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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. 2#3Key Strengths Underpinning Latvia's Credit Profile 3 Flexible and resilient economy with strong and coordinated response to economic challenges Broadly-diversified exports, important factor underpinning healthy current account balance In 2020, the contraction of economic has been less harsh on Latvia than initially forecasted. The economic recovery is expect to start in mid-2021 Prudent fiscal management in previous years has reduced the debt level and made the fiscal space to absorb the Covid-19 negative impact to the economic Well-capitalized and liquid banking sector, with tighter AML/CFT regime#41. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 5 6 14 20 23 28 34#5Latvia 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 Population 2020 Currency GDP per capita 2020 Nominal GDP 2020 Main economic sectors 2020 Source: Central Statistical Bureau of Latvia 64 573 sq. km¹ Estonia, Lithuania, Belarus and Russia Riga 1.91 million¹ Euro EUR 15.43¹ EUR 29.33 billion¹ Services (64%¹) and Manufacturing (11%¹) Latvia Regains Independence Aug 5 Latvia Admitted to NATO Approval of Loan Programme with IMF, EC and Bilateral Lenders Latvia is a Member of the Eurozone, NATO and OECD Eurozone Members Europe | | NATO Members OECD Members Latvia joins Eurozone/ Economic and Monetary Union Latvia Becomes OECD Member OECD 1991 1991 2004 Sep 2004 Mar 2008 2011 - May Dec 2012 2014 Dec Jan Jan 2015 Jan - Jun 2016 Jul Latvia Becomes UN Member Latvia Enters EU International Loan Programme with IMF/EC Closed Successfully Latvia's Presidency of EU Council#6Latvia's Credit Ratings are stable in A category Rating agencies acknowledge flexibility of Latvia's economy, moderate level of government debt and prudent fiscal management as key factors bolstering its creditworthiness. Long-term Foreign Currency Rating Development S&P (A+ Stable) -Moody`s ( A3 Stable) Fitch (A- Stable) 2012 2013 2014 2015 2016 2017 2018 2019 2020 A+/A1 A/A2 A-/A3 BBB+Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 2021 • Key Strengths of Latvia's Sovereign Credit Profile Prudent fiscal management and contained vulnerabilities of financial system The flexibility and dynamisms of the economy and economy's sound external profile Key Risk Factors of Latvia's Sovereign Credit Profile External financing risks and persistent possibility of geo-political tensions continue to constrain the rating Latvia is a small and open economy, making it vulnerable to external shocks • Latvia's inability to reduce government debt to GDP level • • Latvia's moderate government debt to GDP level • Record of fiscal consolidation and implementation of structural reforms, effective policymaking • In previous years created fiscal space to mitigate the impact from various shocks to the economic • . Membership of large international organizations and unions (EU, NATO, OECD, etc.) Source: S&P, Fitch and Moody's 6 Challenges in demographic outlook and labour market, and comparably low income level Reputational risks in financial sector remain Risk of structural shocks to the key sectors or weakening of international competitiveness#7Key Events in 2020/2021 7 1 From March 19, 2020 number of measures to limit the spread of Covid-19 and to mitigate consequences to economy have been adopted by the Government. Total Covid-19 related support provided in 2020 and approved measures as of today for 2021 is 3.9 billion EUR 2 3 On April 30, 2020 the Cabinet of Ministers approved the Latvia's Stability Programme for 2020-2023 On October 9, Fitch affirmed long-term foreign currency sovereign credit ratings at the 'A-' level, revising outlook to stable 4 On December 2, the Saeima adopted the Law on the State Budget for 2021, the Law on Medium-Term Budget Framework for 2021, 2022 and 2023 5 On December 28, 2020 the vaccination against Covid-19 was launched in Latvia. The first vaccines got the healthcare professionals and to the Emergency Medical Service professionals 6 On February 5, 2021 the website <<manavakcina.lv» became operational, where every inhabitant of Latvia can apply for a vaccine against Covid-19 7 On February 9, 2021 the Cabinet of Ministers approves the strategy for Latvia's long-term coexistence with Covid-19 8 On February 12, 2021 S&P affirms foreign currency issuer rating to the level A+ with outlook: Stable#8Strong and coordinated response to economic challenge Approved support measures for the Covid-19 crisis (on February 21, 2021) 2020 Actual Total amount of support Support to the field of taxation Extensions of tax payment periods, cancellation of PIT advance payments, refund of overpaid VAT within 30 days, extension of real estate payment terms Aid in the field of benefits Benefit for families (person) in a crisis situation, supplement to a crisis allowance of EUR 50 for a dependent child, payment of sickness benefit from the state budget from the 2nd day, compensation for idle workers, workers bonus to "Compensation for idle workers" for children, entitlement to unemployment status for patent and micro-enterprise taxpayers, the deadline for receiving parental benefits has been extended, unemployment benefit, downtime allowance, childcare allowance and supplement, guardian's allowance for child support, supplement to the state family benefit for a disabled child, downtime benefits, Subsidized jobs, including support for the tourism sector Aid in the field of loans and guarantees Working capital loans, credit guarantees, portfolio guarantees, increasing the local governments borrowing limit, Investment fund, financial Instrument for the support of large enterprises Sectoral support Support to the air transport industry, health care support, support for distance learning, support for media and public information, exemption from or reduction of rent, to alleviate financial difficulties in the agricultural, forestry, fisheries and food production sectors, allowances for interior sector employees for work in conditions of increased risk and workload, for construction of state roads and repairs of bridges, funding for the establishment of a national research program to combat the consequences of Covid-19, for education and science, support for religious organizations, for the Latvian Board of Sworn Notaries to purchase a server to ensure the continued operation of the e-apostille register, allaminating the difficulties caused by the spread of Covid-19 in the notarial, allowances for prison administration staff, building insulation, human capital - campaign for lifelong learning, funding for the monitoring of university graduates, support for passenger and freight carriers, support for the sports sector, funding for demographic improvement, Institutions and officials subordinate to the Ministry of the Interior, support for the cultural sector Support related to 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 funds Source: Ministry of Finance 8 2021 Plan 4.5% of GDP 8.4% of GDP EUR, billion 1.3 2.6 0.3 0.1 0.1 0.4 0.3 0.9 0.6 1.2 0.027 0.0007#91. Overview: Portrait of an Ascending Sovereign Credit 2.The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 5 9 14 20 23 28 34#10The Covid-19 pandemic has negative effect on economic growth in 2020 Private consumption has the largest negative impact in 2020. In accordance with credit rating agencies GDP will start to recover in the second half of 2021. Real GDP Growth (seasonally adjusted data, %) GDP Growth Composition (%) 4.8 5.23.6 3.2 4.14.4 3.73.7 3.6 4.03.3 3.9 3.0 2.4 2.0 2.4.5 1.4 1.8 1.6 1.0 0.6 1.00.7 0.8 0.5 1.8 0.3 4 2.3 1.4 0.6 0.5 0.5 0.3 05 1.8 0.6 1.4 1.4 1.8 1.6 1.3 0.4 0.5 -1.8 -1.8 -1.5 -1.5 -1.2 -0.7 -2.8 -5.9 -8.6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2014 2015 2016 2017 2018 2019 2020 ■Private consumption 2016 Public consumption 2017 2018 Gross capital formation 2019 2020 ■Net exports IQ-o-q Y-o-y Source: Central Statistical Bureau of Latvia (02.03.2021.) 1.1% 4.0% Real GDP Growth (%) 4.0% 3.3% 2.4% 2.1% Source: Central Statistical Bureau of Latvia (02.03.2021.) GDP Growth (2019, %) 2.1% EU-28: 1.5 % 2014 2015 2016 2017 2018 2019 -3.6% 2020 Estonia Czech Republic Latvia AA-/A1/AA AA-/Aa3/AA- A+/A3/A- Belgium AA/Aa3/AA- France Austria Finland AA/Aa2/AA AA+/Aa1/AA+ AA+/Aa1/AA+ Source: Central Statistical Bureau of Latvia (26.02.2021) 10 Source: Eurostat (18.02.2021.)#11The labour market has been negatively affected by the Covid-19, is expected to return to growth in the second half of 2021 The government took swift actions to mitigate the unemployment growth during Covid-19 crisis; productivity growth is on the rise. 20 20 15 10 5 0 Unemployment: Headline Rate Participation and Employment Rates (age 15-64, %) 80 60 75 70 0 55 65 60 60 55 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Headline unemployment 2015 Participation rate 2016 2017 2018 2019 2020 Employment rate Source: Eurostat (18.02.2021.) Real Productivity Growth Per Worker (2014-2019 average, %) 2.6 Latvia A+/A3/A- Czech AA-/Aa3/AA- Estonia AA-/A1/AA- France AA/Aa2/AA Belgium AA/Aa3/AA- Austria AA+/Aa1/AA+ Source: Eurostat (18.02.2021.) 11 Source: Central Statistical Bureau of Latvia data (02.03.2021.) Average Monthly Wage For Full-time Job (Y-o-y, %) 10 2 1 19876543N HO 0 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 ■Real Net Wages Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 ■Gross Nominal Wages Source: Central Statistical Bureau of Latvia data (02.03.2021.)#12432 1 0 -1 -2 Due to economic challanges inflation has dropped bellow 1% Inflation is mainly affected to the declining demand due to the measures introduced to curb the spread of Covid-19. Jan-14 Mar-14 May-14 Inflation (HICP, annual rate of change %, for food and energy - contribution to changes, as percentage points) Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Jul-17 May-17 Energy Inflation Source: Eurostat (01.03.2021.) Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Inflation In Latvia (HICP, %) Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Harmonised Index of Consumer Prices (December 2020, 12 months average %) EU-27: 0,7% 0.1% Food, alcohol, tobacco Inflation excl. energy, food, alcohol, tobacco Czech Austria France Finland Belgium AA-/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA AA+/Aa1/AA+ AA/Aa3/AA- Source: Eurostat (18.02.2021.) Latvia A+/A3/A- Estonia AA-/A1/AA- 3.2 2.9 2.9 2.8 3.0 2.4 2.6 2.72.72.8 2.3 1.8 0.8 0.2 0.1 -0.2 -0.7 -0.6 2014 0.1 -0.5 2015 2016 2017 2018 2019 2020 ■Total inflation ■Goods inflation ■Services inflation Source: Eurostat (10.02.2021.) 12 1.3 Harmonised Index of Consumer Prices Projection (2021-2022, %) 1.7% EU:1,5 % Czech AA-/Aa3/AA- Belgium AA/Aa3/AA- Austria AA+/Aa1/AA+ Latvia A+/A3/A- Estonia AA-/A1/AA- France AA/Aa2/AA Finland AA+/Aa1/AA+ Source: European Commission, Winter 2021 (18.02.2021.)#13Exports of goods in 2020 continue to grow Exports continue to grow despite the delays in raw material supply chains impacted by Covid-19. Export of Goods and Services (2010=100) Goods Export Growth (% growth between 2009 and 2019) 220 200 180 160 180 140 120 160 100 140 80 60 120 40 100 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 Czechia Estonia Latvia Lithuania Slovenia Slovakia Latvia A+/A3/A- Estonia AA-/A1/AA-AA-/Aa3/AA- Source: Eurostat Source: Eurostat High-Tech Exports (% of Total Exports) Czechia EU 28 Austria Belgium France Finland AA+/Aa1/AA+ AA/Aa3/AA- AA/Aa1/AA AA+/Aa1/AA+ Current Account Balance (%GDP) 16 7.5% 14 12 3.8% 10 8 1.6% 1.3% 1.0% 6 4 -0.6% -0.3% -0.6% -0.7% -1.6% 2 -2.8% 0 -3.7% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2019 Q1'20 Q2'20 Q3'20 Q4'20 Latvia Germany Source: Bank of Latvia (05.03.2021.) Source: Eurostat (18.02.2021.) 13#141. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 5 9 14 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 20 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 23 28 34#15Well capitalised and liquid banking sector The Latvian banking sector entered Covid-19 crisis as 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 Capitalization and liquidity ratios are well above minimum requirements Since Latvia is a part of the European Banking Union, three largest banks are directly supervised by the ECB and are under the remit of the SRB In the short term negative effects of Covid-19 outbreak on the financial stability have been mitigated by the government support package for businesses (incl. loan guarantees and subsidized loans) and households, private moratoria, ultra-accommodative monetary policy and greater regulatory flexibility The ECB and the FCMC have recommended that all banks should consider not distributing any cash dividends or conducting share buy-backs, or to limit such distributions, until 30 September 2021. 64208642086420 18 16 14 12 10 Capital Adequacy (%) 2014 2015 2016 2017 2018 2019 2020 Capital Ownership of the Banking System (4Q 2020) Source: Bank of Latvia 400% 350% 300% 250% 200% 150% 100% 50% 0% 17% ■Domestic ■Nordic 29% Other 54% Liquidity Coverage Ratio Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 Total capital ratio CET1 ratio Minimum requirement for total capital ratio (8%) Average LCR, LV 2018 Average LCR, EU 2019 Minumum requirement Source: FCMF | Note: Tier 1 ratio matches CET 1 ratio. The Pillar 1 minimum Total capital ratio is 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer. Source: FCMC, EBA 15 2020#16Lending remains subdued The recovery in growth of loan portfolio is to be delayed due to Covid-19 outbreak and decline in the economic activity Key Highlights Loans to Domestic Clients (yoy) 8% Loans to domestic households and NFCs stood at 34% of GDP in December 2020, down from almost 100% at the outset of the global financial crisis 6% 4% • Lending had been subdued before Covid-19 outbreak and is expected to remain in negative territory The impact of Covid-19 on the economy has not been reflected in the overall quality of bank loan portfolio yet; the coverage ratio of 90 days overdue loans remained high. Government support measures and the private loan moratorium have been limiting growth in credit risk in the short term -2% -4% -6% 2% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 NFCs HHs 20% 15% 10% 5% Total Loan Portfolio Quality 0% 2011 2012 2013 2014 2015 2016 Share of loan loss provisions in outstanding loans Share of loans over 90 days past due in outstanding loans 2017 2018 2019 2020 Source: FCMC, Credit Register 16 -8% Source: ECB 149.1 *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 195.2 ■2011 Q4 ■ 2020 Q4 137.9 95.3 73.8 61.9 (%) 112.6 89.5 Estonia Latvia Lithuania Euro Area Source: ECB#17Domestic loans are mainly funded by domestic deposits Lending is the core banking product in the domestic market. Parent bank funding has been replaced with domestic deposits 300% 250% 200% Loan-to-deposit ratio Growth Rates of Domestic and Foreign Client Deposits 25% Introduction of tougher AML/CFT requirements 15% 150% 100% 50% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Domestic Total Source: Bank of Latvia Deposits (EUR bn) 5% - 5% - 15% - 25% - 35% - 45% Weaker CIS economies - 55% - 65% 2012 2013 2014 2015 2016 2017 2018 2019 2020 Annual growth rate of foreign client deposits (adjusted for exchange rate) Annual growth rate of domestic non-financial private sector deposits 2021 Source: Bank of Latvia Liabilities to foreign MFIS (EUR bn) 18 16 14 12.4 12 10 10.8 8 14 15.4 12 10 8 6 16 115 6 st 4 4 3.3 2 2 0 0 2015 2016 2017 2018 Q1 Domestic Q2 Q3 Q4 Q1 Q2 2019 2018 2019 2019 2020 2020 .-Foreign Q3 Q4 Jan 2020 2020 2021 Source: Bank of Latvia 17 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: Bank of Latvia Liabilities to foreign MFIS incl. parent banks#18Banking sector profitability still challenged by the pandemic Ability to generate profits in the short-term subdued due to effects of COVID-19. In 2020, banks' total profit decreased mostly due to COVID-19 related provisions and hedging Key Highlights Largest lenders entered the COVID-19 crisis with sound profitability Before the pandemic, the average Return on Equity (ROE) of the Latvian credit institutions was relatively high and exceeded the EU average. In 2019, the average ROE was 9.6% and in 2020 ROE decreased to 5.3% (EU average was 5.7% in 2019 and 2.5% in 2020 Q3) Credit institutions increased their provisions as the pandemic unraveled, as a result net expenses on provisions increased by 44% in 2020. Second largest negative impact came from drop in net trading income (by 52%) due to revaluation of securities and hedging. As a result, profit before tax decreased by 36%. However, net interest income and net commission and fee income decreased moderately as a result of loan moratoria and public support measures. Risks to credit institutions' profitability remain elevated due to still heightened uncertainty regarding ability to return to growth after the pandemic. ROE CI Interest Spread on Outstanding Loan Amounts 8% ◆ ROE EBA average ◆ CI 7% 12% 70% 6% 10% 65% 5% 8% 60% 4% 6% 55% 3% 4% 50% 2% 2% 45% 1% % 40% 0% 2017* 2018 2019 2020 2017* 2018 2019 2020 Source: FKTK (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS *One-off adjusted data Note: 2020 EBA refers to Q3 2020 18 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Interest rate on deposits Source: Bank of Latvia Interest rate on loans#19Parent Banks are financially sound and profitable The parent institutions 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 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 in Nordic countries enhance risk absorption capacity of the Latvian banking sector Since January 2019 Luminor Bank Latvia continues its operations as a branch of Estonia's Luminor Bank 19 Banks Financial Information Banking Groups' Equity Prices (01.01.2019 = 100, local currency) 150 Swedbank SEB Luminor Latvia branch* 140 DNB Nordea 130 120 Assets (EUR mil)* 7,764 4,288 3,618 110 CAR (%)* 31.2 20.7 100 ROE (%)* 8.4 9.2 90 S&P Global long-term rating A+ A+ 80 wwwww 70 Moody's long-term rating Aa3 Aa2 Baa2 60 Fitch long-term rating A+ AA- 50 2019 2020 2021 Source: Association of Latvian Commercial Banks - financial reports, 4th quarter 2020 Banks' investor relations (ratings at group level) STOXX Europe 600 Banks Swedbank SEB DNB Nordea In January 2019 Luminor Bank Latvia became a branch of Estonian Luminor Bank. Bank ratings (at Group level)#201. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 5 9 3. Banking Sector: Well-Capitalized and Liquid 14 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 20 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 23 28 34#21Fiscal Sustainability Remains Top Priority Prudent fiscal management has produced low budget deficits well below the EU-28 average over the past 8 years. The spread of Covid- 19 and support measures for mitigating the consequences thereof are expected to significantly impact fiscal indicators of Latvia in short term. General Government Budget Balance (% of GDP) Budget Balance (2019, % GDP) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2.0 0.2 0.0 -2.0 -0.8 -1.0 -0.8 -0.6 -0.8 -3.9 -1.6 -1.4 -1.7 -0.7 -2.4 -4.0 -2.9 -5,5 0.6 EU-28: (-0.8%) -4.5 -6.0 -5.3 -6.1 -8.0 -10.0 * indicative current (end of February) estimation of fiscal balance based on approved, anticipated and potential new Covid-19 related measures, subject to further decisions and pandemic situation development -8.4 ■Latvia ■ EU-28 -9,4* France Belgium Finland Latvia Estonia AA/Aa2/AA AA/Aa3/AA- AA+/Aa1/AA+ A+/A3/A- AA-/A1/AA Czech Austria AA-/Aa3/AA-AA+/Aa1/AA+ Source: Eurostat, MoF estimate, Law on Medium-term Budget 2021-2023, AMECO Autumn forecast 2020 Support measures to mitigate Covid-19 crisis (as of February 21, 2021) (EUR, Billion) 2.5 2.0 1.3 1.5 1.0 0.5 0.0 Actual Support in 2020 2.6 Approved Support for 2021* * Approved amount of support as of February 21st, 2021. Amount may change during the course of 2021, subject to further decisions and pandemic situation development 21 Source: Ministry of Finance Source: Eurostat 2021 Budget: Expenditure for priorities* 344,4 2021 2022 345,5 • (EUR, million) Salary increase for the medical personnel, teachers, officials of the justice system • Minimum remuneration rate increase for the academic staff ⚫ Enforcement of the Constitutional judgments in the field of welfare Court Implementation of the housing guarantee support program 343,1 2023 • Compensation for the loss of delivery of the subscribed press publications • Support for the Latvian School Youth Song and Dance Celebration • Withdrawal of the social media from the advertising market *Does not include Covid-19 which is as a high priority Source: Ministry of Finance#22Pension Reform Underpins Stability of Public Finances Latvia is well positioned to withstand fiscal challenges arising from an ageing population. 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 October 1st, 2020, the State Social Insurance Agency (SSIA) is indexing the ammount of pensions or parts thereof that do not exceed 454 euros per month. 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 2021 till 1st January 2022 retirement age is 64 years. 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) Age-related Spending, Projected Change (2016-2070, % GDP) -1.4 France Latvia Estonia Finland Austria Belgium Czech AA/Aa2/AA A+/A3/A- AA-/A1/AA AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa3/AA- AA-/Aa3/AA- Source: European Commission Ageing Report, May 2018 Latvia's age-related spending is among the lowest in (2016, % GDP) EU 14.8% 5.0 12.2% 12.3% 4.0 10.9% 4.5 9.5% 8.5% 3.0 3.6 7.3% 6.1% 6.6% 3.3 2.8 2.0 2.3 2.0 1.7 1.0 1.5 1.2 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 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 22 16.4 Latvia A+/A3/A- Czech Estonia AA-/Aa3/AA- AA-/A1/AA- Belgium Austria Finland France AA/Aa3/AA AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa2/AA Source: European Commission Ageing Report, May 2018#231. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 5 10 9 14 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 5. New Reform Push: Targets Productivity and More Inclusive Growth 20 23 6. Government Debt and Funding Strategy 7. Conclusion 28 34#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 Estonia AA-/A1/AA- Latvia A+/A3/A- Finland AA+/Aa1/AA+ Austria AA+/Aa1/AA+ France AA/Aa2/AA Czech AA-/Aa3/AA- Belgium AA/Aa3/AA- 18 19 20 20 Source: World Bank, Doing Business 2020 (18.02.2021.) 27 22 32 32 41 Adjusted Top Statutory Tax Rate on Corporate 20 20 Income (2020, %) World Bank Worldwide Governance Rankings 84 84 80 81 73 72 60 55 68 65 Political Stability and Absence of Violence 46 Government Effectiveness ■Latvia 2009 Regulatory Quality Rule of Law Control of Corruption ■Latvia 2019 Source: World Bank (18.02.2021.) Czech AA-/Aa3/AA- Latvia A+/A3/A- Estonia Finland Austria Belgium AA+/Aa1/AA+ AA-/A1/AA- AA+/Aa1/AA+ AA/Aa3/AA- France AA/Aa2/AA Source: European Commission, Taxation Trends in the European Union 2020 24 Global Competitiveness Index Ranking The Global Competitiveness Index Rankings Finland Belgium 11 22 Italy 30 Czech Rep. Portugal 32 34 Slovenia 35 Poland 37 Lithuania 39 Latvia 41 Slovakia 42 Hungary 47 Bulgaria 49 Romania 51 Croatia 63 Global Sustainable Competitiveness Index Ranking 4 Finland 6 Estonia 7 Latvia 10 Croatia 24 33 34 2222222232 Slovenia Lithuania Czech Rep. Portugal 21 Slovakia Romania Hungary Belgium Italy Bulgaria Source: World Economic Forum, The Global Competitiveness Report 2019, The Global Sustainable Competitiveness Report 2020#25. Reform Policies Laying Foundation for New Growth Model Structural reforms will help to strengthen Latvia's growth potential in medium term. Labour Market, Social Policy and Healthcare Business Environment Addressing labor market issues through education and employment SME access to financing, export policies; decreasing tax burden on labor; activating social benefit oriented programmes, reduction of recipients; improving accessibility, quality and efficiency of healthcare • Decrease of the tax burden on labor, increase of the untaxed minimum, etc. Activation of unemployed through active labor 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.) administrative burden • Support programmes of the Latvian Investment and Development ALTUM Agency and are being implemented (business incubators, credit guarantees, loans, etc.) Annual Action Plan Improvement of the Business Environment is being implemented, etc. on 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 Whistleblower protection law in force since 1 May 2019 Improvement in the insolvency process and tax compliance is being observed Administrative Territorial Reform 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 40 60 80 AUS CAN OECD average 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 25 TURI LUX PRT ESP NOR ANI JPN DEU DNK 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. Progress Of EU Funds Investments by sectors for 2014-2020 • 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. 84,9 %| 55,7% 51,6 % 46,3% 19,5% O Source: Ministry of Finance; Data on 01.02.2021 EU Funding 4 418,2 milj.€ Source: Ministry of Finance Contracted amount -1957 3751,0 milj.€ Payments to final beneficiaries 2462,0 milj.€ Declared EU Funding 2281,0 milj.€ Received interim payments 2044,9 milj.€ Finished projects - 792 862,7 milj.€ • • EU Funds After 2020 On 21 July 2020, the European Council adopted conclusions on the recovery plan and multiannual financial framework for 2021-2027. Further the consent of the European Parliament is required to conclude the decision-making process. The Latvia's Cohesion policy allocation together with grant allocations from new instruments (Recovery and Resilience Facility, REACT EU, Just Transition Fund of NextGen package) is ~ 6,4 billion EUR (in 2018 prices). Indicatively 2,3 billion EUR will be available in loans from Recovery and Resilience Facility. As regards to Cohesion policy, Latvia will remain eligible to receive support from all three Cohesion policy funds (Cohesion Fund, European Regional and Development Fund, European Social Fund). • As • • a Measures to mitigate effects of the Covid-19 crisis result of CRII and flexibility, CRII plus regulation on 19 May 2020, the government approved the proposals for reallocating nearly €500 million of EU funds to mitigate the consequences of the Covid-19 crisis. REACT-EU envisages allocation of a top-up of € 272 million of EU funds to Latvia as part of European Commission's proposal for Recovery Plan for Europe. The guaranteed funding available to Latvia under the RRF is €1.65 billion (in current prices) funding in form of grants for recovery and stretghening of the economy. EU funds investment progress is transparent and can be followed: www.esfondi.lv 26#27New tax changes have been approved by the parliament Key goals: promotion of the country's social sustainability and economic competitiveness Main tax changes from 2021* 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 mandatory state social insurance contributions is reduced (from 35.09% (employer's rate -24.09%, employee's rate - 11%) to 34.09% (employer's rate -23.59%, employee's rate - 10.5%) A minimum social 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 is 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 the minimum salary from EUR 430 to EUR 500 in 2021 * In accordance with the informative report "On the Development Directions of Tax Policy, Promotion of the State's Social Sustainability and Economic Competitiveness" submitted to the Cabinet of Ministers on September 2, 2020 Source: Ministry of Finance 27#281. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 5 6 14 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 20 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 23 28 34#29Estonia EU-28: 1.6% 0.7 Sweden Luxembourg Norway Bulgaria Czechia Denmark Latvia Germany Netherlands Source: Eurostat 29 Lithuania Finland Romania Slovakia Ireland • 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 General government debt will increase, but remain below 60% in medium term Despite the projected debt increase in the medium term because of Covid-19 support measures it is expected to be in line with Maastricht criteria Key Characteristics of Latvia's Government Debt General Government Debt Year End (EUR million, % GDP, ESA methodology) Interest payments 2019, % GDP General government debt was amongst the lowest in the EU at 36.9 % of GDP at the end of 2019. It is the 4th lowest in the Eurozone and the 9th lowest in the EU 50.8% 50.6% 49.1% 43.7% 40.4% 39.0% 37.1% 36.9% Malta Austria France Poland Slovenia Belgium Croatia United Kingdom Spain Hungary Cyprus Greece Portugal Italy 8.4 15 658 16 597 16 941 12 906 10 245 10 519 10 816 11 247 2017 2016 2018 2019 2020 F 2023 F Source: Eurostat (actual data 2016-2019), current estimation for 2020, indicative estimation for 2021- 2023, subject to Covid-19 fiscal impact and government decisions about Covid-19 mitigation and support measures 2021 F 2022 F General Government Debt (Eurozone countries 2019, % GDP) Estonia Lithuania Luxembourg Latvia 36.9 Malta Slovakia Netherlands Ireland Source: Eurostat (October 2020) Finland Germany Slovenia Austria Euro area United Kingdom 84.0 Cyprus Spain Belgium France Portugal Italy Greece 134.7 180.5#30Borrowings in international financial markets and bilateral loan facilities related to Covid-19 On the back of Covid-19 outbreak, necessary funding was ensured to finance Government approved support measures in 2020 Borrowing activities in international capital markets in 2020 In order to swiftly react to the Covid-19 outbreak and ensure liquidity to finance the Government measures to support society, entrepreneurs and economic activity as a whole: On March 26, Latvia re-opened its outstanding Eurobond maturing 7 October 2026 by issuing EUR 550 million. The yield was set at 0.406%. Amount outstanding of October 2026 bonds after that tap reached EUR 1,5 billion. On April 6, Latvia priced a new 3 year benchmark Eurobond in a total amount of EUR 1 billion. Yield was set at 0.209%. Mid YTM, % 0.4 Latvia Secondary Eurobond Market (mid yield to maturity, %) 0.46 0.43 0.2 0.18 0.0 -0.2 -0.24 -0.22 -0.39 -0.33 -0.4 0.43 -0.48 -0.6 -0.56 0.17 Loans from international financial institutions and EU In 2020 Latvia signed a loan facility with Nordic Investment bank in amount of EUR 500 million. The loan facility has been granted for the funding of extraordinary government expenditure in Latvia in order to mitigate the impact of the Covid-19 epidemic. 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 took an opportunity and signed loan agreement with EU in account of EUR 192.7 million. As of today the loan is fully disbursed. 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 LATVIA EUR Eurobond ―LATVIA USD Eurobond - LATVIA domestic bonds Source: Data as of 22 February 2020, Bloomberg EUR USD Outstanding International Bonds (nominal amount, million) 2049 1.875% 19/02/2049 2047 2036 2.250% 15/02/2047 1.375% 16/05/2036 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 2021 5.250% 16/06/2021 0 200 400 600 800 1000 1 200 1 400 1 600 30 Source: The Treasury Eurobond issuances in international capital markets in 2020 TAPs of existing Eurobonds in domestic market during Oct 2020 and February 20219 Source: The Treasury (22.02.2021)#31Domestic Market Continues to Perform Strongly Demand in domestic market is very supportive trough challenging times, also during Covid-19 crisis. Domestic Securities Outstanding by Original Maturity 0.3% 8.9% (as on December 31, 2020, %) Government Securities Competitive Multi-Price Auctions 4.7% 250 200 23.6% 2 years bonds 150 100 5 years bonds 50 0 ■7 year bonds 10 years bonds Savings bonds N N للللللله 7y TAP2026 Mar Apr May June Jul Sep Oct Nov Jan Feb 2021 2020 Source: The Treasury 62.6% Government domestic securities outstanding by maturity (as on March 1, 2021, million EUR) LV0000570182 01.07.2027. (0%) 31.01.2025. 02.11.2023. 12.05.2023. LV0000580058 27.10.2022. (5.25%) 20.03.2022. 27.01.2022. 0 LV0000570141 (0.375%) LV0000570166 (0.5%) LV0000570158 (0.25%) LV0000570174 (0%) LV0000550101 (0%) 100 200 300 400 500 • • • Amount sold, million EUR Bids total, million EUR ■Bids of Eurobond TAP in Domestic Market Source: The Treasury | Note: Bid-to-Cover ratio: Bid Amount to State Treasury offered amount, * Since 2015 6m T-Bills benchmarks are tap issues of original 12m T-Bills in maturity brackets from 4.5 to 9 months. Securities in the domestic market Primary dealer system operates since 11 February 2013. Domestic debt securities outstanding constituted EUR 1 612 million as of 17 February, 2021. On 19 January 2021 Erste Group Bank AG received Latvia's primary dealer status. The Treasury maintained regular domestic debt securities auctions in 2020 offering medium and long term T-bonds. For several years Latvia has concentrated domestic supply mainly in 5-year segment and focused on increasing the liquidity. In 2020 gross issuance volumes largely increased because of Covid -19. A 2 year T-Bond programme was opened and taped on regular basis, with rising demand. Currently 2 year T-Bond programme is one of the most liquid programms. A new 7 year T-bond program was opened in the July 1, 2020. Coupon was fixed at the 0.000%. On 14th of October 2020 for the first time GMTN programme Eurobonds TAPS were officered in auction in domestic market only (via Primary dealers). Currently re- openings of outstanding Eurobonds are offered on regular basis. Source: The Treasury 31#3232 Central Government Debt Profile Government debt redemptions remain moderate 14 000 12 000 10 000 8 000 6.000 4 000 2.000 Debt structure by Instruments (milion EUR) Debt Redemption Profile (EUR million) 1 600 1 400 1 200 1 000 800 mio EUR 600 400 200 0 2021 2022 2023 2024 2025 2026 2027 Mar-Dec ■Domestic debt redemption 0 1Q15 Other 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Domestic T-bills Domestic T-bonds Source: The Treasury, December 2020 1Q19 3Q19 Eurobonds 1Q20 3Q20 Loans from financial institutions ■SURE ■Eurobonds Source: The Treasury, on February 28, 2021 Debt Portfolio Management 2028 2029 2036 2037- 2047 2048- 2050 2051 2035 2046 Other external debt liabilities EC loan (Program) 2049 Eurobond Tap issues targeted for domestic investors Parameters Strategy 30/09/2020 31/12/2020 Maturity profile (%) • up to 1 year ≤ 25% • up to 3 year ≤ 50% 23.5% 39.1% 18.8 % Share of fixed rate (1) ≥ 60% 78.4% 37.2 % 82.10 % Macaulay duration (years) 5.00 9.00 6.50 6.62 Net debt (2) currency composition 100% EUR with a deviation of +/- 100.53% 5% Source: The Treasury 100.10% 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 Borrowings in international capital markets will continue to 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 General Financing Requirement Central Government Budget Balance Net Lending Other Flows at the Treasury`s Accounts Outstanding Central Government Debt Redemptions (domestic and external) Pre-funding Strategy For Refinancing Debt Borrowing Instruments (BASE scenario) Benchmark issuances in internatioanal capital markets Regular auctions in domestic market in larger gross volumes Loans from international financial institutions (for example EU ) Alternative Instruments Niche market instruments (JPY, CHF, etc.) Private placements (reverse enquiries) Loans from other international financial institutions • T-bills in domestic market Central Government financing estimation (ACTUAL scenario 2021-2023, EUR million) 2021 Jan-Feb|Mar-Dec 28-February-2021 2021 2022 2023 Central government budget balance, net lending and other flows 63 -3 173 -3 110 -989 -448 Outstanding central government debt -1 076 -338 -1 414 -707 -1 593 redemption Of which: Domestic debt repayment External debt repayment -88 -988 -4 -92 -624 -519 -334 -1 322 -83 -1 074 Total -1 014 -3 510 -4 524 -1 696 -2 041 Gross borrowing 439 2 983 3 422 1 650 2 000 Of which: International issuance 0 2 500 2 500 1 000 1 400 Note: Indicative in the planned period, the estimated borrowing volume is based on a number of contingencies, subject to Covid-19 fiscal impact and government decisions on measures for mitigation of spread of Covid-19 and support for the economy The borrowing volume could change due to Covid-19 negative fiscal impact and necessity to provide financing for additional Covid-19 mitigation and support measures, subject to further pandemic development and government decisions 33#341. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 5 10 9 14 4. Fiscal policy: Targeted Action to Contain the Pandemic and Support the Economy and Citizens 20 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 23 28 34#35Investment Highlights Latvia has previously shown a strong ability to recover rapidly from crises situations and overcome external shocks, for instance during the 2008 financial crisis. Thanks to a flexible and resilient economy, a prudent fiscal policy and the government's ability to react swiftly in emergency situations, as proved again during the Covid-19 pandemic, experts anticipate Latvia's economy to rebound in second half of 2021. 35 Flexible and Resilient Economy → Government swift actions to stablize the economy Sustainable Debt Level and Prudent Fiscal Management → Still in the line with Maastricht criteria 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 Banks Well Capitalised, Profitable and Liquid → Predominately foreign owned, resident- serving banking sector →Comprehensive financial sector reforms Stable Credit Ratings →The Flexibility of the economy and economy's sound external profile Diversified Export → Exports continue to grow despite the delays in raw material supply chains impacted by Covid-19