#1#epizodes n 40% 37.756,950 OPKL d Mittel 18 Jan. Forum 1F F2 Republic of Latvia REPUBLIC OF LATVIA Investor presentation September, 2023 www.kase.gov.lv#2Disclaimer This presentation and its contents are confidential and may not be reproduced, redistributed, published or passed on to any other person, directly or indirectly, in whole or in part, for any purpose and should not be treated as offering material of any sort. If this presentation has been received in error it must be returned immediately to the Ministry of Finance of the Republic of Latvia ("Latvia"). This presentation is not directed at, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution or use would be contrary to law or regulation or which would require any registration, licensing or other action to be taken within such jurisdiction. 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Photos in slides 3, 17 and 25 by Shutterstock.com. © Photos in slides 4 and 30 of National Library of Latvia taken by Reinis Hofmanis. © Photos in slides 8 and 12 by Pexels. 2 © Photo in slide 35 of National Library of Latvia taken by Indriķis Stūrmanis.#33 OVERVIEW: Portrait of the Sovereign Credit .4 ENERGY AND SECURITY: Energy Independence and NATO Membership .8 FISCAL POLICY: Moderate Deficit and Low Debt. .12 THE ECONOMY: Flexible and Resilient Economy BANKING SECTOR: Well-Capitalized and Liquid GOVERNMENT DEBT MANAGEMENT: Flexibility in Funding Strategy .17 .....25 ...30#4OVERVIEW: PORTRAIT OF THE SOVEREIGN CREDIT Jelgavas Stefenhageni#5LATVIA BELONGS TO CORE EUROPE Latvia is deeply integrated in the international community and committed to high standards in terms of the quality of economic policies and governance Latvia Eurozone country Key facts Riga Capital Population 2023 GDP per capita 2022 Nominal GDP 2022 Main economic sectors 2Q2023 Currency Credit rating Territory 1.88 million¹ EUR 20.721 EUR 39.08 billion¹ Services (72.3%¹) Manufacturing (13.4%¹) Euro A3 Stable (Moody's), A+ Negative (S&P), A- Positive (Fitch) 64 594 sq. km¹ Source: ¹Central Statistical Bureau of Latvia Latvia is a member of the Eurozone, NATO and OECD 5 EU member, non-Eurozone country OECD Members Europe Eurozone Members NATO Members#66 LATVIA'S CREDIT RATING REVIEWED AND REMAINS IN «A» LEVEL GROUP Rating agencies acknowledge flexibility of Latvia's economy, moderate level of government debt and swift policymaking that bolsters its creditworthiness Long-term foreign currency rating development A+/A1 A/A2 A-/A3 BBB+Baa1 . BBB/Baa2 . BBB-/Baa3 BB+/Ba1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 S&P (A+ Negative) -Moody's (A3 Stable) 2022 2023 Fitch (A- Positive) Source: S&P, Fitch and Moody's Key strengths of Latvia's sovereign credit profile Credible policy-making supported by EU, Eurozone and NATO membership, governance indicators • NATO presence mitigates the geopolitical risks • Moderate government debt-to-GDP ratio and moderate debt service costs • The flexibility and adaptability of the Latvian economy • • Track record of fiscal consolidation and implementation of structural reforms after 2008/2009 crisis Moderate private sector debt level Source: S&P, Fitch and Moody's, Treasury Latest rating announcements A-/A3/A+ Positive/Stable/Negative On July 28, 2023 Moody's published announcement that Latvia's long-term foreign currency sovereign credit ratings remains at the A3 level with Stable outlook (did not contain Rating action) On July 28, 2023 Fitch affirmed long-term foreign currency sovereign credit ratings at the A- level, and changed outlook from Stable to Positive (contained Ratings action) On June 16, 2023 S&P Global published announcement that Latvia's long-term foreign currency sovereign credit ratings remains the A+ level with Negative outlook (did not contain Rating action) Source: S&P, Fitch and Moody's ISS ESG Country rating for Latvia ESG Country Rating D- D+ C- poor C medium C+ B- B good B+ A- A A+ excellent 10 8 7 Decile rank 6 5 4 3 1 Low relative performance High relative performance Source: https://www.issgovernance.com/esg/ratings/country-rating/ and https://www.kase.gov.lv/sites/default/files/public/FRD/%C4%80%C4%93jie%20aiz%C5%86%C4%9 3mumi/2021_11_30_FINAL_SPO-20211130-Latvia.pdf#7SUSTAINABLE ECONOMIC TRANSFORMATION Latest developments On May 31, the Parliament elected foreign minister Mr. Edgars Rinkēvičs as a new President of Latvia On September 15, on September 15, the Saeima gave a vote of confidence to the new Cabinet of Ministers headed by Prime Minister Evika Siliņa Main priorities of the new government are: ✓ prosperity; ✓ security and national defence; ✓ promoting the sense of belonging of the Latvian population. Strengths MAIN UNDERTAKINGS 1 Flexible, resilient economy despite external shocks Keep core inflation under control avoiding recession 2 Investment and export driven economic growth Inflation Defence 3 Prudent fiscal management in pre-COVID years providing fiscal capacity to absorb external shocks 4 5 6 7 Well-capitalized and liquid banking sector, with tight AML/CFT regime Good progress made to diversify sources of energy supply and ensure energy security. Limited energy dependence from Russia NATO membership provides a security guarantee and defence co-operation to defer potential external aggression Continue structural transformation of the economy (inc.EU funds, Recovery and Resilience plan) Economic growth Energy security Continue to increase the military and defence capabilities as part of NATO membership Continue to diversify energy supply sources and keep determined transition to sustainable energy#8ENERGY AND SECURITY: ENERGY INDEPENDENCE FROM RUSSIA AND NATO MEMBERSHIP#9LATVIA HAS FULLY SWITCHED FROM RUSSIAN GAS TO THE NEW ALTERNATIVES Baltic states, including Latvia, are diversified away from Russian gas - Latvia made timely decisions. Gas supply integrity in the Baltic Finnish region provides security Latvia's access to global gas market is ensured by: 1. Primary gas channel with Klaipeda LNG floating terminal in Lithuania and Lithuania- Poland interconnection (GIPL). Klaipeda is planning to expand the LNG capacity. 2. New floating LNG terminal in Finland operational since January 2023. Additional infrastructure available also in Estonia. 3. Inčukalns is a unique underground natural gas storage and the 3rd largest in Europe with the 22.6 TWh total technical capacity (for period 2023/2024) that exceeds Latvia's annual needs. FINLAND BALTIC- CONNECTOR Inkoo LNG ESTONIA LNG LATVIA Inčukalns Gas Storage 9 Inčukalns gas storage capacity is 100% reserved for the 2023/2024 cycle ■ As of 1st July 2023, Inčukalns gas storage capacity is fulfilled 50% more than it was at the end of April 2022. Total technical capacity of Inčukalns is already fully booked for the upcoming heating season. Latvia is well-prepared to tackle a possible energy shortage by creating gas energy security reserves of 1.8 TWh in December 2022. ■ In 2022, annual gas consumption decreased by over 30%, from 12,5 TWh in 2021 to 8,8 TWh in 2022, impacted not only by austerity measures in 2022/2023 season, but also gradually replacing gas heating systems with alternative systems. Klaipeda LNG POLAND LITHUANIA GIPL PIPELINE#10. • • LATVIA IS INTEGRAL PART OF SINGLE EU POWER MARKET. NO ELECTRICITY IMPORTED FROM RUSSIA Latvia has diversified power supply and has strong focus on energy security and renewables Latvia can operate independently from Russia electricity supply From May 22, 2022 there are no electricity imports from Russia, just parallel synchronisation and system stability operations Large amount of electricity generated in hydropower plants, and gas reserves provided by «Latvenergo» can be used for flexible and dispatchable production of electricity and heat in power plants to balance growing capacities of renewable energy sources The Baltic region is connected to European power system with four powerful interconnections. In case of sudden disconnection from BRELL¹ system, emergency synchronization would be immediately ensured Latvia energy mix 2021 1% ■Solids 21% ■Natural gas 41% Renewables and biofuels* 33% ■Oil and petroleum products Other 3% 10 * As per operational data, in 2022 Renewables and biofuels increased to 43.45%, verified statistics will be available on Source: Eurostat Latvia gross final energy consumption in 2021 42% Renewables 58% Other Latvia is among the greenest electricity producers in EU - 64% of actual electricity was generated from renewables in 20212 ☑ Rm 3rd highest overall share of gross final energy consumption from renewable sources among EU countries in 20213 6th largest share of renewable electricity production among EU countries in 20214 ¹BRELL: Belarus, Russia, Estonia, Latvia and Lithuania 2 Source: https://energy.ec.europa.eu/system/files/2022-10/LV_2022_Energy_Snapshot.pdf 3Source: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable energy_statistics 4 Source: https://ec.europa.eu/eurostat/databrowser/view/NRG_IND_REN/default/table?lang=en Way forward 1990: focus imported electricity and on gas as a main source of electricity and heat generation 2020: diversification among hydropower, wind, solar, biomass and other renewables, the share of all together reaching 42% of gross final energy consumption in Latvia 2050: continue to use hydropower, wind, solar, biomass, but fossils are replaced with other renewable (potentially including hydrogen) Full synchronization of Baltic power system with European Continental Network by 2025. Full independence from Russia Several large investment projects planned, for example: • • ELWIND offshore wind farm project between Estonia and Latvia (planned to be implemented by 2030) Latvenergo and Latvijas valsts meži (state-owned land managed) in a joint onshore wind parks project (planned to be implemented by 2030)#11LATVIA - MEMBER OF THE WORLD'S STRONGEST MILITARY ALLIANCE Latvia has been a member of the North Atlantic Treaty Organization (NATO) since 2004 Latvia as part of NATO Eastern flank. Finland - newest member, Sweden NATO member soon EIBH ALLIED TROOPS • • . HOST NATION . AIR DEFENCE BALTIC AIR POLICING Note: Sweden applied for NATO membership, Finland became NATO member on April 4, 2023 11 .. NATO presence in Latvia Latvia's defence and security is ensured by synchronization of the membership of NATO and EU, as well as different cooperation agreements Currently 11 nations are represented in the enhanced Forward Presence battlegroup in Latvia During NATO Summit 2022 in Madrid it was agreed to scale up existing battlegroups to brigade-size units, and before NATO Summit 2023 in Vilnius the roadmap for upgrading Canadian-led NATO enhanced Forward Presence Battle Group Latvia was signed. Latest developments - Latvia and Estonia will jointly acquire German medium-range air defense systems Canada plans to send Leopard-2 tanks to Latvia in the coming months another step towards upgrading NATO's enhanced Forward Presence Battle Group Latvia Denmark will deploy a battalion of soldiers in Latvia starting from next year. National efforts to strengthen combat capabilities and readiness (ART 3) Comprehensive state defence system Capability development in following areas: logistics, supply, air defence, coastal defence, mechanization, cyber • Developing infrastructure, including the new Selonia Military Training Area Introduction of conscription: First wave of volunteer recruits started their state defence service duty on 1 July, 2023 Gradual increase of defence budget to 2.5% of GDP by 2025 (3% of GDP by 2027)#12FISCAL POLICY: MODERATE DEFICIT AND LOW DEBT 21 Dez. 20 Voreinstellungen 4 Jan. 40% 37.756,990 0PM od Mittel Forum 18 Jan. F2 80 3 #3 FA F3 % 94 5 R 6 T G H#13SOLID GROWTH, FISCAL BUFFERS AND HIGH PUBLIC INVESTMENTS IN PREVIOUS YEARS Moderate deficits and solid growth during 2012 -2019 contributed to public debt reduction Since 1995 Latvia's GDP per capita (PPS, 1995=1) has experienced significant increase relative to EU average Change in GDP per capita (1995-1) current prices, purchasing power standard (PPS, EU27 from 2020) Moderate deficits and solid growth during 2012 -2019 contributed to debt reduction by 10 pp in 8 years thus building fiscal buffer for next challenges General government budget balance (% of GDP) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1995 1996 1997 1998 Source: Eurostat 1999 2000 2001 M 2002 2003 2004 European Union - 27 countries (from 2020) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ※ 2019 2020 2021 2022 Debt reduction has been achieved without compromising levels of public investment, which is above EU average, even netting out EU support 2.0 0.0 -2.0 -4.0 -4.3 -4.3 -6.0 -8.0 0.0 -0.8 -0.8 -0.6 -1.2 -1.4 -1.4 -1.6 -4.4 !|! -4.4 -7.1 ■One-off measures (Covid-19, energy etc.) -10.0 Source: Eurostat, Informative report on projections of macroeconomic indicators, revenue and general government budget balance in 2024, 2025 and 2026 (approved on August 15, 2023) -9.5 -8.6 General Government Debt (% of GDP) 6.0 50.0 45.0 5.5 40.0 LV Gross fixed capital 37.0 5.0 formation, % of GDP 35.0 30.0 4.5 25.0 18.5 LV Gross fixed capital 4.0 20.0 formation net of LV capital transfers 15.0 11.9 3.5 receivable from EU 10.0 8.4 institutions, % of GDP 10.0 3.0 5.0 EU27 Gross fixed capital formation, % of 0.0 2.5 GDP 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 13 Source: Eurostat Source: Eurostat 47.6 45.1 43.7 42.0 42.4 41.6 40.8 40.3 40.3 38.9 37.0 37.0 36.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022#14FISCAL SPACE PROVIDED A POSSIBLITY FOR SIGNIFFICANT PUBLIC SUPPORT PACKAGE Extension of support measures from 2022 into 2023 and calibrating them to minimize the negative spill-overs 7.0% Public support packages (% of GDP, impact on budget balance) 6.3% Principles in calibrating the support measures, if needed ✓ All support measures - temporary. 6.0% 5.0% 4.0% 3.6% 3.2% 3.0% 1.1% 14 2.0% 1.0% 0.0% 2020 2021 0.4% 1.1% 2.0% 0.6% 0.4% 0.1% 2022 2023 ■Energy compensation for housholds, social benefits ■Compensation of energy prices for companies Covid-19 related support Note: electricity related support that applies to both households and companies is split equally among those categories * As on 31.07.2023. Source: Ministry of Finance; Data on September 28, 2023, the Treasury calculations ✓ As far as possible the support would be targeted to most vulnearble households and companies Targeted support measures ■ The size of targeted measures would be significant enough to address the underplaying challenges Broad support measures To avoid socio-economic risks and ensure preservance of political stability ■ As small in size as possible to minimize negative effects in wage - inflation spiral#15SUPPORTIVE FISCAL POLICY IN 2020-2022 AND GRADUAL RETURN TO <<<NORMALITY>>> PRUDENT FISCAL POLICY IN THE COMING YEARS Government commitment to respect the structural balance rule of deficit not more than 0.5% of GDP - During COVID-19 crisis general government deficit increased more than just for the fiscal impact of the temporary (one- 1.5 off) support 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Fiscal strategy 2023 - 2026 (expenditure exempted from the calculation: defense investments and energy, COVID-19 and refugees from UA support package) 0.0 0.5 -0.5 -0.6 -1.5 -0.8 -0.8 -1.2 -1.4 -1.6 -2.5 -3.5 10 -4.5 -5.5 -6.5 -7.5 6.0 % of GDP 4.0 2.0 0.0 2.0 - 4.0 -4.4 -4.4 -7.1 -1.3 -2.3 -2.7 -2.6 Projected deficit policy change scenario Deficit Deficit without one-offs Source: Eurostat, Informative report on projections of macroeconomic indicators, revenue and general government budget balance in 2024, 2025 and 2026 (approved on August 15, 2023) Emergency COVID -19 package and supportive fiscal policy pushed deficit to one of highest in EU in 2021 General government budget deficit in 2021 (% of GDP) 0.7 0.0 % of GDP Structural balance (% of GDP, national methodology) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 1.5 0.9 1.0 0.5 0.3 0.3 0.5 -0.1 0.0 -0.5 -0.3 -0.5 -1.0 -1.0 -1.5 -1.4 -2.0 -1.5 -1.6 -2.5 -0.4 -1.1 1 Fiscal space -0.5 -0.5 -0.5 -2.2 2013 2014 1 0 SB SB no policy change scenario Nominal deficit (general government deficit according to ESA methodology, % of GDP 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 -1 3.6 -2 -1.2 -1.4 -1.6 % of GDP 3 0.0 -0.6 -0.8 -0.8 -1.0 -1.0 - 6.0 3.9 3.7 2.9 2.8 2.5 2.4 2.4 2.0 1.8 1.6 1.2 -5 - 8.0 - 7.8 7.1 7.1 7.1-7.1 6.9 6.5 5.8 5.5 5.4 5.1 4.6 Nominal deficit -6 - 10.0 9.0 -7 15 IT MT RO LV HU EL ESP FR AT BE SK CZ SI BG DE PT FI HR NL EE CY PL IE LT SE LUX DK 2013-2023 deficit excluding one-offs, 2024-2026 deficit based on SB objectives -8 Source: Eurostat 2025 2026 0.4 -0.2 -1.3 -2.2 -4.4 -4.4 -7.1 -2.3 -2.6 -2.7 0.1 -1.3 Source: Eurostat, Informative report on projections of macroeconomic indicators, revenue and general government budget balance in 2024, 2025 and 2026 (approved on August 15, 2023)#16CURRENT STRONG FOCUS ON GROWTH FRIENDLY EXPENDITURE AND COMMITMENT TO FURTHER REFORMS RRF and EU financing will support the implementation of the crucial investment and reform measures, including climate and digitalisation Change in the share of growth friendly expenditure, by Member State (2001-2019, % primary expenditure) Recovery and Resilience plan (RRF) (Adopted by the Council on July 13, 2021) 4 0 -4 -8 Source: EC Report on Public Finances in EMU 2021 LT XENONN 10% 37% 20% 1.82 bn EUR ■ Climate 676.2 M € ■Rule of law 37 M € ■ Economic transformation 196 M € Digital transformation 365.2 M € ■Reducing disparities 370 M € 20% 11% ■ Health 181.5 M € 2% Source: Ministry of Finance EU Funds 2021-2027 EU Cohesion policy Programme adopted on November 25, 2022. Intensive work has been caried out in order to start implementation of EU fund 2021-2027 planning period investments. Till mid September 2023 in total 68 sets of project selection criteria for 2 117,7 mil. EUR have been adopted in EU funds Monitoring Committee; 24 Cabinet of Ministers rules for implementation of Specific Objectives and measures for 472,7 mil. EUR have been adopted, and 13 calls of project proposal selections for 192,1 mil. EUR have been launched. CLIMATE 4% 5% 19% 29% 5 bn EUR 24% 19% 16 Source: Ministry of Finance ■ Smarter Europe 968 M € ■ Greener Europe 1175 M € ■ Connected Europe 919 M € DIGITAL TRANSFORMATION REDUCING DISPARITIES ■ Social Europe 1461 M € ■ Europe closer to citizens 263 M € ■ Just Transition Fund investments 217 M € Capacity building measures (TA) 5 M € HEALTH ECONOMIC TRANSFORMATION (II Reforms in Latvia under RRF - - Transition to sustainable transport, energy efficiency in all sectors, wind farms Coordination mechanisms for public digital services, digital skills Administrative territorial reform, GMI reform Healthcare network effectiveness, remuneration reform Innovation eco-system, consolidation of higher education institutions Strengthening capacity of law enforcement agencies RULE OF LAW STA#17THE ECONOMY: FLEXIBLE AND RESILIENT ECONOMY#1818 Source: Eurostat INVESTMENT AND EXPORT DRIVEN ECONOMIC GROWTH Sound fundamentals support economic activity, increase resilience to external shocks GDP and it's components (Q2 2023/average 2015; %; in real terms; s.a) GDP Private consumption 17 Investment Export 0 20 20 17 6 31 4 36 36 40 0 2 GDP in Q2 2023 compared to 2015 average (%; s.a.) and GDP forecast (y/y; %) 18 16 14 12 10 ■LV ■ EU27 8 2023_Q1 2023 F Source: Eurostat; F- European Commission May 2023 and Summer 2023 forecast 2024 F#1919 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 505050 STRUCTURAL TRANSFORMATION TOWARDS MORE PRODUCTIVE SECTORS Merchandise export has become more diversified and sophisticated over time; a shift towards higher value-added services is evident over the long run Export structure by commodity groups and Herfindahl-Hirschman index for commodity group concentration (% of total exports; index) Export income of rail transport and ICT services (million EUR) 2005 1500 1200 1300 1100 1000 900 Rail transport -ICT 800 700 500 600 300 400 100 -100 200 2023 Others Metals and articles of metals Vegetable products Mineral products Wood and articles of wood Transport vehicles I Food and beverages Chemicals I Machinery, mechanical, electrical appliances HHI index (RHS) Source: Central Statistical Bureau 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Latvijas Banka#20EXPOSURE TO RUSSIA IS RATHER LIMITED Latvia has steadily reduced its exposure to Russia; economy is well diversified 2.0% 1.5% 1.0% 0.5% 0.3% Banking sector exposures to RU, BY and UA (% of total assets, July 2023) 0.6% 0.0% RU Assets 20 Source: Latvijas Banka 0.9% 0.6% 0.4% 0.1% 0.1% 0.1% BY 12% 11.75% 10% 1.3% 8% 6% 4% 2% UA Total (RU, UA, BY) 0% ■Liabilities Assets (considering country risk transfer) Export of goods and services to RU (% of total) 4.92% Export of services Export of goods - domestic origin Export of goods - transit trade Total export Source: Central Statistical Bureau of Latvia; Latvijas Banka calculations#210 5 01.01.2005 01.01.2006 01.01.2007 21 Source: Eurostat 10 15 AS GLOBAL ENERGY AND FOOD PRESSURES SUBSIDE, INFLATION DECLINES RAPIDLY Larger share of food and energy in consumption basket and quicker pass-through to consumer prices elevates inflation; no material harm on competitiveness expected in medium term Inflation (HICP; year on year; %) and contribution to changes (percentage points) CPI forecast by European Commission (Spring Forecast 2023): 2023: 9.3% 2024: 1.7% 20 Wages Oil Global food 80 70 70 80 60 60 Energy and food prices in LV and EA (year on year; %) 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 Natural gas Electricity Heating energy Solid fuels Other factor Headline inflation 01.01.2015 01.01.2016 01.01.2017 01.01.2018 01.01.2019 01.01.2020 01.01.2021 01.01.2022 01.01.2023 -10 50 50 40 40 30 20 20 10 10 0 01.08.2021 01.09.2021 01.10.2021 01.11.2021 01.12.2021 01.01.2022 Source: Eurostat EA_Food 01.02.2022 01.03.2022 01.04.2022 01.05.2022 01.06.2022 01.07.2022 01.08.2022 01.09.2022 01.10.2022 01.11.2022 01.12.2022 01.01.2023 EA_Energy LV_Food 01.02.2023 01.03.2023 01.04.2023 01.05.2023 01.06.2023 01.07.2023 01.08.2023 ⚫LV_Energy#22TERMS OF TRADE STAY FAVOURABLE DESPITE SWINGS IN ENERGY PRICES Declining energy prices have decreased import prices more substantially, leading to overall more favourable terms of trade 150 Terms of Trade (2015-100) Export price 140 -Import price 13.9% y-o-y 100% TOP 3 product group in the structure of export and import of goods in 2022 (% of total) 130 -Terms of trade 90% 120 14.6% yo-y 80% 70% 110 60% 100 50% 90 80 2015Q1 2015Q3 2016Q1 201603 22 Source: Central Statistical Bureau of Latvia 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 2019Q3 2020Q1 2020Q3 2021Q1 40% 30% 20% 17 10% 2021Q3 2022Q1 2022Q3 2023Q1 17 0% 21 Wood Export Other Food and agriculture ■Mineral fuels Import Source: Central Statistical Bureau of Latvia#23-10 -8 2 8 57% 6 4 External sector indicators (% of GDP) WHILE CURRENT ACCOUNT DEFICIT TEMPORARILY INCREASED, LATVIA'S EXTERNAL POSITION REMAINS SOUND Current account deficit driven by high energy prices and an increase in inventories; net external debt remains low 0 。 -2 -4 -6 NH 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Current account Net external debt (RSA) Source: Latvijas Banka 23 Import of airplanes Net minerals Current account without minerals and airplanes 10 60.0 9 50.0 8 40.0 7 6 30.0 20.0 10% %0.0 3 2 0.0 1 0 + ST 2010 2011 2012 2013 Source: Latvijas Banka 2014 2015 2016 2017 Investment inflows (% of GDP) 2018 ■Foreign direct investment in Latvia ■Capital account inflows 2019 2020 2021 2022#2424 95 100 100 Q1 2015 Q2 105 105 Q3 Q4 to 110 20 Q1 2010 115 120 03 04 Q1 2017 02 Source: European Commission, WTO 125 130 135 DESPITE INCREASE IN COSTS COMPANIES REMAIN GLOBALLY COMPETITIVE AND PROFITABLE Expansion of market share globally has continued despite appreciation in the real effective exchange rate; corporate profitability remains healthy REER deflated by ULC and export market share (2015 = 100) Profit margins (profit after taxes to equity; 4-quarter moving average %) Q3 Q4 Q1 2018 Q2 Q3 Q4 Q1 2019 Q2 Q3 Q4 Q1 2020 Q2 Q3 Q1 2021 REER deflated by ULC 0 LV goods export market share in world market -5 Q1 2022 Q2 Q3 Q4 Q1 2023 Q2 -10 5 10 15 20 25 30 Manufacturing -Transportation ICT services -Agriculture, forestry Total Source: Central Statistical Bureau of Latvia Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2018 2019 2020 2021 2022 2023#25BANKING SECTOR: WELL-CAPITALIZED AND LIQUID#26DOMESTIC LOANS AND DEPOSITS PREVAIL IN BANKS' OPERATIONS Banking sector focuses primarily on servicing domestic clients 30 25 20 15 bEUR 10 5 Banking sector assets 30 bEUR 25 25 20 15 10 5 0 0 2018 2019 2018 2019 2020 2021 2022 2023 ■Cash and claims on MFI * Loans to other Baltic states ■Securities ■Loans to domestic clients Loans to foreign clients ■Other assets 26 Source: Latvijas Banka Banking sector liabilities 2020 2021 2022 2023 Other liabilities&equity Foreign deposits Deposits form other Baltic states deposits ■Domestic deposits MFI ■LB operations#27BANKS HAVE AMPLE LIQUIDITY RESERVES AND HIGH CAPITALIZATION Banking sector is largely funded by domestic deposits; ample capital buffers provide good shock absorption capacity 110% 100% 90% 80% 70% 60% Domestic loan-to-deposit ratio Average Liquidity Coverage Ratio stands at 244% 50% 2018 2019 2020 2021 2022 2023 27 Source: Latvijas Banka 30% 25% 20% 15% 73.6% 10% 5% 0% 2019 Total capital ratio 2020 2021 -Latvia (COREP) 2022 2023 Latvia 21.6% 19.8% EU/European Economic Area (EBA*) * Data for European Union (EU)/European Economic Area (EEA) are European Banking Authority (EBA) sample of largest institutions, for Latvia COREP data of active institutions are used Source: Latvijas Banka, European Banking Authority (EBA) Risk Dashboard 2023 Q1#28BANKS' CREDIT QUALITY REMAINS GOOD, HOUSEHOLD AND CORPORATE INDEBTEDNESS IS LOW Prudent lending practices and low leverage of households and corporate sector supports asset quality 8% 6% 4% 2% 0% 2016 2017 Total Loan portfolio quality 2018 2019 2020 2021 2022 2023 Total debt*-to-GDP Latvia Lithuania 151.8% Slovenia Croatia Slovakia Estonia Greece Italy Germany Malta Austria Spain Portugal Ireland Finland Belgium Non-financial corporations Households 1.0 France Netherlands Cyprus Luxembourg 0% 50% 100% 150% 200% 250% 300% 350% *Total consolidated debt vis-a-vis rest of the economy in 2023 Q1 Share of loan loss provisions in outstanding loans -Share of loans over 90 days past due in outstanding loans 28 Source: Latvijas Banka's calculations Source: ECB SDW#29BANKING SECTOR PROFITABILITY IS STURDY AND STAYS ABOVE EU AVERAGE Profitability is set to improve further in 2023 due to rising net interest income 3.0% 2.5% 2.0% 1.5% Return on Assets Latvia 2.56% 25% 20% 15% 10% Return on Equity 1.0% 5% 0.5% EU/EEA 0% 0.0% 2019 2020 2021 2022 2023 Q2* 2019 2020 2021 2022 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 2019 Cost-to-income ratio 90% 85% EU/EEA 80% 75% 70% 65% 60% 55% Latvia 39.1% 50% 2019 EU/EEA Net interest income to total net operating income 2020 2021 2022 2023 Q2* 2020 Data on European Union (EU)/European Economic Area (EEA) are European Banking Authority (EBA) sample of largest institutions. For Latvia - FINREP data on all institutions are used * Displayed most recent EBA average available is on 2023 Q1. 29 Source: Latvijas Banka, European Banking Authority(EBA) Risk Dashboard and Latvijas Banka calculations 2023 Q2* Latvia 23.2% Latvia 78.38% EU/EEA 2021 2022 2023 Q2*#30GOVERNMENT DEBT MANAGEMENT: LETONIKA FLEXIBILITY OF FUNDING STRATEGY#31Estonia 18 Luxembourg 25 Source: Eurostat 31 4th lowest general government debt level in the Eurozone in 2022 GENERAL GOVERNMENT DEBT REMAINS LOW The general government debt level is expected to stay well below 60% of GDP, stabilizing at a level about 41% of GDP in the medium term. Eurozone 92% General Government Debt 2022, % GDP (Eurozone countries) Lithuania 38 Latvia 41 Ireland 45 Netherlands 51 Malta 53 Slovakia 58 Germany 66 Slovenia 70 Finland 73 Austria 78 Cyprus 87 Belgium 105 France 112 Spain 113 Portugal 114 Italy 144 Greece 171 Low debt level provides effective buffer for additional funding needs, if necessary General Government Debt % GDP Stability and Growth Pact: 60% 43.7% 42.0% 40.8% 40.3% 39.7% 40.5% 40.2% 38.9% 39.1% 37.0% 36.5% 2016 2017 2018 2019 2020 2021 2022 2023 F 2024 F 2025 F 2026 F Source: Eurostat, August forecast (no policy change)#32DEMAND IN THE DOMESTIC AUCTIONS CONTINUES TO BE SUPPORTIVE Liquidity of the outstanding Eurobonds is facilitated by TAP auctions in domestic market In 2022 the emphasis has been on the domestic market by borrowing largest ever volumes in relatively short period (millions, EUR) Domestic market continues to perform strongly in domestic auctions (BIDS/Sold amount ratio) 4.82 1400 1200 5.00 4.04 1000 800 600 4.00 3.39 3.00 400 200 2.58 1.73 2.00 0 1.73 1.98 -200 2017 2018 2019 2020 2021 2022 2023* 1.62 1.29 ■Net issuance ■Gross issuance *Issued till October 9, 2023 1.00 Okt Nov Jan Feb Mar Apr May June Aug Sept 2023 Source: The Treasury as of 09.10.2023. Source: The Treasury as of 09.10.2023. Liquidity of bonds outstanding is increased by regular TAP auctions of XS ISIN bonds in domestic market 2049 1.875% 19/02/2049 Savings Bonds - inclreasingly popular for retail investors 2.75 2047 2.250% 15/02/2047 2036 1.375% 16/05/2036 2033 3.875% 12/07/2033 2031 0.000% 17/03/2031 2030 0.250% 23/01/2030 2029 0.000% 24/01/2029 2028 3.500% 17/01/2028 2028 1.125% 30/05/2028 2027 3.875% 25/03/2027 2026 0.375% 07/10/2026 2025 1.375% 23/09/2025 2024 0 2.875% 30/04/2024 Sustainability bond, issued in 2021 mil.EUR 250 5 October, 2023 200.8 mEUR 200 Latvia Eurobonds Outstanding 150 (nominal amount, EUR million) 100 50 Oct 2022 7.9 mEUR 0 Jun 2022 Sept 2022 Dec 2022 Mar 2023 Jun 2023 Sept 2023 500 1000 1500 2000 TAPS of outstanding Eurobonds in domestic market 32 Eurobon international issuances (syndication) Source: The Treasury as of 09.10.2023. Source: The Treasury#3333 FLEXIBILITY IS EMBEDDED IN LATVIA`S FUNDING STRATEGY Main funding instruments are government debt securities issued in the international and domestic capital market 2 200 2 000 1 800 1 600 1 400 1 200 1 000 Debt redemption profile (million EUR) stluk…. 800 600 400 200 0 2023 Oct-Dec 2024 2025 2026 2027 2028 2029 2030 2031 2032 Domestic securities (LV ISIN) Source: The Treasury, on September 30, 2023 ■Other external debt liabilities Eurobonds (XS ISIN) 2033 2034- 2036 2037- 2047 2048- 2050 2035 2046 2049 ■Eurobond (XS ISIN) TAPS in domestic market Power of the funding strategy lies within: ✓ Flexibility in choice of timing of issuance ✓ Flexibility in choice of currency ✓ Flexibility in tenors ✓ Flexibility to combine instruments and other available alternatives ✓ Maintained comfortable liquidity buffer Actual 2022 Estimated central government borrowing volumes in 2022-2024 (including international and domestic market) Actual Plan Jan - Sep 2023 Oct-Dec 2023 Plan 2024 Gross Borrowing volumes 2.2 bn EUR 2.6 bn EUR 0.8 bn EUR 3.0 bn EUR (nominal amount) Cash buffer 3.9 5.0 (% of GDP) Source: The Treasury, September 2023 The estimated gross borrowing volume is indicative, subject to actual state budget execution and may change due to number of contingencies and external factors, for example: • possible additional financing requirement arising from the geopolitical situation and measures to strengthen national security of Latvia possible support for the economy and society to reduce the negative impact of increase in energy prices