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A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. 2#33 Key strengths of Latvia's credit profile 1 Flexible and resilient economy with strong and coordinated response to economic challenges 2 3 4 5 Prudent fiscal management in pre-COVID years provides fiscal capacity to absorb the negative impact of external factors on Latvia's economy Direct banking sector exposure to Russia, Belarussia and Ukraine is low, and these exposures have decreased significantly already since 2015 Good progress made to diversify sources of energy supply and ensure energy security NATO presence mitigates risks from geopolitical tension in region#4OVERVIEW: Portrait of an Ascending Sovereign Credit THE ECONOMY: Flexible and Resilient Economy BANKING SECTOR: Well-Capitalized and Liquid FISCAL POLICY: Targeted Action to Contain the Pandemic and to Support the Economy and Citizens........ NEW REFORM PUSH: 5 9 14 .20 Targets Productivity and More Inclusive Growth …………………………... 24 GOVERNMENT DEBT AND FUNDING STRATEGY....... 29 4 CONCLUSION 35#5OVERVIEW: PORTRAIT OF AN ASCENDING SOVEREIGN CREDIT#6LATVIA 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. Key Facts Territory Borders 64 594 sq. km¹ Estonia, Lithuania, Belarus and Russia Capital Population 2022 Currency Credit rating GDP per capita 2021 Nominal GDP 2021 Main economic sectors 1Q2022 Source: ¹Central Statistical Bureau of Latvia Riga 1.88 million¹ Euro A3 Stable (Moody's) A+ Stable (S&P) A- Stable (Fitch) EUR 17.45¹ EUR 32.9 billion¹ Services (74.7%¹) and Manufacturing (14.4%¹) 6 Latvia Regains Independence Latvia Admitted to NATO Latvia is a Member of the Eurozone, NATO and OECD Europe Eurozone Members NATO Members OECD Members Latvia Eurozone/ Economic and Monetary Union Joins Latvia Becomes OECD Member JOECD Aug 1991 1991 Sep 2004 Mar 2004 May Jan 2014 Jan - Jun 2015 Jul 2016 Latvia's Presidency of EU Latvia Becomes Latvia Joins EU UN Member Council#7LATVIA'S CREDIT RATINGS ARE STABLE IN «A» CATEGORY Rating agencies acknowledge flexibility of Latvia's economy, moderate level of government debt and swift policymaking that is bolstering its creditworthiness Long-term Foreign Currency Rating Development A+/A1 A/A2 A-/A3 BBB+Baa1 • BBB/Baa2 • Latest Rating Actions 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 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) • 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 and Russia war in Ukraine Moderate government debt-to-GDP and moderate debt service cost burden • Credible policy-making supported by EU and eurozone membership NATO presence mitigates risks from geopolitical tension in region. Following Russian invasion, NATO has reinforced troops actually stationed in Latvia since 2017 • Latvia's achievements to ensure country's energy security . Track record of fiscal consolidation and implementation of structural reforms 7 Source: S&P, Fitch and Moody's#8KEY EVENTS IN 2022 1 On January 27 The Law on Measures to Reduce the Extraordinary Increase in Energy Prices was adopted (measures to end users and targeted social groups were implemented until 30 April 2022) 2 On April 12 the Government approved Latvia's Stability Programme for 2022-2025 On April 19 the Government supported the development a floating liquefied natural 3 gas (LNG) terminal in Paldiski, a project implemented by Estonia together with Finland, as well as the construction of a LNG terminal in Latvia 4 On June 21 the Cabinet of Ministers approved additional support measures in total ammoun of 350.2 Milj. EUR for reducing the impact of energy prices and inflation (measures adopted for heating season in 2022/2023) 5 On July 14 the Parliament adopted amendments to the Energy Law, which stipulates a ban on natural gas supplies from Russia starting from January 1, 2023.#9THE ECONOMY: FLEXIBLE AND RESILIENT ECONOMY#10THE ECONOMY RECOVERED RAPIDLY FROM COVID-19 PANDEMIC IMPACT The economy in 2021 exceeded pre-Covid-19 levels, and while geopolitical tension could dampen its strong recovery in 2022, prospects remain promising Real GDP Growth (seasonally adjusted data, %) GDP Growth Composition (%) 4.3 3.9 3.6 .9 0.8 -8.7 -0.4 10.1 6.4 2.4 3.5 2.4 1.4 2.7 1.2 2.0 1.8 1.8 -1.5 -1.4 3.0 7.1 8.7 2.7 -4.3 -5.3 -5.2 2015 2016 2017 2018 2019 2020 2021 2022 Q1 2015 2016 2017 2018 2019 2020 2021 2022 ■Private consumption Q-o-q Y-o-y Source: * Flash estimate; Central Statistical Bureau of Latvia (29.06.2022.) Real GDP Growth (%) ■Gross capital formation. Source: Central Statistical Bureau of Latvia (29.06.2022.) GDP Growth in comparison (2021, %) Public consumption ■Net exports 3.9% 4.0% 3.3% 2.4% 2.5% 4.5% 13.5% 8.3% 8.1% 6.8% 6.2% 5.0% EU Average (27 countries): 5.4% 4.8% 4.5% -3.8% 2015 2016 2017 2018 2019 2020 2021 TT 3.3% 3.0% 3.0% Ireland Estonia Slovenia France Belgium Lithuania Austria Latvia Czechia Finland Slovakia Source: Central Statistical Bureau of Latvia (17.05.2022) 10 Source: Eurostat (29.06.2022.)#1111 10 9 8 7 THE LABOUR MARKET RETURNED TO HIGH EMPLOYMENT RATE, PRODUCTIVITY GROWTH IS ON THE RISE The government took swift actions to mitigate the unemployment growth during Covid-19 crisis. Highly flexible labour market showed ability to adjust to economic shocks and swiftly return to high employment rate Unemployment: Headline Rate Participation and Employment Rates (age 15-64, %) 9 80 75 70 65 5 4 60 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Headline unemployment Participation rate Employment rate Source: Eurostat (17.08.2022.) Real Productivity Growth Per Worker (2015-2021 average, %) Source: Central Statistical Bureau of Latvia data (17.08.2022.) Average Monthly Wage For Full-time Job 80 7 65+ 4 2.7 3 2 EU-27: 0,6% 0 -2 1 14 12 8 20 % 6 + NON + 10 4 2 -4 0 Ireland Latvia Estonia Lithuania Czechia Slovenia Slovakia Finland France Belgium Austria 11 Source: Eurostat (29.06.2022.) (Y-o-y, %) Q1'19 Q2'19 Q3'19 Q4'19 ■Real Net Wages Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 ■Gross Nominal Wages Source: Central Statistical Bureau of Latvia data (29.06.2022.) Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18#12EU-27: 5.9% INFLATION INCREASE DUE TO RISE OF WORLD ENERGY AND FOOD PRICES The main impact on price developments will continue to be related to rising world prices for energy and food, which will be largely affected by geopolitical tensions in the region Inflation (HICP, annual rate of change %, for food and energy - contribution to changes, as percentage points) Harmonised Index of Consumer Prices (June 2022, 12 months average %) 42086420864202 24 22 18 16 14 12 10 2227LETE 13.8% 11.8% 9.8% 9.1% 7.8% 5.8% 3.8% 1.8% -0.2% May-22 Jul-22 Jan- Mar-22 Sep-2 Nov-21 May-18 Jul-18 -ΛΟΝ Sep-18 Nov-18 Jan-19 Mar-19 May-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 May-15 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-1 Jan-18 Mar-18 Energy Food, alcohol, tobacco Inflation Inflation excl. energy, food, alcohol, tobacco Source: Eurostat (15.08.2022.) July - estimation Mar-16 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Inflation in Latvia (HICP, %) 3.2 2.92.83.0 2.3 2.62.3 2.72.72.8 1.8 0.2 Belgium Slovakia Ireland Slovenia Austria Finland France EU-27: 6.5% Source: Eurostat (15.08.2022.) Harmonised Index of Consumer Prices Projection (2022-2023, %) 12.0% 10.8% 10.0% 3.6 3.2 8.0% 2.0 6.0% 4.0% 2.0% 0.0% 1.3 0.1 - 0.7 - 0.6 - 0.5 2015 2016 Total inflation 2017 2018 2019 2020 2021 Goods inflation Services inflation 0.1 Source: Eurostat (20.01.2022.) 12 Estonia Latvia Slovakia Slovenia Belgium Austria Ireland Source: European Commission, Summer 2022 (15.08.2022.) Lithuania France Finland#13(% growth between 2010 and 2021) EXPORTS OF GOODS CONTINUE TO GROW In 2021 exports of goods increased substantially. Exports continue to grow despite the delays in raw material supply chains impacted by Covid-19 and Russia invasion of Ukraine 350 300 250 Export of Goods and Services (2010=100) 200 150 Goods Export Growth 250 200 150 100 76.1 Ireland Lithuania Estonia Latvia Slovakia Slovenia Czechia EU 27 Austria Belgium France Current Account Balance (%GDP) Source: Eurostat (17.05.2022.) 50 100 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 - Belgium France Slovenia Source: Eurostat (17.05.2022) Export of Principal Goods Czechia Latvia Slovakia - Estonia Ireland Lithuania -Finland Austria (current prices, 2010=100) 350 Wood and articles of wood Machinery and mechanical appliances, electrical equipment Agricultural and food products 250 Chemical industry products 300 200 1.6% 1.3% 100 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 150 Source: Central Statistical Bureau of Latvia data (15.02.2022.) 13 -0.2% -0.7% 2.9% Finland -2.9% -7.1% 2018 2019 2020 2021 Q1'22 2016 2017 Source: Bank of Latvia (28.06.2022.)#14BANKING SECTOR: WELL-CAPITALIZED AND LIQUID#15WELL CAPITALISED AND LIQUID BANKING SECTOR The Latvian banking sector is well capitalized, liquid and profitable, with a high presence of large Nordic and Baltic banking groups Key Highlights The Latvian banking sector is dominated by subsidiaries and branches of banks from the European Economic Area, mostly from Nordic countries. Since 4Q 2021 Swedbank Baltics AS has been a parent of Swedbank subsidiary banks in Estonia, Latvia, and Lithuania, creating a Baltic sub-consolidation group, which is under the supervision of the European Central Bank. Swedbank Baltics AS is a financial holding company, fully owned by Swedbank AB in Sweden. Latvia is a part of the European Banking Union, and the three largest banks are directly supervised by the ECB and are under the remit of the SRB Direct exposure to RU, BY and UA is low at the aggregate level and limited to a few smaller banks. Overall, these exposures have decreased significantly since 2015 without major systemic shocks to the financial system and economy. Capital Adequacy (%) Capital Ownership of the Banking System (20 27% 11% Source: Bank of Latvia 2022) 62% Domestic✶ ■ Nordic ■Other * Swedbank currently belongs to a holding registered in Latvia, accordingly, the direct owner is in Latvia. Liquidity Coverage Ratio 400% 350% 300% 250% 200% 150% 100% 50% 0% 2016 2017 2018 2019 2020 2021 2022 64208642086420 18 16 14 12 10 Total capital ratio -CET1 ratio Minimum requirement for total capital ratio (8%) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016 2017 2018 2020 2021 2022 Average LCR, LV 2019 Average LCR, EU Minumum requirement Source: FCMC | Note: Tier 1 ratio matches CET 1 ratio. The minimum TCR requirement is the Source: FCMC, EBA regulatory minimum and doesn't include capital buffer requirements and supervisory Pillar 2 requirements. 15#1610% 8% 6% 4% 2% LENDING REMAINS SUBDUED Lending to NFCs so far remains subdued, however housing loans have demonstrated steady growth Key Highlights Lending had been subdued before the pandemic and Russia's invasion of Ukraine, and lending to NFCs so far remained weak in 2022. Housing loans have demonstrated growth Loans to domestic households and NFCs stand at 30% of GDP 8% 6% Loans to Domestic Clients (yoy) لیست 4% 2% 0% 2016 2017 2018 2019 2020 202A 2022 -2% -4% The impact of the war in Ukraine on the economy has not been reflected in the overall quality of bank loan portfolio; the coverage ratio of 90 days overdue loans remained high. -6% -8% -10% NFCs HHs *The time series have been adjusted excluding the one-off effects due to structural changes in the banking sector, sector reclassification, etc. Source: LB calculations Total Loan Portfolio Quality 0% 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 16 Source: Credit Register Domestic Private Sector Loan-to-GDP Ratio (%) 92.4 2010 1Q 2022 104.2 95.1 88.1 59.1 58.3 37.8 30.2 Estonia Lithuania Latvia Euro area Source: ECB, EUROSTAT#17DOMESTIC LOANS ARE MAINLY FUNDED BY DOMESTIC DEPOSITS Lending is the core banking products in the domestic market. Parent bank funding has been replaced with domestic deposits 140% 120% Loan-to-deposit ratio Growth Rates of Domestic Client Deposits (yoy) 25% 100% 20% 80% 15% 60% 10% 40% 5% 20% 0% 0% 2016 2017 2018 2019 2020 2021 2022 - 5% 2016 Domestic Total Source: Bank of Latvia 18 16 14 12 10 22086 Deposits (EUR bn) 5 4 17.4 3 2 2.9 1 2017 2018 2019 NFCs 2020 HHs 2021 2022 Source: Bank of Latvia Liabilities to foreign MFIS 4 2 0 0 2016 2017 2018 2019 Q3 Domestic Q4 Q1 Q2 Q3 Q4 Q1 Q2 2020 2020 2021 2021 2021 2021 2022 2022 Foreign 2016 2017 2018 2019 2020 Liabilities to foreign MFIS Source: Bank of Latvia Source: Bank of Latvia 17 (EUR bn) 2021 incl. parent banks 2022#18BANKING SECTOR PROFITABILITY REMAINED RESILIENT DURING THE PANDEMIC New risks emerging due to the geopolitical situation remain contained Key Highlights • • • • • In 2021, profitability of banks recovered swiftly as there were smaller expenses on provisions and no significant losses from trading with financial instruments compared to 2020 and banks' main sources of income gradually grew Net interest income has increased by 10%, albeit as a result of synthetic growth of one credit institution that acquired a leasing portfolio from a non-bank. Nevertheless, interest income has remained stable during the pandemic as banks were able to maintain sufficient interest rate margin (3 pp on average) Net fee and commission income also increased, mainly from servicing payments and credit cards Administrative costs increased slightly, however overall cost-to-income ratio (58% at the end of 2021) improved compared to 2020 and 2019 The war in Ukraine and bilateral sanctions have increased the uncertainty regarding the need for extra provisions and outlook of income stability. Although financial sector direct exposures to RU, UA and BY are limited, some impact on borrowers is unavoidable, at least in short term, due to a slowdown in the economic activity and price shock Risks are mitigated since largest lenders have decent voluntary capital and retained earnings buffers ROE CI Net interest income and Net fee and commission income (millions EUR) ♦ ROE - EBA average ◆ CI 140 12% 70% 10% 8% 65% 120 60% 100 6% 55% 80 4% 50% 60 2% 45% 40 % 40% 2017 2018 2019 2020 2021 2022**2017* 2018 2019 2020 2021 2022** 20 0 Source: FCMC (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS and ABLV Bank AS. 2017* *One-off adjusted data ** Annualized 1Q 2022 data. 18 2018 2019 NII NFCI 2020 Source: FCMC (FINREP, consolidated), Bank of Latvia's calculations *One-off adjusted data 2021 2022#19PARENT BANKS ARE FINANCIALLY SOUND AND PROFITABLE The parent institutions of Latvia's banks have high credit ratings, high profits and are well- capitalized • • Key Highlights Financial performance and capitalization level of the parent banks is strong Nordic banking groups' profitability is higher than the EU average • • The ability and proven willingness to support subsidiaries in Baltics by the largest parent banks from Nordic countries enhance risk absorption capacity of the Latvian banking sector In October 2021, the ownership of the subsidiary banks in Estonia, Latvia and Lithuania was placed in the holding company Swedbank Baltics AS which is wholly owned by Swedbank AB Banks Financial Information Banking Groups' Equity Prices (01.01.2020 = 100, local currency) Swedbank Luminor Latvia branch* SEB 180 DNB Nordea 170 160 Assets (EUR mil)* 7,553 4,536 3,776 150 CAR (%) * 33.1 22.4 140 130 ROE (%), 7.6 16.7 120 annualized* 110 S&P Global long- www A+ A+ * 100 term rating 90 Moody's long-term 80 Aa3 Aa3 Baa1 rating 70 Fitch long-term 60 AA- AA- * rating 50 2020 2021 2022 Source: Finance Latvia Association - data, 4th quarter 2021 STOXX Europe 600 Banks Swedbank SEB DNB Nordea Banks' investor relations (ratings at group level) In January 2019 Luminor Bank Latvia became a branch of Estonian Luminor Bank. Bank ratings (at Group level) 19#20FISCAL POLICY: TARGETED ACTION TO CONTAIN THE PANDEMIC AND TO SUPPORT THE ECONOMY AND CITIZENS#210.0 -1.0- - 2.0 - 3.0 - 4.0 - 5.0 - 6.0 FISCAL SUSTAINABILITY REMAINS TOP PRIORITY Prudent fiscal policy has produced low budget deficits in pre-pandemic years. The spread of Covid-19 and necessary support measures for mitigating the consequences thereof significantly impacted fiscal indicators of Latvia in the short term. Fiscal strategy of the Stability Programme 2022-2025 is set to provide fiscally sustainable deficit levels, excluding one-off measures Budget Balance (2021, % GDP) General Government Budget Balance (% of GDP) - 7.0 - 8.0 7.3 6.5 - 6.2 - 5.9 A+/A3/A-w Latvia France AA/Aa2/AA Slovakia A+/A2/A Austria AA+/Aa1/AA+ 2017 2018 2019 2020 2021 2022 2023 - 1.0 0.0 - 1.9 -1.0 -0.4 - 2.4 - 2.6 -0.8 -0.9 -0.8 -0.6 -0.7 -2.0 -3.0 -4.0 - 5.2 - 5.5 EA: (-5.1%) -5.0 -4.5 -6.0 Belgium AA/Aa3/AA- Slovenia AA-/A3/A Finland AA+/Aa1/AA+ Estonia AA-/A1/AA- Ireland AA-/A1/AA- Lithuania A+/A2/A -7.0 -2.5 -2.8 -3.7 -5.1 -6.5 -8.0 -7.1 -7.3 -9.0 -10.0 ■Latvia ■EA Source: Eurostat (02.05.2022) Results of the Spending Review (EUR, million) 200.0 172.8 150.0 70.6 100.0 50.0 102.2 0.0 2022 47.5 2023 ■Resources to common government priorities ■Internal resources for own sectoral priorities Source: Eurostat, Stability Programme for 2022-2025, AMECO Spring Forecast 2022 2022 Budget: Expenditure for priorities (EUR, million) 544,6 2022 . • 2023 301,2 309,8 2024 21 Source: Ministry of Finance, Data: Spending Review of 2022 (as of August 2021) Source: Ministry of Finance Salary increase for medical personnel, teachers, officials of the interior system Improving oncology health services (reimbursable infrastructure) Increasing funding for science medicines, Increasing the number of state-paid days of incapacity for work Financing of the municipal investment program Funding for the reconstruction of national regional roads#2222 GOVERNMENT SUPPORT PACKAGES AND THEIR FISCAL IMPACT Total Covid-19 support measures to economy, EUR million and % of GDP 2500 2000 4.3% 1500 1000 500 0 2020 Execution 6.9% 4.1% 1.2% 2021 Execution 2022 Plan Operative performance 30.06.2022 ■Loans and guarantees; working capital loans, credit and portfolio guarantees, increasing the local governments borrowing limit, Investment fund, financial Instrument for the support of large enterprises Through taxation; Extensions of tax payment periods, cancellation of PIT advance payments, refund of overpaid VAT within 30 days, extension of real estate payment terms -500 Impact of Covid-19 support package on budget balance, EUR million and % of GDP -3.3% -1500 -2500 2020 Execution -6.4% 2021 Execution -1.8% -1.1% ■Benefits; downtime allowance, childcare allowance and supplement, subsidized jobs, including support for the tourism sector, support for families EUR 500 for each child in foster care, one-time support EUR 200 for pensioners and person with a disability ■Sectoral support; to the air transport industry, health care, for distance learning, for media and public information, for the sports, the cultural, the agricultural, forestry, fisheries and food production sectors, allowances for interior sector employee ■Restructuring of EU funds; short term loans to farmers, redistribution of EU funds, support for the fisheries sector, over - commitments of EU funds, over commitments for agricultural 2022 Assessment Operative performance 30.06.2022 funds Data. Assesment of MoF according to the government decisions till June 30th, 2022. Operative performance till June 30th, 2022. Support for compensation of increase of energy prices, mln euro Execution of support for heating season 2021/2022 (on August 16, 2022) Planned support for heating season 2022/2023 For targeted social groups; 167.8 mln For all end-users; 200.1 mln For targeted social groups; 156.82 mln For all end-users; 339.4 mln Source: Ministry of Finance, Approved measures by the Cabinet of Ministers by August 9th, 2022 Social benefits include 65.3 mln euro which at the same time are recorded as the Covid support measures as well#23PENSION REFORM UNDERPINS STABILITY OF PUBLIC FINANCES Latvia is well positioned to withstand fiscal challenges arising from an ageing population Age-related Spending, Projected Change Latvia's Pension System And Recent Reforms Latvia's reformed pension system consists of three tiers: state compulsory unfunded pension scheme (the 1st tier) state funded pension scheme (the 2nd tier) private voluntary pension scheme (the 3rd tier) On June 14, 2022, Latvian parliament approves pension indexing from August 1. Indexes vary depending on CPI, years of service and working conditions. From 1 January 2014, the retirement age is gradually increased by three months every year - until 1 January 2025, it will be 65 years. In period from 1st January 2022 till 1st January 2023 retirement age is 64 years and three months. From 1st January 2020, a person has the right to choose to whom to transfer the capital accumulated in the 2nd tier, in case he or she dies before the granting of the old-age pension, i.e.: ✓ ✓ transfer the state pension to the special budget (then the capital will be taken into account when calculating the survivor's pension); add accumulated capital to another person's 2nd tier pension; leave for inheritance in accordance with the procedures specified in the Civil Law. Source: The State Social Insurance Agency The 2nd Tier Pension Net Assets (EUR billion, % GDP) 11.0 9.0 7.0 5.0 3.0 1.0 -1.0 -0.8 -1.6 -3.0 Estonia AA-/A1/AA- France AA/Aa2/AA -0.6 Latvia (2019-2070, % GDP) 6.1 6.2 5.4 3.8 3.4 1.6 Source: European Commission Ageing Report, May 2021 10.8 8.9 Latvia's age-related spending is among the lowest in EU (2019, % GDP) 7.0 18.3% 17.3% 6.0 30 14.8% 6.0 5.0 12.2% 12.3% 25 10.9% 5.1 4.0 9.5% 4.5 20 8.5% 7.3% 15.3 15.8 3.0 6.1% 6.6% 3.6 15 13.2 3.3 2.0 2.8 2.3 10 2.0 10 1.0 1.7 1.5 1.2 0.0 2015 2016 2017 2018 2019 2020 2021 Ireland AA-/A1/AA- Lithuania A+/A2/A 23 2011 2012 2013 2014 2nd tier pension net assets (EUR billion) 2nd tier pension net assets (% of GDP) Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia Source: European Commission Ageing Report, May 2021 Latvia A+/A3/A- Estonia AA-/A1/AA- Slovakia A+/A2/A 17.2 18.3 18.6 29.5 26.5 26.5 26.7 25.6 20.7 Czechia AA-/Aa3/AA- Slovenia AA-/A3/A Belgium AA/Aa3/AA- Finland AA+/Aa1/AA+ Finland AA+/Aa1/AA+ Austria AA+/Aa1/AA+ France AA/Aa2/AA#24NEW REFORM PUSH: TARGETS PRODUCTIVITY AND MORE INCLUSIVE GROWTH#25LATVIA'S ADVANCED COUNTRY STATUS REFLECTED IN "SOFT" METRICS Expanded structural reforms built on existing high institutional strengths and favourable business environment World Bank "Ease of Doing Business" Ranking Lithuania A+/A2/A Estonia AA-/A1/AA- Latvia A+/A3/A- Finland AA+/Aa1/AA+ Ireland AA-/A1/AA- Austria AA+/Aa1/AA+ France AA/Aa2/AA Slovenia AA-/A3/A Czechia AA-/Aa3/AA- Slovakia A+/A2/A Belgium World Bank Worldwide Governance Rankings 11 18 72 85 80 77 19 73 64 60 ☑ 81 74 75 63 20 24 27 32 37 41 Political Stability Government 45 and Absence of Effectiveness Regulatory Quality Rule of Law Control of Corruption 46 Violence ■Latvia 2010 ■Latvia 2020 AA/Aa3/AA- Source: World Bank, Doing Business 2020 (19.05.2022.) Statutory Tax Rate on Corporate Income 13 20 (2021, %) 25 Source: European Commission, Taxation Trends in the European Union 2021 28 Source: World Bank (01.02.2022.) The Global Competitiveness Index Rankings Global Competitiveness Index Ranking Finland 11 4 Finland Belgium 22 6 Estonia Italy 30 Czech Rep. Portugal 32 34 Slovenia 35 Poland Lithuania Latvia Slovakia Hungary Bulgaria Romania 3333337 2 2 2 5 7 Latvia 10 Croatia 16 17 Slovenia Lithuania 19 Czech Rep. 39 41 42 47 49 Croatia 51 63 33 222223 20 Portugal Slovakia 24 Romania Hungary Belgium Italy Bulgaria Global Sustainable Competitiveness Index Ranking Source: World Economic Forum, The Global Competitiveness Report 2019, The Global Sustainable Competitiveness Report 2020#26RECOVERY AND RESILIENCE FACILITY (RRF) FOR LATVIA Targeted use of EU funds will promote competitiveness and stimulate economic growth as well as support necessary structural reforms Recovery and Resilience plan (Adopted by the Council on July 13, 2021) Reforms under RRF 10% CLIMATE TRANSFORMATION Transition to sustainable transport, energy efficiency in all sectors, enabling wind-farm deployment Coordination mechanisms for public digital services, digtal skills & skills agenda DIGITAL ■ CLIMATE 676,2 M € 37% ■ RULE OF LAW 37 M € 20% 1,82 billion € ■ ECONOMIC TRANSFORMATION 196 M € ■ DIGITAL TRANSFPRMATION 365,2 M € DISPARITIES ■ REDUCING 20% 370 M € 11% 2% ■ HEALTH 181,5 M € On 10 September, 2021, Latvia received pre-financing of 13% (EUR 237 million) of the total amount of the Recovery Fund 26 Source: Ministry of Finance; Data on 10.02.2022. REDUCING DISPARITIES HEALTH ECONOMIC TRANSFORMATION RULE OF LAW ব . Administrative territorial reform, GMI reform Healthcare network effectiveness, remuneration reform Innovation eco-systems, consolidation of higher education institutions Strengthening capacity of law enforcement agencies to combat shadow economy and economic crimes In June 2022 Latvia submitted to the EC the first payment request in amount of EUR 231 million#2727 EU FUNDS PLAYING KEY ROLE IN FUNDING STRUCTURAL TRANSFORMATION IN LATVIA Targeted EU funds investments contributes to the economic growth and raising standard of living while addressing Latvia specific challenges • • Targeted EU funds to mitigate effects of the Covid-19 pandemic (2014-2020) Reallocation of EU Funds was done in order to mitigate the consequences of the Covid-19 crisis + 230,3 million € of additional funding to Latvia as part of European Commission's proposal for Recovery Plan for Europe (REACT-EU) was recieved and allocated within multifund Operational Programme for 2014-2020 EU Funds After 2020 (EU Cohesion policy Programme to be adopted by the end of 2022) 0,1% 4% 5% 19% 29% 5,0 billion € 24% 19% Source: Ministry of Finance; Data on 31.05.2022 ■ Smarter Europe 968 M € ■ Greener Europe 1175 M € ■Connected Europe 919 M € ■ Social Europe 1461 M € ■ Europe closer to citizens 263 M € ■ Just Transition Fund investments 217 M € ■ Capacity building measures (TA) 5 M € More funding sources greater opportunities The Latvia's Cohesion policy allocation (2021- 2027) together with grant allocations from new instruments (RRF, REACT EU, Just Transition Fund of NextGen package). ~ 6,9 billion €#2828 MAIN CHANGES IN TAX LEGISLATION Key goals: decrease of income inequality and promotion of economic competitiveness 2021 2022 Increase of the income threshold up to which the differentiated non-taxable minimum is applied (from EUR 1200 per month to EUR 1800 per month) The rate of the compulsory state social security contributions is reduced (from 35.09% to 34.09%) A minimum social security contribution object for employees whose monthly income does not reach the amount of the minimum wage is introduced Reorganization of the micro-enterprise tax regime (the tax rate increased to 25% up to turnover of EUR 25'000 and 40% for the excess amount) Gradually increase of excise duty on tobacco products and changes in vehicle taxes, etc. Increase of differentiated non-taxable minimum and non-taxable minimum for pensioners (as from Jan-2022 EUR 350 per month; as from Jul- 2022 EUR 500 per month) Reduction of the VAT rate for books, press and other mass media issued in the form of printed or electronic publication (from 12% to 5%) and e- books, newspapers and periodicals and media content in digital format (from 21% to 5%) Inclusion of the employer's health service in the benefits provided for in collective agreements with a limit of 480 euros per year Increase of the maximum social security contribution object (from EUR 62'800 to EUR 78'100) Increase of the minimum salary from EUR 430 to EUR 500 in 2021 Source: Ministry of Finance#29GOVERNMENT DEBT AND FUNDING STRATEGY#30EU-27: 1.4% 0.5 9 Estonia 0.0 Luxembourg 30 Source: Eurostat (April 2022) Sweden Lithuania Bulgaria Denmark Latvia Finland Finland Germany Netherlands Czechia Ireland Austria Poland Malta Slovenia Slovakia France Romania Croatia Belgium Cyprus GENERAL GOVERNMENT DEBT REMAINS MODERATE AND SUSTAINABLE Despite the recent increase due to fiscal impact of Covid-19 pandemic, the debt level is expected to be below 60% of GDP in the medium term Key Characteristics of Latvia's Government Debt General government debt was amongst the lowest in the EU at 44,8% of GDP at the end of 2021 - the 4th lowest in the Eurozone and the 8th lowest in the EU General government debt level increased due to fiscal impact of Covid-19 pandemic, but expected to be well below 60% of GDP in the medium term Latvia enjoys low debt servicing costs, significantly lower than the EU and Eurozone averages Since March 2014 Latvia participates in the European Stability Mechanism, which provides additional financial stability to its members General Government Debt at Year End (EUR million, % GDP, ESA methodology) 45% 46% 45% 44% 43% 43% 40% 39% 37% 37% 16 679 17 646 18 420 18 999 14 740 12 754 10 245 10 519 10 816 11 247 T T 2016 2017 2018 2019 2020 2021 2022 F 2023 F 2024 F 2025 F 3.5 Interest payments 2021, % GDP Source: Eurostat (actual data 2016-2021), forecast 2022-2024 (Stability Programme of Latvia 2022-2025) General Government Debt 2021, % GDP (Euro zone countries) Spain Hungary Portugal Greece Italy Estonia Luxembourg Lithuania Latvia Source: Eurostat (April 2022) Netherlands Eurozone Average: 95,6% 44.8 Ireland Malta Slovakia Finland Germany Slovenia Austria Cyprus Belgium France Spain Portugal Italy Greece#3131 FUNDING IN INTERNATIONAL CAPITAL MARKETS AND VIA BILATERAL LOAN FACILITIES IN 2021 Financing was ensured largely by capital market instruments, including the first Sustainability Bond under the Sustainability Bond Framework in line with the ICMA standards Borrowing activities in international capital markets in 2021 On March 17, Latvia issued a new 10 year benchmark Eurobond in a total amount of EUR 1,25 billion. Yield was set at 0.105%. On July 1, Latvia issued a new 7 year (long) benchmark Eurobond in a total amount of EUR 0.5 billion. Yield was set at 0.003%. Both transactions mark several records: (1) the lowest ever long-term borrowing yield reached, and (2) is the historically lowest coupon (0,000%) achieved by the Republic of Latvia in its Eurobond transactions. On December 6, 2021 Latvia issued debut 8 year (long) Sustainability Bond in amount of EUR 600 million, the first also from Baltics and Scandinavia region Loans from international financial institutions and EU facility related to Covid-19 in 2020-2021 In 2020 Latvia signed a loan facility with Nordic Investment bank for the funding of extraordinary government expenditure in order to mitigate the impact of the Covid-19 epidemic in amount of EUR 500 million. As of today the loan is fully disbursed. In 2020 taking into account EU coordinated response to the Covid-19 by offering a new instrument for temporary support to mitigate unemployment risks in an emergency (SURE), Latvia signed loan agreement with EU in amount of EUR 192.7 million. According to Council Implementing Decision (EU) 2021/677 of 23 April 2021, the total amount of SURE support available for Latvia was increased up to EUR 305,2 million. As of today SURE support is fully disbursed. Mid YTM, % 3.0 Latvia`s Secondary Eurobond Market (mid yield to maturity, %) 2.43 2.5 2.32 2.13 2.58 2.67 2.74 2.0 2.25 2.04 1.41 1.88 1.5 1.72 1.0 1.03 1.23 0.5 0.26 0.0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 ―LATVIA EUR Eurobond LATVIA domestic bonds Source: Data as of August 19, 2022, Bloomberg 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 2023 0 Outstanding Eurobonds (nominal amount, EUR million) 2.875% 30/04/2024 0.125% 14/04/2023 500 1500 Eurobond issuances in international capital markets in 2021 ■Sustainability bond, issued in 2021 1000 TAPS of outstanding Eurobonds in domestic market Source: The Treasury (01.08.2022.) 2000#32DOMESTIC MARKET CONTINUES TO PERFORM STRONGLY IN 2022 Domestic market is operational with regular government debt securities auctions, i.e. re- openings of outstanding XS ISIN bonds. Demand is supportive also in the current of geopolitical situation ensuring the largest ever borrowing volumes in domestic market Domestic Auctions via Primary Dealer system (millions, EUR) 2.5 300 250 255 260 200 200 154 151 157 135 116 122 86 88 92 73 59 2.0 Average weighted yields at domestic auctions as on 27 July, 2022, % Eurobond 2028 TAP's 2.077 1.870 ⚫ 2.040 Eurobond 2026 TAP's 1.593 1.543 Eurobond 1.5 129 2029 TAP's 109 98 1.019 81 1.0 69 10 0.919 21 Eurobond 2031 TAP's 0.5 Millions 150 100 79 50 0 34 35 TAP2028 TAP2029 TAP2029 TAP2031 TAP2031 TAP2025 TAP2025 TAP2029 TAP2031 TAP2025 TAP2024 TAP2025 TAP2026 TAP2026 TAP2025 TAP2026 TAP2024 TAP2026 TAP2028 TAP2025 TAP2024 TAP2026 TAP2028 0.0 Eurobond 2024 TAP's Eurobond 2025 TAP's 08.2022 07.2022 04.2022 05.2022 06.2022 03.2022 -0.5 -0.253 02.2021 03.2021 05.2021 01.2021 04.2021 06.2021 0.034 295 -0.179 09.2021 10.2021 11.2021 01.2022 02.2022 07.2021 08.2021 12.2021 Nov Dec Feb Mar 2021 Apr 2022 May June JulyAug Sept Oct Source: The Treasury Bids total, million EUR Amount sold, million EUR • • • 32 Primary dealers group Primary dealer system in Latvia operates since 11 February 2013. Enlargement of Primary dealer group took place on 19 January 2021 by assigning the dealer status to Erste Group Bank There are five banks in the group: 1. Citadele banka AS 2. Erste Group Bank AG 3. Luminor Bank AS 4. SEB bankas 5. Swedbank AS Source: The Treasury Government securities in the domestic market On 14th of October 2020 for the first time GMTN programme XS ISIN Eurobonds TAPS were offered in auction in domestic market only (via Primary dealers). Since October 2020 only re-openings of outstanding XS ISIN bonds under GMTN programme are offered in domestic auctions The gross borrowing volume in domestic market as of 22 August 2022 has reached historically largest volume for domestic maket - EUR 1,12 billion (in nominal value) The outstanding volume of LV ISIN securities (issued under domestic legislation) is EUR 1.05 billion of which 86.3% is 5-year bonds (original maturity)#33milj.EUR CENTRAL GOVERNMENT DEBT PROFILE Government debt portfolio is well managed according to the Central Government Debt and Cash Management Strategy Debt structure by Instruments (milion EUR) Debt Portfolio Management 18 000 Parameters Strategy 31/03/2022 31/06/2022 16 000 14 000 12 000 Maturity profile (%) up to 1 year ≤ 25% 10.7% 18.9% 10 000 up to 3 year ≤ 50% 33.6% 33.6% 8 000 Share of fixed rate (1) ≥ 60% 83.1% 75.2% 6.000 4.000 2.000 0 Macaulay duration 5.00 9.00 6.44 6.14 (years) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q21 2Q22 Net debt (2) currency composition 100% EUR with a deviation of 100.27% 100.26% +/- 5% Other Domestic T-bonds Loans from financial institutions Source: The Treasury, June 31, 2022 2 000 1 800 1 600 1 400 1 200 1000 800 600 400 200 Domestic T-bills Eurobonds Source: The Treasury | (1) Fixed rate central government debt with a maturity over one year; (2) Central government debt at the end of the period less the amount of loans and receivables, where impairment loss of guarantees are not taken in account (including Treasury's cash accounts, investments in deposits and fixed income securities, loans, receivables (including receivables of derivative financial instruments which are not classified as risky from credit risk perspective)), and increased by provisions of guarantees as well as liabilities of derivative financial instruments which are not classified as risky from credit risk perspective. Debt Redemption Profile (million EUR) 0 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Aug-Dec Domestic securities (LV ISIN) Other external debt liabilities 2032- 2035 Eurobonds (XS ISIN) 2036 33 Source: The Treasury, on July 31, 2022 2047 2050 >=2051 2037- 2048- 2046 2049 Eurobond (XS ISIN) TAPS in domestic market#34MEDIUM TERM FUNDING REQUIREMENT AND BORROWING STRATEGY Main funding instruments are government debt securities in the international and domestic capital markets. Domestic market plays important role and the borrowing volumes via auctions have been increased over the last years Medium Term Borrowing Strategy Goal Principles Ensure timely and full availability of financial resources for covering the financing requirement, by maintaining continuous borrowing opportunities in the international and domestic financial markets on optimal terms and conditions Flexibility (towards timing, maturities and currencies) Balance between risks and costs Consistency and transparency to markets General Financing Requirement Central Government Budget Balance Net Lending Other Flows at the Treasury`s Accounts Outstanding Central Government Debt Redemptions Borrowing Instruments Benchmark issuances in the international capital markets Regular GMTN programme XS ISIN Eurobonds TAP auctions in domestic market (via Primary dealers) Other Possible Instruments Borrowing opportunities from international financial institutions and EU loan facilities (RRF facility, SURE) Issuance of LV ISIN (under local legislation) Short-term loans from commercial banks Private Placements (Bonds under GMTN) Issuance in niche markets and USD 33 Central Government Financing Estimation 2022-2024 from 1.0 to 1.7 Aug - Dec (forecast, indicative) 1.0 2022 Jan - Jul (actual) (EUR billion) 2.9 2.8 2023 2024 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 1#3636 INVESTMENT HIGHLIGHTS Latvia has previously shown a strong ability to recover rapidly and overcome external shocks thanks to its flexible and resilient economy, a sustainable fiscal policy and the government's ability to ensure swift policy-making in emergency situations Flexible and Resilient Economy → Government swift actions to stabilize the economy Sustainable Fiscal Policy → General government debt level moderate and sustainable, and in line with Stability and Growth Pact →Fiscal metrics remains strong despite Covid-19 impact Resilience towards external shocks → Proven track record in overcoming economic crisis in the past → Steps taken to diversify sources of energy supply and bolster energy security Belongs to the Core of Europe → Eurozone membership → Member of all the important international organisations, incl. NATO →Security in the context of potential Russian agression Banks Well Capitalised, Profitable and Liquid → Predominantly foreign owned, resident-serving banking sector Predictable public policies and outstanding track record of successful structural reforms Stable <<A>>> Credit Ratings → Flexibility of the economy and economy's sound external profile → Progress made towards enhancing energy security → NATO presence and security guarantees mitigating geopolitical risks Diversified Export → Exports continue to grow despite the delays in supply chains impacted by Covid-19 and geopolitical situation