#1Republic of Latvia Building a New Economic Model through Structural Reforms July 2019#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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There is no obligation to update, modify or amend this presentation or to otherwise notify any recipient if any information, opinion, projection, forecast or estimate set forth herein changes or subsequently becomes inaccurate or in light of any new information or future events. This presentation contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or including the words "anticipates," "estimates," "expects," "believes," "intends," "plans," "aims," "seeks," "may," "will," "should" or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Latvia's control that could cause Latvia's actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements speak only as at the date of this presentation. Latvia expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or any new information or change in events, conditions or circumstances on which any of such statements are based. 1#33 Key Strengths Underpinning Latvia's Credit Profile 1 Flexible, resilient economy, among fastest growing in the Eurozone 2 Broadly-diversified exports, important factor underpinning healthy current account balance 3 Fiscal discipline, deeply embedded, reflected in low, and still declining, government debt 4 New era of reforms launched in 2017, focused on building a new economic model, based on improving productivity and more inclusive growth 5 Well-capitalized and profitable banking sector, supporting moderate expansion of credit, with tighter AML/anti-terrorism funding regime#41. Overview Portrait of an Ascending Sovereign Credit#5Presentation Outline 1) Overview: Portrait of an Ascending Sovereign Credit 2) The Economy: Strong, Sustainable Growth 3) Banking Sector: Well-Capitalized, Profitable, and Growing at Moderate Pace 4) Fiscal Policy: Disciplined Approach Drives Improved Credit Profile 5) New Reform Push: Targets Productivity and More Inclusive Growth 6) Government Debt and Funding Strategy 7) Conclusion 4 9 14 20 23 28 34#6Latvia Belongs to Core Europe Latvia belongs to core Europe. The country is also 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 Capital 64,573 sq. km¹ Estonia, Lithuania, Belarus and Russia Riga 1.93 million 1 Euro Population 2018 Currency GDP per capita 2018 Nominal GDP 2018 EUR 15.3281 Latvia is a Member of the Eurozone, NATO and OECD Europe | Eurozone Members I NATO Members EUR 29.52 billion¹ Main economic sectors 2017 Services (74%) and Manufacturing (13%) OECD Members Source: Central Statistical Bureau of Latvia CO 6 Latvia Regains Independence Latvia Admitted to NATO Approval of Loan Programme with IMF, EC and Bilateral Lenders Latvia joins Eurozone/ Economic and Monetary Union Latvia Becomes OECD Member OECD 1991 1991 Aug Sep Mar 2004 2004 May 2008 Dec Dec 2011-Jan 2012 2014 Jan Jan - Jun 2015 Jul 2016 Latvia Becomes UN Member Latvia Enters EU International Loan Programme with IMF/EC Closed Successfully Latvia's Presidency of EU Council#7Latvia's Credit Ratings are on an Improving Trend Rating agencies acknowledge Latvia's low general government debt, small fiscal deficit and institutional strength as key factors bolstering its creditworthiness. In September 2018, S&P raised its sovereign credit rating on Latvia to A from A-. Long-term Foreign Currency Rating Development 7 S&P Fitch Moody's J 2012 2013 2014 2015 2016 2017 2018 2019 A/A2 A-/A3 BBB+/Baa BBB/Baa2 BBB-/Baa3 BB+/Ba1 Key Strengths of Latvia's Sovereign Credit Profile • Sustained strong economic and fiscal performance Eurozone membership further strengthens Latvia's creditworthiness: underpins economic policy coherence and credibility • - - improves fiscal and external financing flexibility reduces foreign-currency risks on balance sheets gives Latvian banks access to European Central Bank liquidity facilities Membership in the OECD with its accompanying commitments to structural reforms and economic liberalization Sound banking sector - strong Scandinavian banks play central role in sector Key Risk Factors Affecting Latvia's Sovereign Credit Profile . External financing risks and geo-political tensions with Russia continue to constrain the ratings • Latvia is a small and highly open economy, making it vulnerable to external shocks • Latvia's GDP per capita is below the median level of its 'A' category peers Source: S&P, Fitch and Moody's#88 Key Events in 2019 5 1 In Q1 2019 Latvia's economic growth continued to be robust and balanced. In April the Parliament adopted Law on the State Budget for 2019 and the Government approved Latvia's Stability Programme for 2019 - 2022. 3 In the first half of the year credit rating agencies S&P Global, Fitch and Moody's Investors Service reaffirmed their long term foreign currency sovereign credit rating on the Republic of Latvia at current levels respectively 'A', 'A-' and 'A3'. Latvia has carried out its planned funding activities in the international capital markets in 2019 by raising EUR 1 billion in total. On May 29, the Government elected new president of the Republic of Latvia.#92. The Economy Strong, Sustainable Growth#10Growth Accelerated in 2018 and Remains Elevated Today Latvia is among the top 5 fastest growing countries in the EU with a 3.1% average growth in the last 6 years. Robust growth is currently supported by strong domestic demand, private investment inflows, the EU funding cycle and favourable foreign trade conditions. Real GDP Growth (%) GDP Growth Composition (%) 3.6 2.9 2.5 2.3 2.5 2 1.7 1.8 1.7 1.2 0.6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 5.1 5.7 5.3 4.7 4.3 4.9 4.6 5.1 3.5 3.2 3 2.6 0.7 0.7 2.8 0.6 0.5 0.5 0.3 9.8 0.7 2.6 2.8 0.9 0.9 -2.1 -1.7 -2.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2017 2018 2019 Y-o-y 2014 2015 ■Private consumption Public consumption Source: Central Statistical Bureau of Latvia 2016 2017 ■Gross capital formation 2018 ■Net exports 2014 2015 Q-o-q Source: Central Statistical Bureau of Latvia Real GDP Growth (%) 6.4% 4.0% 3.0% 2.4% 2.1% 1.9% 4.8% 4.6% 3.2% 2011 2012 2013 2014 2015 2016 2017 2018 2019F Source: Central Statistical Bureau of Latvia, Ministry of Finance 10 4.8% GDP Growth (2018, %) EU-28: 1.9 % Latvia A/A3/A- Austria Estonia Czech France Belgium AA-/A1/AA- AA-/A1/AA- AA+/Aa1/AA+AA+/Aa1/AA+ AA/Aa2/AA AA/Aa3/AA- Finland Source: Eurostat#110 Wage and Employment Growth Boosts Domestic Demand Unemployment is slightly below the natural rate; productivity growth is on the rise. Unemployment: Headline and Natural Rates Participation and Employment Rates (age 15-64, %) 20 15 10 5 וווווווד TTTTTTTT 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Headline unemployment Natural unemployment 200 70 75 80 65 60 55 2011 2012 2013 2014 2015 2016 2017 2018 2019 Participation rate Employment rate Source: Central Statistical Bureau of Latvia data Average Monthly Wage For Full-time Job (Y-o-y, %) Source: Eurostat, Bank of Latvia Real Productivity Growth Per Worker (2013-2018 average, %) 10.0 2.5 9.0 8.0 7.0 6.0 09876543 5.0 4.0 3.0 2.0 1.0 0.0 Latvia A/A3/A- Czech AA-/A1/AA- Estonia AA-/A1/AA- France AA/AA2/AA Belgium AA/Aa3/AA- Austria AA+/Aa1/AA+ Source: Eurostat 11 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 ■Gross Nominal Wages Source: Central Statistical Bureau of Latvia data ■Real Net Wages#1243 2 107 -1 -2 Inflation close to 3% is healthy, reflecting income convergence potential Latvia has maintained moderate and predictable inflation for years. Core inflation is moderate and stable. Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Inflation (HICP, %) Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Energy Inflation Source: Central Statistical Bureau of Latvia data, Bank of Latvia calculations Inflation In Latvia (HICP, %) 2.32.5 1.7 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Harmonised Index of Consumer Prices (May 2019, 12 months average %) 2.9% EU-28: 1.9% Food, alcohol, tobacco Inflation excl. energy, food, alcohol, tobacco Estonia Latvia Belgium Czech Austria France Finland AA-/A1/AA- A/A3/A- AA/Aa3/AA- AA-/A1/AA- AA+/Aa1/AA+ AA/Aa2/AA AA+/Aa1/AA+ Source: Eurostat 3.2 2.9 2.9 3.0 2.8 2.4 2.6 2.3 1.8 0.4 0.6 0.0 0.2 0.1 -0.1 - 0.2 -0.7 - 0.6 2012 2013 2014 2015 2016 Total inflation ■Goods inflation 2017 Services inflation 2018 Source: Central Statistical Bureau of Latvia data 12 Harmonised Index of Consumer Prices Projection (2019-2020, %) 2.6% Source: European Commission, Spring, 2019 EU-28: 1.7% IT Latvia A/A3/A- Estonia AA-/A1/AA- Czech Austria Belgium Finland France AA-/A1/AA- AA+/Aa1/AA+ AA/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA#13Improved Competitiveness and Value-Added Products Drive Exports Favourable position in both price and quality competitiveness underpins strong current account position. Export of Goods and Services (2010=100) Goods Exports Growth (% growth between 2009 and 2017) 121.5% 130 125 120 115 EU-28: 66.4% 110 105 100 95 90 85 2010 2011 2012 2013 2014 2015 2016 2017 Latvia A/A3/A- Czech AA-/A1/AA- Estonia Austria Belgium France Finland AA-/A1/AA-AA+/Aa1/AA+ AA/Aa3/AA- AA/Aa2/AA AA+/Aa1/AA+ Czech Republic Estonia Lithuania Slovak Republic Latvia Slovenia Source: World Trade Organization Source: Eurostat 6208642 16 14 12 10 High-Tech Exports (% of Total Exports) Current Account Balance (%GDP) 1.6% 0.7% 4.2% -0.5% -1.0% -1.7% -2.7% 0 -3.6% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Germany Latvia 2012 2013 2014 2015 2016 2017 2018 Q1'19 Source: Eurostat 13 Source: Bank of Latvia#143. Banking Sector Well-Capitalized, Profitable, and Growing at Moderate Pace#15Well Capitalised and Liquid Banking Sector Latvia's banking sector is well capitalized; large share of banks is owned by large Nordic banking groups. . Key Highlights Capital Ownership of the Banking System (1Q 2019) The Latvian banking sector is dominated by subsidiaries and branches of banks from the European Economic Area, mostly Nordic countries1 • Capitalisation and liquidity ratios are well above minimum requirements. . The three largest banks are directly supervised by the ECB. Four banks fall under the remit of the Single Resolution Mechanism The fallout from the closure of the Latvia's largest non-resident-serving bank ABLV in February 2018 has been well contained - non-resident deposits have continued to fall, but the liquidity and capital ratios of the banks serving the sector remain high. The reduction of non-resident deposits has markedly lowered Latvia's short-term external debt without undermining the country's economy, fiscal position, or financial system Source: FCMC, 2EBA risk dashboard, fully loaded ratio Capital Adequacy (%) 32% 19% 49% Source: Bank of Latvia Liquidity Coverage Ratio 26 ■Domestically ■Nordic ■Other 400% זוווווו----- 350% 300% 250% 200% 150% 100% 50% 0% 2011 2012 2013 2014* 2015 2016 2017 2018 2019 Q3 Q4 Q1 Q2 2016 Q3 Q4 2017 Q1 Q2 Q3 Q4 Q1 2018 2019 Total capital ratio CET1 ratio Minimum requirement for total capital ratio (8%) Liquidity Coverage Ratio (%) Minumum requirement 2208642086420 18 16 14 12 10 Source: FCMF | Note: As of Q1 2014 capital adequacy is calculated according to the CRDIV/CRR requirements and is not directly comparable with the data until Q1 2014 due to differences in methodology. Tier 1 ratio matches CET 1 ratio. The regulatory minimum capital adequacy requirement is 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer. 15 Source: FCMC#16Bank Lending Recovers and Supports Growth Domestic lending recovers and there are favourable preconditions for further lending growth. Key Highlights After a prolonged period of deleveraging, lending growth turned positive in April 2016 o Loans to domestic households and NFCs stood at 35% of GDP in March 2019, down from almost 100% at the outset of the crisis o Domestic loan-to-deposit ratio has fallen substantially, leading to more balanced and sustainable domestic funding for loans 15% 10% Loans to Domestic Clients excluding Government (yoy) 5% • The quality of the loan portfolio continues to improve gradually and the coverage ratio of 90 days overdue loans remains high 0% 2012 2013 2014 2015 2016 2017 2018 2019 -5% Estonia Lithuania Latvia Total Loan Portfolio Quality 20% 15% 10% 5% 0% 2011 2012 2013 Source: FCMC 16 2014 2015 2016 2017 2018 2019 Share of loan loss provisions in outstanding loans Share of loans over 90 days past due in outstanding loans -10% Source: ECB *The time series have been adjusted excluding the one-off effects of loan write-offs, exchange rate fluctuations, reclassification, etc. Domestic Loan-to-Deposit Ratio (%) 186.0 146.8 116.3 90.7 136.9 ■2012 March ■2019 March 112.2 95.5 88.9 EE LV LT EZ Source: ECB#17Banking Sector Profitability Remains Healthy Banking sector profitability is supported by stable interest spread and economic growth. Key Highlights 20% . Profitability of domestically active banks is sound and returns gradually increase as a result of a favorable macrofinancial conditions. The profitability of banks servicing foreigners is volatile due to ongoing de- risking that resulted in a decline in their business volume. Although banks servicing foreigners posted a profit in 2018, a further deterioration in their profitability is expected. Average Return on Equity (ROE) of the Latvian credit institutions is relatively high and still exceeds the EU average. In 2018, average RoE was 10.2% (9.1% in 2017); EU average - 6.5% (EBA Risk Dashboard Q4 2018). 10% ROE 40% 30% 20% 10% 0% -10% 0% -20% 2017* 2018 2019 V** Domestically active banks -Weighted average 2018 2017* 2019 V** Banks servicing foreign clients ◆ Median Source: Bank of Latvia | Noted: *One-off adjusted data, **Annualised Interest Spread on Outstanding Loan Amounts • 17 8% As a result of record-low loan and deposit rates, interest rate spread on outstanding amounts remains stable at around 3 pp. 7% 6% 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011 2012 2013 2014 Interest rate on deposits 2015 2016 2017 2018 2019 ― Interest rate on loans Source: Bank of Latvia#18The Role of Banks Serving Foreign Clients is Shrinking Banks owned by strong Nordic parents, funded through domestic deposits, lending to Latvia-based clients are the core of Latvia's banking system. Banks funded through foreign currency deposits play a small role in Latvia's economy. The Role of Foreign Clients Servicing Banks in Latvia Total Banking Assets Total Domestic Lending Total Domestic Deposits 25% 15% Growth Rates of Domestic and Foreign Client Deposits Introduction of tougher AML/CFT requirements 5% 7% 7% -5% 20% -15% -25% - 35% - 45% Weaker CIS economies - 55% -65% 2012 2014 Source: Bank of Latvia May 2019 2013 2015 2017 Annual growth rate of foreign client deposits (adjusted for exchange rate) Annual growth rate of domestic non-financial private sector deposits 2016 2018 2019 Source: Bank of Latvia Economic Impact of ABLV Bank Liquidation in February 2018 Bank Liquidity Ratios Well Above CRR IV Requirement • There have not been obvious spill-overs to the resident serving sector, which is dominated by subsidiaries of Scandinavian banks, due to their lack of interconnectedness 500% 450% 400% 350% NRDs fell mostly in the first half of 2018, in the second half of 2018 and 2019 NRDs have stabilized; the liquidity and capital ratios of foreign clients serving banks remain high 300% 250% 200% • The reduction of NRDs has markedly lowered Latvia's short-term external debt without undermining the country's economy, fiscal position, or financial system 150% 100% Funds covering guaranteed deposits were transferred from ABLV and currently 80% of deposits have been paid out 50% 3Q 4Q 2016 1Q 2017 Q2 Q3 Q4 1Q 2018 Q2 Q3 Q4 1Q 2019 • NRDs have been decreasing without denting confidence of domestic depositors Banks servicing FCs** Domestically active banks* Minimum requirement for LCR 18 Source: Bank of Latvia, *Fitch (Latvia sovereign risk from ABLV Bank failure appears limited, 27.02.2018.) Source: FCMC#19Parent Banks are Financially Sound and Profitable The parents of Latvia's banks have high credit ratings, good profits and are well-capitalized Key Highlights Financial performance and capitalization level of the parent banks are strong • Nordic banking groups' profitability is higher than the average in Europe . Banks continue to invest in IT related projects to increase their operational efficiency and lower administrative expenses • Since January 2, 2019 Luminor Bank Latvia was branch of Estonian registred Luminor Bank. Luminor completes its banks' cross-border merger. . Recent money laundering allegations put shares of Nordic banks under pressure, though the impact on financing costs is very limited. Deposits (EUR bn) Banks Financial Information Swedbank SEB DNB Luminor Latvia branch* Nordea Assets (EUR mil)* 5,694 3,948 4,368 CAR (%)* 28.5 17.6 ROE (%)* 14.4 13.8 S&P Global long term rating AA- A+ Moody's long term rating Aa2 Aa2 Fitch long term rating AA- AA- Source: Association of Latvian Commercial Banks - financial reports, 1st quarter 2019 | *January 2019 Luminor Bank Latvia was branch of Estonian Luminor Bank. Banking Groups' Equity Prices (01.01.2018 = 100, local currency) 12.4 9.2 8.1 8.1 12.2 5.9 120 110 13.0 100 90 90 3.6 80 2015 2016 2017 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 Source: Bank of Latvia 19 --Domestic --Foreign 70 10 60 60 2018 2019 STOXX Europe 600 Banks Swedbank SEB DNB -Nordea#204. Fiscal Policy Disciplined Approach Drives Improved Credit Profile#21Fiscal Sustainability Remains Top Priority Prudent fiscal management has produced small budget deficits well below the EU-28 average over the past 7 years. Priority is being given to improving the quality of spending and alignment between programs and policy goals. General Government Budget Balance (% of GDP) Budget Balance (2018, % GDP) 2012 2013 2014 2015 2016 0.1 2017 2018 2019 2020 -1.2 -1.2 -1.4 -1.4 -1.7 -2.3 -2.9 -3.3 -4.3 -0.6 -0.6 -0.5 -0.4 -1.0 -1.0 -1.0 -1.0 ■Latvia ■ EU-28 Source: Eurostat, AMECO, Latvia's Stability Programme 2019-2022 Spending Review Results (EUR, Million) 7.7 43.6 9.2 24.5 2019 2020 ■Resources to common government priorities ■Internal resources for own sectoral priorities Source: Ministry of Finance 21 - 1.0 EU-28: (-0.6%) France Latvia Belgium Finland Estonia Austria Czech AA/Aa2/AA A/A3/A- AA/Aa3/AA- AA+/Aa1/AA+ AA-/A1/AA- AA+/Aa1/AA+ AA-/A1/A+ Source: Eurostat 2019 Budget: Expenditure for priorities (EUR million) 29.2 2019 2020 22.5 Implementation of the Moneyval Plan • Implementation of the provisions of the Diaspora Law • Assessment of the functions of the judicial authorities • Availability of medicine for rare disease patients 22.8 2021 • • Source: Ministry of Finance Improving the quality of long-term social care service Development of special care allowance for children and adults with disabilities Implementation of administrative-territorial reform Support for non-governmental organisations#22Pension Reform Underpins Stability of Public Finances Latvia is well positioned to withstand fiscal challenges arising from an ageing population. Age-related Spending, Projected Change (2016-2070, % GDP) • Latvia's Pension System And Recent Reforms Latvia's reformed pension system consists of three tiers: 1. state compulsory unfunded pension scheme (the 1st tier) 2. state funded pension scheme (the 2nd tier) 3. private voluntary pension scheme (the 3rd tier) In 2012, measures were introduced to address long-term sustainability: starting with 2014 retirement age is gradually increased by 3 months each year until it reaches 65 years in 2025 - - minimum contribution period to secure full pension was increased from 10 to 15 years starting from 2014 and up to 20 years starting from 2025 contributions to the funded, e.g. 2nd tier, pension scheme increased from 2% to 4% in 2013, to 5% in 2015, and to 6% in 2016 Source: The State Social Insurance Agency The 2nd Tier Pension Net Assets (EUR billion, % GDP) France AA/Aa2/AA -1.4 Latvia A/A3/A- Estonia Finland Austria Belgium Czech AA-/A1/AA AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa3/AA- AA-/A1/AA- Source: European Commission Ageing Report, May 2018 Latvia's age-related spending is among the lowest in EU (2016, % GDP) 12.1% 12.2% 11.0% 9.6% 3.6 8.5% 3.3 7.4% 6.7% 2.8 6.1% 23 2.3 2.0 1.7 1.5 1.2 16.4 2011 2012 2013 2014 2015 2016 2017 2018 Latvia A/A3/A- Czech Estonia Belgium Austria Finland France AA-/A1/AA- AA-/A1/AA- AA/Aa3/AA- AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa2/AA 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 2018 22 222#235. New Reform Push Targets Productivity and More Inclusive Growth#24Latvia's Advanced Country Status Reflected in "Soft" Metrics Expanded structural reforms build on existing high institutional strengths and favourable business environment. World Bank "Ease of Doing Business" Ranking World Bank Worldwide Governance Rankings Estonia AA-/A1/AA- Finland AA+/Aa1/AA+ Latvia A/A3/A- Austria AA+/Aa1/AA+ France AA/Aa2/AA Czech AA-/A1/AA- Belgium AA/Aa3/AA- Source: World Bank, Doing Business 2018 16 17 19 26 32 35 45 Adjusted Top Statutory Tax Rate on Corporate Income (2019, %) 20 19 20 20 20 20 20 32 30 25 25 Czech AA-/A1/AA- Estonia Latvia Finland France A/A3/A- AA+/Aa1/AA+ AA-/A1/AA- AA+/Aa1/AA+ AA/Aa3/AA- AA/Aa2/AA Austria Belgium Source: European Commission, Taxation Trends in the European Union 2019 24 83 80 79 74 70 71 69 66 66 63 62 64 Control of Corruption Rule of Law Regulatory Quality Government Effectiveness Political Stability ■Latvia ■Regional Average and Absence of Violence Voice and Accountability Source: World Bank, 2017 Rankings dated 21st September 2018. Regional Average based on Europe and Central Asia countries Global Competitiveness Index Ranking The Global Competitiveness Index Rankings Finland Belgium 11 21 Czech Rep. Italy Portugal Slovenia Poland Lithuania Slovakia Latvia Hungary Bulgaria Romania 233712252 41 42 Croatia 68 898 Global Sustainable Competitiveness Index Ranking 33 22222222 27 Finland 9 Latvia 10 Estonia 11 Slovenia Croatia Slovakia 15 Czech Rep. Lithuania Belgium Romania Italy Portugal Hungary 46 Bulgaria Source: World Economic Forum, The Global Competitiveness Report 2018, The Global Sustainable Competitiveness Report 2017#2525 Reform Policies Laying Foundation for New Growth Model Structural reforms help strengthening Latvia's growth potential. Labour Market, Social Policy and Healthcare Addressing labour market issues through education and employment policies; decreasing tax burden on labour; activating social benefit recipients; improving accessibility, quality and efficiency of healthcare Decrease of the tax burden on labour, increase of the untaxed minimum, etc. Activation of unemployed through active labour market policy measures • Strengthening vocational education and introduction of the work-based learning principle Comprehensive healthcare reform (new healthcare financing model, increase in remuneration of healthcare personnel, etc.) Business Environment SME access to financing, export oriented programmes, reduction of administrative burden • Support programmes of the Latvian Investment and Development Agency and ALTUM are being implemented (business incubators, credit guarantees, loans, etc.) Annual Action Plan on Improvement of the Business Environment is being implemented, etc. Education, Research and Innovations Increasing the quality of education and research, fostering investments in R&D and innovations . Smart Specialization Strategy is being implemented Support programmes are being implemented (support in introduction of new products, Innovation Motivation Programme, wider involvement of SOEs in research, development and innovation activities is being ensured, support for start-ups, etc.) 2017 OECD Reform Responsiveness Index, % Public Administration and Judiciary Increasing efficiency of public administration, strengthening the conflict of interest prevention regime, improving tax compliance; improving the insolvency regime and accountability of insolvency administrators Public sector reform is being implemented Administrative Territorial Reform 80 • Whistleblower protection law in force since 1 May 2019 Improvement in the insolvency process and tax compliance is being observed OECD 40 20 Bringing together municipalities in more sustainable and economically stronger units that are able to ensure the performance of autonomous functions of local governments in comparable quality and accessibility 0 60 The new model is planned to be introduced starting from 2021 Source: 2019 National Reform Programme; European Commission's Country Report Latvia 2019; EU Council's recommendations 2019; OECD Economic Survey on Latvia 2017, 2019 SVK HUN SWE USA COL DECD average NLD CZE CHN ISR CHL LATVIA#26EU Playing Key Role in Funding Structural Change in Latvia Efficient and well targeted absorption and use of EU funds will promote competitiveness and stimulate economic growth as well as support necessary structural reforms. Allocation Of EU Funds For 2014-2020 By Priority Axes 9% 11% 7% 2% 4% 4% 11% 12% 26% 14% ■Promoting sustainable transport and removing bottlenecks in key network infrastructures ■Protecting the environment and promoting resource efficiency ■Investing in education, skills and lifelong learning ■Supporting the shift towards a low-carbon economy in all sectors ■Strengthening research, technological development and innovation ■Promoting social inclusion and combating poverty ■Enhancing the competitiveness of small and medium-sized enterprises Enhancing access to, and use and quality of, information and communication technologies Promoting employment and supporting labour mobility ■Technical assistance Source: Ministry of Finance. EU Cohesion Policy Accompanies Structural Reforms The Latvian economy and the goals envisaged by the National Development Plan are strongly supported by well targeted and smart EU cohesion policy funds (EU funds like Structural funds and Cohesion Fund) and investments. EUR 4.4 billion EU funds are available for targeted and smart investments in Latvia within the 2014-2020 programming period across major nine priority areas with the general aim to enhance competitiveness of Latvia's economy and reinforce the country's solid foundation for sustained and smart growth. EUR 3.3 billion EU funds are already contracted for investment projects. • During 2007 - 2013 period Latvia has successfully completed the investment programme supported by EUR 4.5 billion Cohesion Policy EU funds (100% of EU funds <<envelope» for Latvia). Source: Ministry of Finance • • EU Funds After 2020 and Government's Support The European Commission has published a proposal for the new multiannual financial framework after 2020 in May 2018. The European Commission expects to start negotiations regarding planning documents of the framework in 2019. Initial European Commission proposal for Latvia's Cohesion policy allocation is 4.26 billion EUR (in 2018 prices). Allocation will be a subject of negotiations and Latvia will insist on bigger allocation. Latvia will remain eligible to receive support from all three Cohesion policy funds (Cohesion Fund, European Regional and Development Fund, European Social Fund). EU funds investment progress is transparent and can be followed: www.esfondi.lv 26#27Pro-growth Tax Reform in Line with Balanced Budget Mandate Key goals: improve competitiveness, promote exports, reduce inequality and raise revenue to one-third of GDP. Strategy framework • Tax structures and rates review Main changes Improving tax administration Non-taxable minimum - EUR 250 Differenced depending on income level from EUR 0/month to EUR 250 per month (2020) The fight against the shadow economy Principles Predictability and a long-term vision Regional competitiveness, at least in the Baltic region • Tax motivation for improvement . A similar tax burden on similar types of revenue • Lending and capitalization improvement Allowance for dependents EUR 250 per month (2020) Minimum salary from EUR 380 to EUR 430 Social contribution increase by 1% directed to health care • Reducing the cost of tax administration • Positive impact on economy Raise disposable income of employees and induce private consumption More competitive entrepreneurs on regional and global scene as well as stimulation of own investment Better capitalized businesses, more opportunities to raise additional funds for development Increased prospects to raise production capacity of goods and services, more effective and efficient production process More equality between different income groups and types of income Higher tax revenue resulting from increased economic activity and less tax avoidance Source: Ministry of Finance 27 Reform of Solidarity tax PIT rate smoothing Progressive Personal Income Tax Decrease from 23% to 20% for year's salary up to EUR 20,004, 23% for EUR 20,004 - 62,800, 31,4% for above EUR 62,800 Corporate Income Tax 20% on distributed profit; no CIT is payable on undistributed profits#286. Government Debt and Funding Strategy#29Public Debt on Declining Trend Latvia remains committed to keeping government debt at moderate levels. • Key Characteristics of Latvia's Government Debt General government debt is amongst the lowest in the EU at 36 % of GDP at the end of 2018. It is the 4th lowest in the Eurozone and the 8th lowest in the EU Latvia enjoys one of the lowest debt servicing costs across the region, 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 Debt Servicing Costs (%GDP) General Government Debt Year End (EUR million, % GDP, ESA methodology) 41% 39% 40% 40% 37% 37% 36% 36% 8 893 9 669 10 092 10 807 11 716 11 975 10 608 8 953 2013 2014 Source: Eurostat, The Treasury 2015 2016 2017 2018 2019F 2020F General Government Debt (2018, % GDP) 3.5 3.0 EU-28: 80% 2.5 2.0 1.5 102 % 98 % 74% 59 % 36% 33 % 1.0 0.5 8% 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Latvia ⚫Lithuania ⚫EU-28 Eurozone Estonia AA-/A1/AA- Czech AA-/A1/AA- Latvia A/A3/A- Finland Austria France Belgium AA+/Aa1/AA+AA+/Aa1/AA+ AA/Aa2/AA AA/Aa3/AA- Source: European Economic Forecast, Spring 2019, European Commission Source: Eurostat 29 29#30Conservative Borrowing Based on Pre-funding Latvia is conducting a prudent and efficient debt management strategy. Government Gross Borrowing (EUR million) TOTAL 1 668 763 TOTAL 1 920 TOTAL 1 470 TOTAL 1 330 TOTAL 1 150 1 087 TOTAL 1 100 534 156 737 621 905 529 936 593 944 833 2016 2017 2018 ■Total gross borrowing 2019F ■Pre-funding reserve 2020F Source: The Treasury Mid YTM, % Latvia Secondary Eurobond Market (mid yield to maturity, %) 3.0 2.46 2.5 2.30 2.0 1.5 1.0 0.5 -0.03 0.020.08 0.13 0.10 0.0 -0.08 -0.5 -0.16 -0.29 -0.24 -0.12 -1.0 2021F Borrowing activities in international capital markets in 2019 • On February 12, Latvia priced the Eurobond in the international capital markets in a total amount of EUR 700 million 30-year Eurobond (maturing 19 February 2049) • 1.26 1.26 0.84 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 28 29 30 LATVIA EUR Eurobond Source: Data as of 7th July 2019, Bloomberg 30 LATVIA USD Eurobond LATVIA domestic bonds • Yield was set at 1.929% Coupon was set 1.875% By this transaction the Treasury has fulfilled largest part of this year's funding requirement in the international capital markets On May 20, Latvia re-opened its outstanding 30-year Eurobond by issuing EUR 300 million: • Maturing 19 February 2049 Yield was set at 1.746% and coupon was set 1.875% With this transaction the Treasury successfully completed a funding plan for borrowing in a total amount of EUR 1 billion#31Domestic Market Continues to Perform Strongly Demand is steady and average yields remain low. Domestic Securities Outstanding by Original Maturity 15.1% (end of the March 2019, %) 0.5% 0.5% Domestic T-Bond Competitive Multi-Price Auctions 35 55 30 ■5 years bonds 25 6.2 5.7 5.3 20 5.1 4.9 4.6 ■10 years bonds 4.4 4.1 15 3.3 3.1 10 11 years bonds 5 ■Savings bonds 0 6 7.4 7.2 ∞ 7.0 7 6 5.2 5 4 3 2 1 • • 83.9% Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Primary dealer system operates since 11 February 2013. Domestic debt securities outstanding constituted EUR 1 080 million as of 3rd July 2019 2018 2019 ― Bid-offer Ratio (RHS) The Treasury maintains regular domestic debt securities auctions offering medium term T-bonds. Long term segment is covered by international issues For several years Latvia has concentrated domestic supply mainly in 5-year segment and focuses on increasing the liquidity A new 5-long T-bond program was opened at the beginning of July, 2019. Coupon was fixed at the 0.000%. Currently amount outstanding is 20 million EUR. In order to maintain liquidity it is expected to continue regular auctions and gradually increase on-the-run 5-year T-bond program Amount sold, million EUR (LHS) T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9 months. Last 5 year T-Bond auction results On 3rd of July, Latvia had its last T-bond auction Nominal value of 16 million EUR were sold in a competitive multi-price auction with total demand of 83.18 million EUR (bid-offer ratio of 5.20) In addition, 4 million EUR were sold in non-competitive (fixed price) auction The weighted average yield rate was 0.122% Source: The Treasury 31#32Central Government Debt Profile International Loan Programme has been largely refinanced in international capital markets, while government debt redemptions remain moderate. Debt structure by Instruments (%) 100% 75% 50% 25% Debt Redemption Profile (EUR million) 1 600 ■Eurobonds 1 400 1 200 ■Loans from financial institutions (incl. IMF and EC loans) ■Domestic T-bonds 1.000 800 600 400 200 Domestic T-bills 0 2019 2020 Jul-Dec 2021 2022 ut 2023 2024 2025 2026 2027 2028 2029 2036 2037 2047 2048- >=2050 2035 2046 2049 ■Domestic debt redemption ■EC loan (Program) Other external debt liabilities Eurobonds World Bank loan (Program) 0% ■ Other 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 Source: The Treasury Outstanding Bonds in the International Markets (nominal amount, million) Source: The Treasury 2021 5.250% 16/06/2021 2020 2.750% 12/01/2020 USD 2049 1.875% 17/02/2049 2047 2.250% 15/02/2047 2036 1.375% 16/05/2036 EUR 2028 1.125% 30/05/2028 2026 0.375% 07/10/2026 2025 1.375% 23/09/2025 2024 2.875% 30/04/2024 2021 2.625% 21/01/2021 2020 0.500% 15/12/2020 0 200 400 600 800 1000 Source: The Treasury 32 22 Debt Portfolio Management Parameters Strategy 31/12/2018 31/03/2019 Maturity profile (%) • up to 1 year ≤ 25% 13.4% 16.7% • up to 3 year ≤ 50% 40.5% 38.1% Share of fixed rate (1) ≥ 60% 90.1% 86.6% Macaulay duration (years) 5.00 - 9.00 6.49 7.44 Net debt (2) currency composition 100% EUR with a deviation of +/- 5% 100.07% 100.04% 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.#33Medium Term Funding Requirement and Borrowing Strategy External borrowing instruments will represent the most significant share of the overall borrowing volume. Goal Principles Medium Term Borrowing Strategy 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) Achieve balance between risks and costs Consistency and transparency to markets Borrowing Instruments (BASE scenario) Benchmark issuances in global capital markets Continuing issuances in domestic market Alternative Instruments Niche capital market instruments (JPY, CHF, etc.) . Private placements (reverse enquiries) . Loans from international financial institutions (EIB, CEB, etc.) 33 General Financing Requirement Central Government Budget Balance Net Lending Other Flows at the Treasury's Accounts Outstanding Central Government Debt Redemptions (domestic and external) Central Government financing estimation (2019-2021, EUR million) 30-June-2019 2019 Jan-Jun Jul-Dec 2020 2021 Total Central government budget balance, net lending and other flows 629 -1 118 -489 -500 -504 Pre-funding Strategy For Refinancing Debt Outstanding central government -793 -182 -975 -1 300 -1435 debt redemption Of which: Domestic debt repayment -236 -140 -376 -114 -91 External debt repayment -557 -42 -599 -1 187 -1 344 Total -163 -1 300 -1 464 -1 801 -1 939 Gross borrowing 1 170 300 1 470 1 920 1 100 Of which: International issuance 1 000 0 1 000 1 800 1.000 Note: Indicative in the planned period The borrowing volume could be increased in case of: Liability management activities Possible restructuring of the government guaranteed commitments (loans) of several hospitals by refinancing / early repayment#347. Conclusion Building on Past Success, Facing Future Challenges#35Investment Highlights Latvia has fully recovered from the economic recession and restored its strong fiscal position, returning to its previous standards of fiscal prudence. The economy is on a sustainable, robust growth path, characterized by improved competitiveness, solid domestic demand, and a flexible business sector able to adjust to external shocks. 35 Flexible and Resilient Economy → Decreasing Unemployment Sustainable Debt Levels and Prudent Fiscal Management → Investor attractiveness Resilient towards external shocks → Proven track record in overcoming economic crisis in the past Belongs to the Core of Europe → EZ membership Member of all the important international organizations Predictable public policies and outstanding track record of successful structural reforms → Long term growth reinforced Well Capitalised Banking Sector → Bank lending growing at moderate pace, providing ample support for economic development Higher Credit Ratings Investors confidence boosted due to reforms and sound macroeconomic fundamentals Solid Export Growth → Balance of Payments improvement → Sustainable Current Account Balance