#1#epizodes n 40% 37.756,950 OPKL d Mittel 18 Jan. Forum 1F F2 Republic of Latvia REPUBLIC OF LATVIA Investor presentation March, 2023#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 ENERGY AND SECURITY: 4 Energy Independence and NATO Membership ........8 FISCAL POLICY: Moderate Deficit and Fiscal Buffers...... THE ECONOMY: 12 Flexible and Resilient Economy .17 BANKING SECTOR: Well-Capitalized and Liquid .25 GOVERNMENT DEBT MANAGEMENT: Flexibility in Funding Strategy .30 CONCLUSION .35#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 Capital Population 2023 GDP per capita 2022 Nominal GDP. 2022 Main economic sectors 4Q2022 Currency Credit rating Territory Riga 1.89 million¹ EUR 20.721 EUR 39.08 billion¹ Services (71.3%¹) Manufacturing (14.3%¹) Euro A3 Stable (Moody's), A+ Negative (S&P), A- Stable (Fitch) 64 573 sq. km¹ Source: ¹Central Statistical Bureau of Latvia Latvia is a member of the Eurozone, NATO and OECD OECD Members 5 EU member, non-Eurozone country Europe Eurozone Members NATO Members#66 LATVIA'S CREDIT RATING RECENTLY REVIEWED AND REMAINS STABLE 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+Baal • BBB/Baa2 • BBB-/Baa3 BB+/Ba1 2012 2013 2014 2015 2016 2017 2018 2019 S&P (A+ Stable) 2020 2021 2022 Moody's (A3 Stable) Fitch (A- Stable) Latest rating actions A-/A3/A+ Stable/Stable/Negative On April 29, 2022 Moody's affirmed long-term foreign currency sovereign credit ratings at the A3 level with Stable outlook On December 6, 2022 S&P Global affirmed long-term foreign currency sovereign credit ratings at the A+ level and changed outlook from Stable to Negative On February 3, 2023 Fitch affirmed long-term foreign currency sovereign credit ratings at the A- level with Stable outlook ISS ESG Country rating for Latvia . • • • • Source: S&P, Fitch and Moody's Key strengths of Latvia's sovereign credit profile The flexibility and adaptability of the Latvian economy and resilient export sector Track record of fiscal consolidation and implementation of structural reforms Moderate government debt-to-GDP ratio and moderate debt service costs Credible policy-making supported by EU, Eurozone and NATO membership Latvia's preparedness and progress made to ensure country's energy security ESG Country Rating D- D D+ C- poor C medium C+ B- B good B+ A- A A+ excellent 10 7 Decile rank 6 5 3 2 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 %93mumi/2021_11_30_FINAL_SPO-20211130-Latvia.pdf#7LATEST DEVELOPMENTS IN LATVIA AND CHALLENGES Latest developments Priorities of the new Government are: national security and foreign policy, education, energy, climate and environment, competitiveness and improving the quality of life To accelerate the transition to renewable resources, a new Ministry for Climate and Energy in Latvia has been created and it has started to operate as of January 2023 On March 9, the Saeima adopted the law on the State budget for 2023 and the budget framework for 2023, 2024 and 2025. Strengths 1 Flexible economy with strong recovery prospects 2 Investment and export driven economic growth 3 4 Prudent fiscal management in pre-COVID years providing fiscal capacity to absorb external shocks Well-capitalized and liquid banking sector, with tight AML/CFT regime 5 Good progress made to diversify sources of energy supply and ensure energy security. Limited energy dependence from Russia 6 7 NATO membership provides a security guarantee and defence co-operation to defer potential external aggression Mitigate the impact of higher energy prices on the most vulnerable Structural transformation of the economy (inc.EU funds, Recovery and Resilience plan) Challenges Inflation Defence Economic growth Energy security Increase the military and defence capabilities as part of NATO membership Diversify energy supply sources and energy supply routes#8ENERGY AND SECURITY: ENERGY INDEPENDENCE FROM RUSSIA AND NATO MEMBERSHIP#9LATVIA HAS ALREADY SWITCHED FROM RUSSIAN GAS TO THE NEW ALTERNATIVES Baltic states, including Latvia, are well diversifying away from Russian gas Latvia has moved quickly and made timely decisions 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) 2. New floating LNG terminal in Finland operational since Jan 2023 3. Possibly, an LNG terminal in Latvia in 2-3 years - Skulte port, located near underground gas storage at Inčukalns. Inčukalns is a unique underground natural gas storage and the 3rd largest in Europe with the 21,8 TWh total technical capacity that exceeds Latvia's annual needs of ~12 TWh 9 Latvia banned the Russian gas import on 1 January 2023, alternative gas supplies provide security ■ In 2022, annual gas consumption decreased naturally by over 40%, from 12,7 TWh in 2021 to 8,8 TWh in 2022. ▪ Latvia is well-prepared to tackle a possible energy shortage by creating gas energy security reserves of 1.8 TWh in 2023 ■ Situation with high energy prices made the Government to adopt support packages for households and companies, as well as approve social benefits for most vulnerable Public sector applies the energy austerity measures for the heating season 2022/2023 FINLAND BALTIC- CONNECTOR Inkoo LNG ESTONIA Skulte LNG LATVIA Inčukalns Gas Storage Klaipeda LNG POLAND LITHUANIA GIPL PIPELINE#10• • • WHILE LATVIA IS TECHNICALLY CONNECTED TO BRELL SYSTEM, IT IS ALREADY INTEGRAL PART OF SINGLE EU POWER MARKET AND HAS DIVERSIFIED POWER SUPPLY Latvia 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 operations Large amount of electricity generated in hydropower plants, and gas reserves provided by «Latvenergo» can be used for production of electricity and heat in power plants 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 Latvia gross final energy consumption in 2021 Latvia is among the greenest electricity producers in EU - 64% of electricity was generated from renewables in 20212 3rd highest overall share of gross final energy consumption from renewable sources among EU countries in 20203 5th largest share of renewable electricity production among EU countries in 20204 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/web/energy/data/shares 10 ■Natural gas 42% 37% ■Renewables ■Renewables and biofuels 37% ■Oil and petroleum products 58% 25% 1% Other Source: Eurostat Other Way forward 1990: focus on gas as a main source of electricity and heat generation 2020: diversification among hydropower, wind, solar, biomass and other renewables, the share of the latter 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. Fulzatdependente power syste 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)#1111 LATVIA - 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 and Sweden - official NATO members soon Note: Sweden and Finland applied for NATO membership Source: NATO, June 2022, Ministry of Defence ALLIED TROOPS HOST NATION AIR DEFENCE BALTIC AIR POLICING • 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. There are also American and Danish units in Latvia. New baseline for deterrence and defence posture agreed in NATO Summit in Madrid scaling up existing battlegroups to brigade-size units U.S. troops will continue a robust presence in Latvia National efforts to strengthen combat capabilities and readiness (ART 3) Comprehensive state defence system Capability development: ■ Gradual increase of defence budget to 2.5% of GDP by 2025 Capability areas: logistics, supply, air defence, coastal defence, mechanization, cyber Development of new military training range Introduction of State defence service#12FISCAL POLICY: MODERATE DEFICIT AND FISCAL BUFFERS 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 PREVIOUS YEARS PUBLIC INVESTMENTS IN Moderate deficits and solid growth during 2012 -2019 contributed to public debt reduction 6.0 5.0 4.0 3.0 2.0 1.0 0.0 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 2.0 0.0 -2.0 -4.0 -4,3 -6.0 -8.0 יווי 0,0 -0,8 -0,8 -0,6 -1,2 -1,6 -1,4 -1,4 -4,3 -4,7 -7,0 -8,6 -10.0 -9,5 ■One-off measures (Covid-19, energy etc.) -12.0 13 Source: Eurostat 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Source: Eurostat 1995 1996 1997 1998 1999 2000 2001 2002 2008 2009 2010 2011 2012 2013 L 2014 2015 2016 2017 2018 2019 2020 2021 Debt reduction has been achieved without compromising levels of public investment, which is above EU average, even netting out EU support 2003 2004 European Union - 27 countries (from 2020) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Latvia 2019 2020 2021 LV Gross fixed capital formation, % of GDP 50.0 45.0 40.0 35.0 30.0 LV Gross fixed capital 25.0 formation net of LV 20.0 capital transfers 11.9 15.0 10.0 8.4 receivable from EU institutions, % of GDP 10.0 5.0 EU27 Gross fixed capital formation, % 0.0 of GDP 2005 2006 2007 Source: Eurostat, Law on State Budget for 2023 and budgetary framework for 2023-2025 18.5 37.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 47.6 45.1 43.6 42.0 42.4 41.6 40.3 37.0 40.3 38.9 37.0 36.5 40.9 Latvia general government debt development (% of GDP) Source: Eurostat, Law on State Budget for 2023 and budgetary framework for 2023-2025, February 2023 2020 2021 2022F#1414 FISCAL SPACE PROVIDED A POSSIBLITY FOR SIGNIFFICANT PUBLIC SUPPORT PACKAGE Extension of support measures into 2023 and calibrating them to minimize the negative spill-overs 7.00% Public support packages (% of GDP, impact on budget balance) Principles in calibrating the support measures ✓ All support measures are temporary 6.00% 5.00% 4.00% 3.00% 2.00% 3.17% 1.00% 0.00% 2020 3.6% 6.26% 1.13% 2021 0.42% 2.04% 0.46% 0.31% 0.15% 2022 2023* Energy compensation for housholds, social benefits ■Compensation of enegy prices for companies ■Covid support Note: electricity related support that applies to both households and companies is split equally among those categories * Execution on 28.02.2023. Source: Ministry of Finance; Data on March 13, 2023, the Treasury calculations ✓ As far as possible the support is targeted to most vulnerable households and companies Targeted support measures The size of targeted measures should be significant enough to address the underplaying challenges Broad support measures Necessary to avoid socio- economic risks and ensure preservance of political stability Should be as small in size as possible to minimize negative effects in wage – inflation spiral#15% of GDP SUPPORTIVE 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 the general government deficit has increased more than just for the fiscal impact of the temporary (one-off) support Fiscal strategy 2023 - 2025 (expenditure exempted from the calculation - defense investments and energy, COVID-19 and refugees from UA support package) 1.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 0.0 0.0 -1.0 -0.6 -0.8 -0.8 -2.0 -1.2 -1.6 -1.4 -3.0 -4.0 -5.0 -6.0 -7.0 -8.0 -4.2 -4.3 -4.7 -7.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 0.0 -0.2 -0.4 -0.3 -0.6 -2.0 -2.3 -0.8 -0.7 -1.0 -1.2 -1.0 -1.4 -1.6 -1.8 ויוןויו!! -0.03 -0.5 -0.5 -0.5 -0.5 -1.1 -1.2 -1.2 -1.5 As of 2023 planned structural deficit, including fiscal security reserve 0,1% of GDP -2.0 -1.9 Deficit Deficit, excluding one-off measures Source: Eurostat, Law on State Budget for 2023 and budgetary framework for 2023-2025, February 2023 -6 -8 64202 46% -2 -4 Emergency COVID -19 package and supportive fiscal policy pushed deficit to one of highest in EU General government budget defict in 2021 (% no GDP, results of the EDP notification Autumn 2022) 0.8 -0.1 -1 -1.8-1.7-1.7 -2.9-2.7-2.6-2.6-2.4 -3.9-3.7 -7.8-7.5-7.2-7.1-7.1-7.0-6.9-6.5-5.9-5.6-5.5-5.1-4.7 -6 -7 -10 2013-2022 deficit excluding one-off Structural balance, excluding one-off measures Nominal deficit Structural balance objectives (2023-2025) (General Government deficit according to ESA methodology) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2013 1 0 3.6 -1 % of GDP -2 -1.2 -1.4 -1.6 -3 -4 -5 56 0.0 -0.8 -0.6 -0.8 -1.0 -0.9 0.1 Deficit projections -2.0 IND HN -4.3 -4.7 -4.2 -2.3 MT EL IT HU RO LV ESP FR AT BE SK CZ SI BG DE PT FI HR NL EE PL IE CY LT SE LUX DK -8 measures, for 2023-2025 deficit based on Structural balance objectives -7.0 15 Source: Eurostat Source: Eurostat, Law on State Budget for 2023 and budgetary framework for 2023-2025, February 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 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. Line ministries are working on fast-tracking implementation of planned investments within Programme. First call of project proposals had been launched on March 6, 2023. CLIMATE 4% 5% ■ Smarter Europe 968 M € 19% ■ Greener Europe 1175 M € ■ Connected Europe 919 M € ■ Social Europe 1461 M € 29% 5 bn EUR 24% 16 19% Source: Ministry of Finance DIGITAL TRANSFORMATION REDUCING DISPARITIES HEALTH ■ Europe closer to citizens 263 M € ■ Just Transition Fund investments 217 M € ■ Capacity building measures (TA) 5 M€ 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#18INVESTMENT AND EXPORT DRIVEN ECONOMIC GROWTH Sound fundamentals support economic activity, increase resilience to external shocks GDP components (Q4 2022/average 2015; %; in real terms; s.a) GDP 16 Private consumption 18 Source: Eurostat GDP in Q4 2022 compared to 2015 average (%; s.a.) and GDP forecast (y/y; %) 18 16 14 12 LV 26 EU27 10 8 6 Investment 24 Export 0 20 20 34 34 40 4 2 0 2022_Q4 2023 F Source: Eurostat; F- European Commission February 2023 forecast 2024 F#1919 STRUCTURAL TRANSFORMATION TOWARDS MORE PRODUCTIVE SECTORS Economic recovery from pandemic is dominated by several higher income sectors; a shift towards higher value-added services is evident over the long run Value added by sectors (Q4 2022/average 2019; %; s.a.) Export income of rail transport and ICT services (million EUR) 15 10 35 30 25 20 GSTENS u 5 ...... 0 -5 -10 -15 -20 -25 -30 Source: Central Statistical Bureau Construction 1200 1000 Rail transport -ICT 800 600 400 200 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% Banking sector exposures to RU, BY and UA, % of total assets, December 2022 1.0% 0.7% Export of goods and services to RU (% of total) 12% 11.75% 10% 1.5% 8% 6% 0.8% 4% 0.7% 0.5% 0.3% 0.5% 0.1% 0.1% 0.1% 0.0% RU BY UA Total (RU, UA, BY) 20 Source: Latvijas Banka Assets ■Liabilities Assets (considering country risk transfer) 2% 0% Export of goods - domestic origin Export of goods - transit trade Export of services -Total export Source: Central Statistical Bureau of Latvia; Latvijas Banka calculations 4.92%#21S 01.01.2005 2022: 17.2% 20 2023: 7.9% GLOBAL ENERGY AND FOOD PRESSURES PUSH UP INFLATION 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: 80 Energy and food prices in LV and EA (year on year; %) Wages Oil 15 10 5 Global food Natural gas Electricity Heating energy Solid fuels Other factor Headline inflation 01.01.2006 01.01.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016 01.01.2017 01.01.2018 21 Source: Eurostat; Latvijas Banka staff estimation 01.01.2019 01.01.2020 01.01.2021 01.01.2022 01.01.2023 01.01.2024 0 70 60 60 50 40 40 30 30 20 20 10 2021M08 2021M09 2021M10 2021M11 Source: Eurostat 2021M12 2022M01 2022M02 EA_Food 2022M03 2022M04 EA_Energy 2022M05 2022M06 2022M07 2022M08 LV_Food 2022M09 2022M10 2022M11 2022M12 2023M01 ⚫LV_Energy#22TERMS OF TRADE STILL FAVOURABLE DESPITE SURGING ENERGY PRICES Energy price shock is cushioned by strong global price growth in several large export categories Terms of Trade (2015-100) TOP 3 product group in the structure of export and import of goods in 2022 (% of total) 150 100% Export price 13.9% yo-y 90% 140 -Import price 80% -Terms of trade 130 70% 14.6% y-q 120 60% 50% 110 40% 100 30% 17 20% 90 10% 21 17 60 80 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 2022Q3 2022Q4 0% Export Import Wood Other Food and agriculture ■Mineral fuels 22 Source: Central Statistical Bureau of Latvia 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 DESPITE INCREASE IN COSTS COMPANIES REMAIN COMPETITIVE GLOBALLY AND PROFITABLE Expansion of market share globally has continued despite appreciation in the real effective exchange rate; corporate profit margins remain healthy REER deflated by ULC and export market share (2015 = 100) Profit margins (profit after taxes to turnover; 4-quarter moving average %) 130 125 120 115 110 105 100 95 Q1 2015 Q2 Q3 Q4 Q1 2016 zd Q3 Q4 Q1 2017 Q2 Q3 Q4 Q1 2018 Q2 Q3 Q4 Q1 2019 Source: European Commission, WTO zo 4 2 16 14 12 10 8 16 0 REER deflated by ULC Manufacturing -Transportation -2 ICT services LV goods export market share in world market -4 Agriculture, forestry Total Q3 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Q1 2022 Q2 Q3 -6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2020 2021 2022 Source: Central Statistical Bureau of Latvia#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 Banking sector liabilities 0 0 2018 2019 2020 2021 2022 2023 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 Other liabilities&equity ■Foreign deposits Deposits form other Baltic states deposits ■Domestic deposits ■MFI#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 30% 25% 20% 15% 10% 71.9% 5% Average Liquidity Coverage Ratio stands at 218% 50% 2018 2019 2020 2021 2022 2023 27 Source: Latvijas Banka Total capital ratio Latvia Sweden 18.9% Minimum requirement 0% 2019 2020 2021 2022 Latvia (COREP) Minimum requirement Sweden (EBA*) ♦ EU/European Economic Area (EBA*) * Data for Sweden and 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#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 Total Loan portfolio quality Total debt*-to-GDP Lithuania Latvia 54.2% Slovenia Estonia Slovakia Italy Greece Germany Malta Austria Spain Finland Portugal Ireland Belgium Non-financial corporations Households 1.0 France 2017 2018 2019 2020 2021 2022 Netherlands Cyprus Luxembourg Share of loan loss provisions in outstanding loans 0% 50% 100% 150% 200% 250% 300% 350% -Share of loans over 90 days past due in outstanding loans *Total consolidated debt vis-a-vis rest of the economy in 2022 Q3 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 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% Return on Assets 0.0% 2019 2020 2021 2022 75% Latvia 1.25% 70% Cost-to-income ratio 65% EU/EEA 60% EU/EEA 55% 50% Latvia 52.1% 2019 2020 2021 2022 29 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 Source: Latvijas Banka, European Banking Authority (EBA) Risk Dashboard and Latvijas Banka calculations#30GOVERNMENT DEBT MANAGEMENT: LETONIKA FLEXIBILITY OF FUNDING STRATEGY#31GENERAL GOVERNMENT DEBT REMAINS LOW Despite additional funding needs during Covid-19 pandemic and current support measures during the energy price peak period, the debt level is expected to stay well below 60% of GDP in the medium term 4th lowest general government debt level in the Eurozone Low debt level provides effective buffer for scenarios of additional funding needs General Government Debt Q3 2022, % GDP (Eurozone countries) Estonia Lithuania Luxembourg Latvia 25 40 49 49 16 37 53 59 67 71 Ireland Netherlands Malta Slovakia Finland Germany Slovenia Austria Source: Eurostat 31 Cyprus Euro area Belgium France Spain 72 81 92 93 106 113 116 120 147 178 Portugal Italy Greece General Government Debt % GDP Stability and Growth Pact: 60% 43.6% 42.0% 41.9% 40.3% 40.9% 38.9% 39.3% 38.6% 37.0% 36.5% 2016 2017 2018 2019 2020 2021 2022 F 2023 F 2024 F 2025 F Source: Eurostat, Law on State Budget for 2023 and budgetary framework for 2023-2025#3232 FUNDING INSTRUMENTS ARE CUSTOMIZED TO ACTUAL SITUATION Demand in the domestic auctions continues to be supportive in 2023 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) 1400 1200 4.50 1195 3.67 4.00 3.89 3.39 3.50 3.00 680 622 2.50 567 573 535 2.00 1.45 422 385 385 1.50 1.96 1.68 1.00 0.50 0.00 2019 2020 Gross issuance 2021 2022 2023* * Issued till March 22, 2023 Apr May June July Aug Sept Oct Nov Jan Feb Mar 2022 2023 1000 800 600 330 400 150 200 107 46 0 2017 -200 -422018 ■Net issuance 1.67 * Source: The Treasury as of 22.03.2023. Last disbursement under EU SURE facility In December 2022 Latvia received the last tranche from EC SURE facility in amount of 167 million EUR Total amount of tranches Latvia has disbursed under EU SURE instrument is EUR 472 million Source: The Treasury as of 22.03.2023. Primary dealers group and auctions Primary dealer system in Latvia operates since 11 February 2013 Enlargement of Primary dealer group took place on 19 January 2021 when Erste Group Bank joined Citadele banka AS, Luminor Bank AS, SEB bankas, Swedbank AS ■ Since 14 October 2020 GMTN programme XS ISIN Eurobonds TAPS are offered in auction in domestic market only (via Primary dealers) ■ The Treasury holds regular auctions and offers tenors to address investor demand NOTE: SURE - EU coordinated response to the Covid-19 for temporary support to mitigate unemployment risks in an emergency#33CONSERVATIVE CENTRAL GOVERNMENT DEBT MANAGEMENT STRATEGY Debt portfolio parameters are in lines with Central Government Debt and Cash Management Strategy Eurobonds dominate in debt structure by instruments (million EUR) Liquidity of bonds outstanding is increased by regular TAP auctions of XS ISIN bonds in domestic market 18 000 16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 3Q21 1Q21 3Q22 ■ Other Domestic T-bills ■Domestic T-bonds Source: The Treasury, December 31, 2022 ■Eurobonds Loans from financial institutions 2049 1.875% 19/02/2049 2047 2.250% 15/02/2047 Latvia Eurobonds Outstanding (nominal amount, EUR million) 2036 1.375% 16/05/2036 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 2023 2.875% 30/04/2024 0.125% 14/04/2023 0 500 1000 1500 2000 ■Sustainability bond, issued in 2021 TAPS of outstanding Eurobonds in domestic market Eurobond issuances in international capital markets in 2023 Source: The Treasury, 22.03.2023 Weighted average interest rate of debt portfolio below 1% in 2021 Duration (years) Debt Portfolio parameters are in line with Strategy Parameters Strategy 30/09/2022 31/12/2022 8.00 Maturity profile (%) 7.00 7.61 • up to 1 year ≤ 25% 18.3% 17.4% 6.00 6.49 6.62 6.55 5.00 5.86 5.85 5.77 up to 3 year ≤ 50% 39.7% 38.2% 4.00 4.97 4.47 4.16 3.00 Share of fixed rate (1) ≥ 60% 75.8% 76.4% 2.00 1.00 0.00 Macaulay duration (years) 5.00 9.00 6.00 5.85 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Feb Duration (years) Net debt (2) currency composition 100% EUR with a deviation of +/- 5% 100.53% 100.47% 33 Source: The Treasury Source: The Treasury#34FLEXIBILITY IS EMBEDDED IN LATVIA`S FUNDING STRATEGY Main funding instruments are government debt securities issued in the international and domestic capital market 2 000 1 800 Debt redemption profile (million EUR) 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 392 1 600 1 400 1 200 1 000 112 224 529 427 1 500 800 1000 500 145 1 250 1 250 600 500 1 000 1 000 1 000 400 850 850 610 600 200 410 320 300 177 191 208 0 2023 Mar-Dec 2024 2025 2026 2027 2028 2029 2030 2031 2032- 2035 2036 2037- 2046 2047 2048- 2049 2050 ■Domestic securities (LV ISIN) Source: The Treasury, on February 28, 2023 Other external debt liabilities Eurobonds (XS ISIN) Eurobond (XS ISIN) TAPS in domestic market Estimated central government borrowing volumes in 2022-2024 (including international and domestic market) Actual 2022 Actual Plan Jan-Feb 2023 Mar-Dec 2023 Plan 2024 Gross Borrowing 2.2 bn EUR 0.9 bn EUR 2.4 bn EUR 2.4 bn EUR volumes Cash buffer 3.9 6.0 (% of GDP) 34 Source: The Treasury, March 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: • additional financing requirement arising from the geopolitical situation and measures to strengthen national security of Latvia support for the economy and society to reduce the negative impact of increase in energy prices#35CONCLUSION#3636 INVESTMENT HIGHLIGHTS Latvia has previously shown a strong ability to recover rapidly and overcome external shocks thanks to its flexible and resilient economy and the government's ability to ensure swift policy-making in extraordinary situations Republic of Latvia Stable <<A>> Credit Ratings Flexible Economy with Investment and Export Driven Economic Growth Supportive Fiscal Policy and Gradual Return to <<Normality>> Low Government Debt Level Banks Well Capitalised and Liquid Good Progress in Ensuring Energy Security Member of NATO - the World's Strongest Military Alliance