#1Hepizodes 40% 37.75.95 OP Mittel Forum 18 Jan. 1 #N 12 Republic of Latvia REPUBLIC OF LATVIA Investor presentation September, 2022#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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O Photos in slides 4 and 30 of National Library of Latvia taken by Reinis Hofmanis. © Photos in slides 8 and 12 by Pexels. 2 O 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 fiscal buffers... .12 THE ECONOMY: 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 by 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 2022 GDP per capita 2021 Nominal GDP. 2021 Main economic sectors 2Q2022 Currency Credit rating Territory Riga 1.85 million¹ EUR 17.481 EUR 32.9 billion¹ Services (70.7%¹) Manufacturing (15.1%¹) Euro A3 Stable (Moody's), A+ Stable (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 Latest Rating Actions A+/A1 A/A2 A-/A3 • BBB+Baal BBB/Baa2 • BBB-/Baa3 • BB+/Ba1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 S&P (A+ Stable) Moody's (A3 Stable) Fitch (A- Stable) A+/A-/A3/all Stable On April 29, 2022 Moody's affirmed long-term foreign currency sovereign credit ratings at the A3 level with Stable outlook On June 17, 2022 S&P Global affirmed long-term foreign currency sovereign credit ratings at the A+ level with Stable outlook On August 5, 2022 Fitch affirmed long-term foreign currency sovereign credit ratings at the A- level with Stable outlook • • • • Key Strengths of Latvia's Sovereign Credit Profile The flexibility of the Latvian economy and its resilience to the negative effects of the Covid-19 pandemic Track record of fiscal consolidation and implementation of structural reforms Moderate government debt-to-GDP ratio and moderate debt service cost burden Credible policy-making supported by EU and Eurozone membership NATO presence that mitigates risks from geopolitical tension in region Latvia's preparedness and progress made to ensure country's energy security Source: S&P, Fitch and Moody's#77 KEY STRENGTHS AND CURRENT CHALLENGES OF LATVIA 1 Strengths Flexible and resilient economy with strong recovery prospects Mitigate the impact of higher 2 Investment and export driven economic growth 3 Prudent fiscal management in pre-COVID years providing fiscal capacity to absorb external shocks energy prices on the most vulnerable 4 5 6 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 Structural transformation of the economy (inc.EU funds, Recovery and Resilience plan) Challenges Inflation Defence Increase the military and defence capabilities as part of NATO membership Economic growth Energy security Decrease energy dependency from Russia#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 Russia 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 connection with Poland (GIPL) 2. A new floating LNG terminal in Estonia operational from Nov/Dec 2022 3. New 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 needs of ~12 TWh FINLAND BALTIC- CONNECTOR Paldiski LNG ESTONIA Skulte LNG LATVIA Incukalns Gas Storage 9 Latvia will ban the Russian gas import as of 1 January 2023 and challenges in short term lie ahead ■ In the period from 2011-2020 the proportion of natural gas consumption decreased by 8.5% and in 2020 it was 20.8% (of the total consumption of energy resources) ■ Latvia is well-prepared to tackle a possible energy shortage by creating strategic gas reserves 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 prepares to apply the energy austerity measures for the heating season 2022/2023 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 already swiftly provided by «Latvenergo» can be used for production of electricity and heat in power plants The Baltics 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 2020 Latvia gross final energy consumption in 2020 Latvia is among the greenest electricity producers in EU - 62% of electricity was generated from renewables in 20212 3rd highest overall share of gross final energy consumption from renewable sources among EU countries in 2020* 5th largest share of renewable electricity production among EU countries in 2020** 1BRELL: Belarus, Russia, Estonia, Latvia and Lithuania 2 Source: https://www.ast.lv/lv/electricity-market-review?year=2021&month=13 *Source: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable energy_statistics ** Source: https://ec.europa.eu/eurostat/web/energy/data/shares 10 5.2 % Other 39.6% 42% ■Renewables ■Renewables and biofuels 35.7 % ■Oil and petroleum products 58% ■Natural gas 19.9 % 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. 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)#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. Voreinstellungen 4 Jan. 40% 37.754.99 S 0 PM add Mittel 18 Jan. Form 17 29 Bole 22 2 Mo 00 F3 940 F4 % 5 3 #3 54 E R 9#13PUBLIC INVESTMENTS IN thus building 2023 2024 Moderate deficits and solid growth during 2012 -2019 contributed to debt reduction by 10 pp in 8 years fiscal buffer for next crises SOLID GROWTH, FISCAL BUFFERS AND HIGH 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 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Change in GDP per capita (1995=1) current prices, purchasing 1995 1996 1997 1998 1999 power standard (PPS, EU27 from 2020) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0.2 -1.4-1.2 -1.6 -1.4 -0.8 -0.8 -0.6 -4.3 ון! 2.0 0.0 - 2.0 Latvia - 4.0 -4.3 - 6.0 European Union - 27 countries (from 2020) - 8.0 - 10.0 - 12.0 Source: Eurostat Debt reduction has been achieved without compromising levels of public investment, which is above EU average, even netting out EU support 6.0 5.0 4.0 ン 3.0 2.0 1.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 13 Source: Eurostat 2018 -4.5 -2.4 -1.8 -6.5 -7.2 2025 -9.5 ■Deficit excluding support measures Support measures (COVID, energy) Source: Eurostat, Latvia Stability Program - April 2022 -8.6 43.3 44.8 42.0 Source: Eurostat, the Treasury forecast on 26.09.2022. 60.0 LV Gross fixed capital 50.0 formation, % of GDP 40.0 30.0 LV gross fixed capital net of 18.5 LV capital transfers 20.0 11.9 revevable from EU 10.0 8.4 insitutions, % of GDP 10.0 EU27 Gross fixed capital 0.0 formation, % of GDP 2005 2006 2007 2008 2009 2010 2011 2012 47.7 45.1 42.4 40.4 41.6 37.1 36.7 2013 2014 2015 2016 Latvia general government debt development (% of GDP) 40.4 39.0 37.1 36.7 2017 2018 2019 2020 2021 2022F 2019 2020 2021#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 7.0% Public support packages (% of GDP, impact on budget balance) 6.4% Principles in calibrating the support measures ✓ All support measures are temporary 6.0% 5.0% 4.0% 3.3% 3.0% 2.0% 1.0% 0.0% 2020 2021 3.8 % 0.4% 1.6% 1.3 % 0.4% 1.8% 0.9% 2022 Compensation of enegy prices for companies Energy compensation for housholds, social benefits Covid support Source: Ministry of Finance; Data on 28.09.2022 2023 ✓ 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#15SUPPORTIVE FISCAL POLICY IN 2020-2022 AND GRADUAL RETURN TO <<<NORMALITY>>> Government commitment of annual 0.5% of GDP budget deficit reduction 2.0 During COVID-19 crisis the general government deficit has increased more than just for the fiscal impact of the temporary (one-off) support 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Fiscal strategy 2023- 2025 (expenditure exempted from the rule - defence investments and energy support package) Structural deficit 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 0.2 0.0 -0.8 -0.8 -0.6 - 2.0 -1.2 -1.6 -1.4 - 4.0 - 6.0 - 8.0 IN -4.5 -6.5 -7.2 1.0 0.3 0.0 -0.9 -1.8 - 1.0 -0.3 -0.3 -0.8 -2.4 -0.8 -1.5 -1.2 -1.1 - 2.0 -1.3 -2.0 -1.6 -1.9 -1.5 - 3.0 -2.0 -2.5 - 4.0 -3.5 Deficit -Deficit excluding temporary support (COVID, energy) Source: Eurostat, Latvia Stability Program - April 2022 4.0 2.0 Emergency COVID -19 package and supportive fiscal policy pushed deficit to one of highest in EU General government budget deficit in 2021 (% of GDP, results of the EDP notification in spring 2022) 0.0 - 2.0 - 4.0 - 6.0 - 8.0 - 10.0 - 8.0 7.4 - 7.3 - 7.2 - 7.1 - 6.9 - 6.8 - 6.5 - 6.2 - 5.9 5.9 Malta Greece Latvia 15 Source: Eurostat Iitaly Romania Spain Hungary France Slovakia Austria Czechia Belgium Slovenia 4.1 3.7 - 5.5 5.2 Bulgaria Germany Croatia 2.9 2.8 2.6 2.5 2.4 1.9 1.9 1.7 Portugal Finland Netherlands Estonia Ireland Poland Cyprus Lithuania 0.2 1.0 Sweden Denmark Luxembourg 2013 2014 2.3 1 0.9 0 Structural balance, as of 2023 forecast for no policy change scenario Structural balance objectives Nominal deficit (General Government deficit according to ESA methodology) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 0.2 -1 - 0.8 -2 - 1.2 -0.8 - 1.6 - 1.4 -3 -4 -5 -6 -7 ON 3 4 5 6 7 ∞ -8 Source: Eurostat, Latvia Stability Program - April 2022 -0.6 1.3 0.8 Deficit in the no-policy change scenario Γ Hy 3.7 Deficit including temporary support measures - 2.8 - 2.3 - 1.7#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 -4 -8 LRETTENKIN REINCENN Source: EC Report on Public Finances in EMU 2021 EU Funds after 2020 (EU Cohesion policy Programme to be adopted by the end of 2022) 5% 4% 19% ■ Smarter Europe 968 M € 29% 5 bn EUR 24% 19% 16 Source: Ministry of Finance ■ Greener Europe 1175 M € ■ Connected Europe 919 M € 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 € Source: Ministry of Finance CLIMATE DIGITAL TRANSFORMATION REDUCING DISPARITIES ECONOMIC TRANSFORMATION RULE OF LAW Reforms in Latvia under RRF (D) At - - 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 ■ Social Europe 1461 M € ■ Europe closer to citizens 263 M € ■ Just Transition Fund investments 217 M € ■ Capacity building measures (TA) 5 M€ HEALTH#17THE ECONOMY: FLEXIBLE AND RESILIENT ECONOMY#18INVESTMENT AND EXPORT DRIVEN ECONOMIC GROWTH Sound fundamentals support economic activity, increase resilience to external shocks GDP in Q2 2022 compared to 2015 average (%; s.a.) and GDP forecast (y/y; %) GDP components (Q2 2022/average 2015; %; in real terms; s.a.) GDP 17 Private consumption 13 18 Source: Eurostat. Investment Export 10 10 20 20 29 29 30 18 16 14 12 10 80 6 4 31 2 40 0 2022 Q2 Source: Eurostat; F- European Commission forecast. 2022 F ■LV EU27 2023 F#19-10 -20 0 30 20 10 STRUCTURAL TRANSFORMATION TOWARDS MORE PRODUCTIVE SECTORS Income model has changed: higher income sectors and sectors relevant for society development recover strongly; a shift towards higher value-added services Value added by sectors (Q2 2022/average 2019; %; s.a.) ווויי Health Profesional services ICT Manufacturing Financial services Education Public administration GDP Agriculture Real estate Trade Transport Energy Tourism 19 Source: Central Statistical Bureau. Art, entertainment Construction 1000 900 800 Export income of rail transport and ICT services (million EUR) 700 Rail transport ICT 600 500 400 300 200 100 0 2000 2001 2002 2003 Source: Latvijas Banka 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021#20EXPOSURE TO RUSSIA IS RATHER LIMITED Latvia has steadily reduced its exposure to Russia; economy is well diversified Banking sector exposures to Russia, Belarus and Ukraine (% of total assets, July 2022) Export of goods and services to Russia (% of total) 2.0% 1.5% 1.0% 0.8% 12% 11.61% 1.6% 10% 8% 0.9% 6% 0.7% 4% 0.5% 0.3% 0.5% 0.1% 0.1% 0.1% 2% 0.0% Russia 20 Source: Latvijas Banka Belarus Ukraine Total (Russia, Belarus, Ukraine) 0% Assets Liabilities Assets (considering country risk transfer) 5.79% Export of services Export of goods - domestic origin Export of goods - transit trade Total export Source: Central Statistical Bureau of Latvia; Latvijas Banka calculations.#21GLOBAL 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) Consumer Price Index forecast by 80 60 Energy and food prices in Latvia (LV) and Euro Area (EA) (year on year; %) European Commission: 2022 15.5% 2023 6.0% 20 Wages Oil Global food 15 10 10 5 Natural gas Electricity Heating energy Solid fuels Other factor Headline inflation 0 S 01.01.2005 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 21 Source: Eurostat; Latvijas Banka staff estimation. 01.01.2017 01.01.2018 01.01.2019 01.01.2020 01.01.2021 70 0 60 60 50 01.01.2022 01.01.2023 01.01.2024 40 40 30 20 20 10 10 0 2021M08 2021M09 2021M10 2021M11 2021M12 2022M01 " 2022M02 2022M03 " 2022M04 - EA_Food EA_Administered prices ⚫LV_Energy EA_Energy LV_Food LV_Administered prices 2022M05 2022M06 2022M07 Source: Eurostat.#2280 60 06 90 2015Q1 2015Q2 100 2015Q3 TERMS 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) TOP3 product group in the structure of export and import of goods in 2021 (% of total) 150 100% ➡Export price 23.7% y-o-y 90% 140 -Import price 80% -Terms of trade 130 70% 21.9% y-o-y 60% 120 50% 110 40% 2015Q4 2016Q1 2016Q2 22 Source: Central Statistical Bureau of Latvia. 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 30% 14 20% 10% 19 0% Source: Central Statistical Bureau of Latvia. Export Import ■ Wood Food and agriculture Other Mineral fuels Other 11#232 -4 NO ~ +600 0 -2 -6 -8 -10 2010 Net minerals Current account Source: Latvijas Banka. 23 2011 4 8 60% 6 HN 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 2021 2022 H1 Current account without minerals Net external debt (Right Side Axis) Source: Latvijas Banka. 11% 10 0 2010 20 20 1 2011 30 30 3 2 2012 2013 60 10 60 50 40 40 8 7 5 2014 2015 2016 2017 6 ■Foreign direct investment in Latvia ■Capital account inflows 2018 2019 2020 2021 2022 1H Investment inflows (% of GDP)#24DESPITE 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 Real Effective Exchange Rate (REER) deflated by Unit Labour Cost (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 55 Q1 2015 Q2 Q3 Q4 Source: European Commission, WTO. 24 10 10 REER deflated by ULC LV goods export market share in world market 10 16 14 12 10 6 4202 +6 -2 -4 8 -6 I III I III 2018 2019 I 2020 III I 2021 III I 2022 -Total in economy -Transport Agriculture Manufacturing ICT services Source: Central Statistical Bureau of Latvia.#25BANKING SECTOR: WELL-CAPITALIZED AND LIQUID#26DOMESTIC LOANS AND DEPOSITS PREVAIL IN BANKS' OPERATIONS Banking sector focused primarily on servicing domestic clients; non-residents deposits have diminished significantly Billion, EUR 30 25 20 15 10 5 0 2018 Banking sector assets Billion, EUR 30 25 25 20 20 15 10 5 Banking sector liabilities 0 2020 2021 2022 2018 2019 2020 2021 2022 Other liabilities&equity 2019 Other assets ■ Securities Loans to foreign clients ■Loans to other Baltic states Loans to domestic clients ■Cash and claims on Monetary Financial Institutions 26 Source: Latvijas Banka Foreign deposits ■Deposits form other Baltic states deposits ■Domestic deposits Monetary Financial Institutions ■Latvijas Banka 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 Domestic loan-to-deposit ratio 110% 100% 90% 80% 70% 60% 30% 25% 20% 15% 76% 10% 5% Total capital ratio Average Liquidity Coverage Ratio stands at 320% 0% 2019 2020 50% 2018 2019 2020 2021 2022 27 Source: Bank of Latvia Latvia 25.0% Sweden EU/EEA Minimum requirement 2021 2022 Latvia (FCMC FINREP) 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 FINREP data of all institutions are used Source: Financial and Capital Market Commission (FCMC), European Banking Authority (EBA) Risk Dashboard, Bank of Latvia calculations#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% Total Loan Portfolio Quality Total debt*-to-GDP Lithuania Latvia 56.8% Slovenia Estonia Slovakia Italy Greece Germany Austria Malta Spain Finland 1.6% Portugal France Ireland ■Non-financial corporations Households 0% Belgium 2016 2017 2018 2019 2020 2021 2022 Share of loan loss provisions in outstanding loans -Share of loans over 90 days past due in outstanding loans Netherlands Cyprus Luxembourg 0% 50% 100% 150% 200% 250% 300% 350% 28 Source: FCMC, Latvijas Banka's calculations *Total consolidated debt vis-a-vis rest of the economy in 2022 Q1 Source: ECB SDW#29BANKING SECTOR PROFITABILITY STAYS ABOVE EU AVERAGE Profitability has recovered post pandemic and remains high compared to EU peers 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% Return on Assets 75% 70% Latvia 1.03% 65% 60% EU/EEA 55% Cost-to-income ratio 0.0% 50% 2019 2020 2021 2022 2019 2020 2021 2022 29 Data for Sweden and European Union (EU)/European Economic Area (EEA) are European Banking Authority (EBA) sample of largest institutions, for Latvia FINREP data of all institutions are used Source: Financial and Capital Market Commission, European Banking Authority(EBA) Risk Dashboard, Latvijas Banka calculations EU/EEA Latvia 56.8%#30GOVERNMENT DEBT MANAGEMENT: LETONIKA FLEXIBILITY OF FUNDING STRATEGY#3131 Source: Eurostat Estonia Luxembourg Lithuania Latvia Eurozone average: 95.6% 44.8 Netherlands Ireland Malta Slovakia Finland Germany Slovenia Source: Eurostat (April 2022) Million, EUR 400 350 300 250 200 150 100 50 Latvia enjoys low debt servicing costs M 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Interest, payments, million EUR Interest, payments, % of GDP Austria Cyprus GENERAL 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 General Government Debt 2021, % GDP (Eurozone countries) Low debt level provides effective buffer for scenarios of additional funding needs General Government Debt % GDP 1 0.8 0.6 0.5 0.4 0.2 0 1.4 1.2 % of GDP Belgium 1.8 1.6 France Spain Portugal Italy Greece Stability and Growth Pact: 60% 44.8% 43.3% 42.0% 43.0% 42.4% 41.5% 40.4% 39.0% 37.1% 36.7% 2016 2018 2019 2020 2021 2022 F 2023 F 2024 F 2025 F 2017 Source: Eurostat (April 2022), the Treasury forecast on 28.09.2022. Low debt level is one of the strength of Latvia credit rating A quote from Fitch Ratings 5th August, 2022 report: «Latvia's ratings are supported by a credible policy framework supported by EU and eurozone membership, as well as government debt levels and debt servicing costs below the median of 'A' rated peers.>>#3232 FUNDING INSTRUMENTS ARE CUSTOMIZED TO ACTUAL SITUATION Demand in the domestic auctions is supportive in 2022 ensuring the largest ever borrowing volumes 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 1000 800 680 622 600 422 330 400 150 200 0 -200 2017 2018 4.0 1160 3.5 3.0 2.5 1.84 2.0 1.5 1.0 2019 2020 2021 2022 0.5 (26 Sept) 0.0 ■Gross issuance in domestic market Feb I Mar Russia invasion of Ukraine 1.96 3.67 1.68 ■Net issuance in domestic market Source: The Treasury as of 26.09.2022. Options of new loans from international financial institutions remain available For COVID-19 related needs in 2020/2021 Latvia used international financial institutions facilities: Nordic Investment bank loan in 2020 for the funding of extraordinary government expenditure in order to mitigate the impact of the Covid-19 epidemic in amount of EUR 500 million. The loan is fully disbursed ■ EU SURE facility - the total amount of SURE support available for Latvia was EUR 305.2 million. As of today SURE loan is fully disbursed. NOTE: SURE - EU coordinated response to the Covid-19 for temporary support to mitigate unemployment risks in an emergency Source: The Treasury as of 26.09.2022. ☐ Apr May June July Aug Sept 2022 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 ■ On 14 October 2020 for the first time GMTN programme XS ISIN Eurobonds TAPS were offered in auction in domestic market only (via Primary dealers) ■ The Treasury holds regular auctions and offers tenors to address investor demand#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 in 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 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Years 3.43% 3.17% 8.00 2.81% 7.00 2.41% 6.00 5.00 4.00 5.86 3.00 4.97 4.47 2.00 4.16 1.00 0.00 2014 2015 2016 2017 Duration (years) 33 Other Domestic T-bills Source: The Treasury, June 31, 2022 Weighted average interest rate of debt portfolio below 1% in 2021 Domestic T-bonds 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Eurobonds 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 ■Loans from financial institutions 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q21 2Q22 2049 1.875% 19/02/2049 2047 2.250% 15/02/2047 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 1.125% 30/05/2028 2026 0.375% 07/10/2026 2025 1.375% 23/09/2025 2024 2.875% 30/04/2024 2023 0.125% 14/04/2023 0 500 Latvia Eurobonds Outstanding (nominal amount, EUR million) Eurobond issuances in international capital markets in 2021 TAPS of outstanding Eurobonds in domestic market 1000 1500 ■Sustainability bond, issued in 2021 2000 Source: The Treasury Debt Portfolio parameters are in lines with Strategy Parameters Strategy 31/03/2022 31/06/2022 3.5% 3.0% Maturity profile (%) • 2.5% up to 1 year ≤ 25% 10.7% 18.9% 2.18% 2.03% 1.60% 2.0% up to 3 year ≤ 50% 33.6% 33.6% 7.61 0.87% 1.5% 6.49 Share of fixed rate(1) ≥ 60% 83.1% 75.2% 1.0% 6.62 6.14 0.5% Macaulay duration 5.00 9.00 6.44 6.55 0.0% (years) 2018 2019 2020 2021 PORTFOLIO: weighted average interest rate, % Net debt (2) currency composition 100% EUR with a deviation of +/- 5% 100.27% 100.26% 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 1 500 1 000 500 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, starting from 5 years onwards ✓ Flexibility to combine instruments and other available alternatives 0 2022 Oct-Dec 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032- 2036 2037- 2047 2048- 2050 2035 2046 2049 > =2051 ✓ Maintained comfortable liquidity buffer Eurobonds (XS ISIN) Eurobond (XS ISIN) TAPS in domestic market Other external debt liabilities Source: The Treasury, on September 30, 2022 ■Domestic securities (LV ISIN) Gross Borrowing volumes Cash buffer (% of GDP) 34 Source: The Treasury, 28.09.2022 Estimated Central Government Borrowing volumes in 2022-2024 (EUR billion) Actual 2021 Actual Estimated 2022 Jan-Sep 2022 Oct-Dec 2023 2024 2.3 bn EUR 1.16 bn EUR from 1 bn to 1.7 bn EUR 3.25 bn EUR 2.4 bn EUR 5.6 6.0 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 • Covid-19 fiscal impact (i.e. possible government decisions on measures for mitigation of spread of Covid-19)#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 and Resilient 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