentary Republic Administrative organisation: 110 communities (novadi) 9 republican cities (republikas pilsētas) Area: 64,573 km² Population: 2,013,468; density: 31 inhabitants/km² Official language: Latvian Local currency: 1 Euro = 100 Cents Capital: Rīga 658,640 inhabitants Major cities and population: Daugavpils Liepāja Jelgava Jūrmala Ventspils 87,403 inhabitants inhabitants inhabitants inhabitants inhabitants Ethnic groups: Religion: 61.4% Latvians, 26% Russians, 3.4% Belarussian, 2.3% Ukrainians, 2.2% Poles, 1.1% Lithuanians, 3.6% others 34.7% Lutheran, 24.5% Roman-Catholic, 18.1% Orthodox, 3% others, 19.7% no declared religion Natural resources: Wood, dolomite, clay, sand, limestone, silica sand for glass, peat Most important sectors: Membership in international organisations: Retail and wholesale, transports and storage, manufacturing, construction, agriculture, tourism NATO, WTO, Council of Europe, IMF, Schengen, UN, UNESCO, OSCE, FAO, ISO, CBSS, CEN, World Bank / 2

3 RISK ASSESSMENT Coface Country Assessment B Economy sustained by consumption Growth in 2015 is expected to remain at a moderate level, with household consumption being the driving force once again, thanks to the continuing fall in unemployment, wage rises in the public sector, a small reduction in income tax and higher family allowances. There is also last year s introduction of indexing for pensions. In terms of investments, after two years of decline or standstill, there is likely to be a small upturn. Whilst infrastructure construction projects will continue to receive European funding, investments by companies and households, with ongoing debt reduction, will remain weak in the light of uncertain internal and external prospects. Exports, mainly food products (20% of exports), wood products (15%), telephones and screens, will benefit from economic growth in their leading markets, which are Lithuania (17% of sales) and Estonia (15%). Any improvement will however be only moderate. Its sales to Russia (11% of exports in 2013) will continue to suffer under European sanctions and Russian counter-sanctions. The cost of lost food product sales, mostly dairy products and drinks, is estimated at 0.7% of GDP. Other product sales are suffering from the weak Russian economy and the fall of the rouble. In addition, any recovery in sales of iron and steel products is dependent on the restarting of its sole steel mill, Liepajas Metalurgs, which has been shut since its insolvency at the end of Public accounts under control The public accounts deficit will remain at a low level, despite the reduction in revenue from income taxes and increased expenditure. In addition to the measures mentioned previously, a subsidy has been brought in for poor households to offset the impact of the deregulation of the electricity market on prices. The reduction in the level of public debt will continue. Although a large part is held by non-residents, denominated in euros, there is no exchange rate risk involved. External bank debt linked with non-resident deposits The small current account deficit encompasses a large deficit in the trade of goods (9.2% of GDP in 2013). The low added value of exports means they are overly susceptible to competition, whilst the limited diversification of domestic output encourages imports. On top of this, the lack of port facilities and land link infrastructure towards the rest of the European Union does not help promote the geographic diversification of trade. Nevertheless, the surplus in services, from tourism, European capital flows and remittances from the increasing number of emigrant workers help offset most of this deficit. The balance is financed by foreign investments. The external debt, despite its constant reduction, does however remain substantial (135% of GDP vs. 160% in 2010). One-quarter is owed by the State, with another quarter owed by non-financial companies. The remaining half is borne by the banks. Whilst the debt held by local banks with their Swedish parents is significantly lower, non-resident deposits, mainly Russian, are increasing. These deposits are concentrated in a number of institutions and mostly invested in liquid foreign investments. Strengths Long coastline Transit point between the European Union and Russia Member of the Eurozone Potential for membership to the OECD in the near future Financial system dominated by Swedish banks Weaknesses Declining active population High level of structural unemployment Technologically backward Lack of land routes connecting it with rest of the European Union Concentration of wealth in the capital 60% of energy needs (i.e. all fossil fuels) are supplied by Russia / 3

4 RISK ASSESSMENT A large Russian-speaking minority The elections in October 2014 saw the return to power of the centre-right coalition between the Unity Party, the Union of Greens and Farmers, and the National Alliance. The Prime Minister, Laumdota Straujuma, in office since January 2014, thus has 61 of the 100 seats in the Assembly. The leading party however remains in the opposition. This is the centre-left Harmony Party, which holds 24 seats and is headed by the Mayor of Riga. This unites the Russian speakers who constitute 27% of the population and who are concentrated in the capital and in the poorer Latgale region in the east of the country. In the context of the Russia- Ukraine crisis and the sanctions, voting is mainly on an ethnic basis. The continuation of a high level of unemployment linked with poor levels of training, regional disparities and poverty, poorly targeted by social assistance which is not necessarily directed at those who need it most, therefore come in second place when it comes to voting. / 4

5 FOREIGN TRADE & ECONOMIC KEY DATA Latvia s Top Trading Partners Imports in MEUR EU 28 8,434 * 9,680 * 9,920 * 10,021 * Lithuania 2,063 2,450 1,833 2,228 Germany 889 1, ,415 Estonia 1,331 1,416 1,034 1,174 Russian Federation 938 1, ,025 Exports in MEUR EU 28 6,200 * 6,862 * 8,208 * 7,404 * Lithuania 1,546 1,583 1,258 1,889 Estonia 1,164 1, ,201 Russian Federation 902 1, ,105 Germany Source: Central Statistical Bureau of Latvia. * EU 27 Economic Key Data Key Data (e) 2015 (f) GDP growth (%) Inflation (yearly average) (%) Budget balance (in % of GDP) Current account (in % of GDP) Public debt (in % of GDP) (e) estimate (f) forecast Source: Coface / 5

6 INSOLVENCY Top 5 sectors Financial services Business and personal services Mineral products, chemicals, petroleum, plastics, pharmaceuticals and glass Paper, packaging and printing Utilities and public services Flop 5 sectors Construction Non specialised trade Motor vehicles, motorcycles, other vehicles and transport Agriculture, meat, agro food and wines Wood and furniture Insolvencies in 2014 Latvia is recording mixed economic results. The industrial and construction sectors are declining but the biggest insolvency in 2013 Liepajas metalurgs, Latvia s largest steel producer - resumed production in 2015 after being taken over by the Ukrainian KVV group. The plant has already started its operations with a wide exposure to foreign markets and plans to reinstate about 1,300 employees. Companies in the Baltic States are suffering from the deterioration in foreign trade with Russia, although they are actively trying to substitute alternative trade destinations. Company insolvencies show that deteriorated economic conditions translate into an increased number of bankruptcies. Whereas official data available for Lithuania shows that insolvencies rose by 5.4% in 2014, our estimation assumes that one-digit growth was also recorded in Latvia and Estonia, at 4.3% and 1.8%, respectively. As changes in the macroeconomic environment have an impact on the microeconomic side with some delay, we forecast a further rise of insolvencies in the Baltics, which will reach 8-10% by the year end. Insolvency Laws & Insolvency Procedures The provisions of the Insolvency Law are applicable to legal persons, partnerships, sole traders and foreign registered individuals carrying on standard business in Latvia, agricultural producers and natural persons. Insolvency Law is applicable also to legal protection proceedings for mentioned companies and persons. The purpose of this Law is to promote the honoring of the obligations of a debtor in financial difficulties and, where possible, the renewal of solvency, applying the principles and lawful solutions specified in the Law. Creditors may apply to the court to initiate the insolvency procedure, if they are owed more than EUR 4,268. To submit an application for the insolvency procedure, you must pay a fee of EUR 355,72 and administrator s costs EUR 720. A copy of the court order to commence the insolvency procedure shall immediately be sent to the state agency, The Insolvency Administration, so that it may recommend a candidate receiver (administrator) and to the Commercial Register so that it may make the relevant entry in the insolvency register. Latvia s Biggest Insolvencies in 2014 Company Name Sector Total liabilities in Euro Town 1. FATINA TRANS Transport 108,000 Liepaja 2. GK Holding Manufacture of metal structures and parts of structures 82,000 Daugavpils 3. MARK INVEST LATVIA Operation of gravel and sand pits 78,000 Lielvardes district 4. KURZEMES KRASAS Construction 76,000 Liepaja 5. OKOS Construction 58,000 Riga / 6

7 CHECKLIST FOR BUSINESS OPERATIONS The following table summarizes relevant information for investors and exporters. Corporate law Minimum capital for a stock company: EUR 35,000,- Minimum capital for a limited liability company: EUR 2,820,- Tax law 24% income tax for natural persons 15% corporate income tax 21% VAT (reduced rate: 12%) Investments Equal treatment of Latvian and foreign investors Foreign investors may establish any legal form of business entity Ownership up to 100% of Latvian companies is possible Foreign exchange No restrictions within EU Labour law Minimum wage: EUR 320,- Average wage: EUR 765,- Latvian labour law is largely aligned with European standards Customs The harmonised customs tariff of the EU as well as the rules of the CEFTA, EFTA and WTO apply Travel and residence No restrictions for EUcitizens Residence permit for stays of more than three months Corruption Doing Business Latvia was 43 rd in the International Corruption Perceptions Index In comparison, Germany was ranked 12 th and Austria was ranked 23 rd. The Corruption Perceptions Index is issued by Transparency International, and lists countries according to the perceived level of public sector corruption. This perception is based on surveys of managers and experts, and related solely to the public sector. The Doing Business Index issued by the World Bank ( expresses the ease of doing business in a particular country. In this ranking, Latvia was ranked 23 rd in 2015 advancing one places compared to the previous year. Germany and Austria were rated 14 th and 21 st, respectively. This index consists of ten different sub-indexes that determine whether laws or other regulations exist in certain areas and whether or how they are applied. For example, the subcategories deal with the payment of taxes, hiring of staff and the founding and closing of companies. / 7

8 CONTACTS COFACE Coface Austria & Coface Central Europe Stubenring Vienna T. +43 (1) F. +43 (1) Coface Lithuania Vilniaus str Vilnius T (5) F (5) Coface Albania serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Macedonia serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Belarus serviced by Coface Russia 1st Tverskaya-Yamskaya str., 23, bld Moscow T. +7 (495) F. +7 (495) Coface Moldova serviced by Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Bosnia & Herzegovina serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Montenegro serviced by Coface Serbia Bulevar Oslobodjenja Belgrade T (11) F (11) Coface Bulgaria 42 Petar Parchevich str Sofia T (2) F (2) Coface Poland Al. Jerozolimskie Warsaw T. +48 (22) F. +48 (22) Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Czech I.P. Pavlova Prague T F Coface Serbia Bulevar Oslobodenja Belgrade T (11) F (11) Coface Estonia serviced by Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Slovakia Soltésovej Bratislava T (2) F (2) Coface Hungary Tüzoltó utca Budapest T. +36 (1) F. +36 (1) Coface Slovenia Slovenceva ulica Ljubljana T (1) F (1) Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Ukraine 4 B. Gmyri Str., of Kyiv T (44) F (44) / 8

9 REFERENCES Internet >> Country Risk and Economic Research, CEE Insolvencies Panorama 2014, Coface, Niederlassung Austria, Vienna Print Handbuch Länderrisiken 2015, Coface, Niederlassung Austria, Vienna Imprint Media owner and production: Coface, Niederlassung Austria, Stubenring 24, 1010 Vienna, Austria; Editorial office: Susanne Krönes. Copyright and Liability Coface, Niederlassung Austria (Stubenring 24, 1010 Vienna, Austria) copyright, conditions of use: you may copy and publish the information on this site provided that you do not make commercial use of it and clearly indicate that it originates from Coface, Niederlassung Austria. This information is provided without guarantee and does not bind Coface, Niederlassung Austria in any way. The Coface Country Assessment was included in this country report as of August Coface, Niederlassung Austria cannot accept responsibility for changes made at a later date. / 9