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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#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 Impact from Covid-19 on Latvia's economy has been relatively moderate and the recovery is expected in 2022 Prudent fiscal management in previous years provided the fiscal space to absorb the Covid-19 negative impact on 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 5 6 14 23 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 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 2021 Currency GDP per capita 2020 Nominal GDP 2020 Main economic sectors 1H2021 Source: ¹Central Statistical Bureau of Latvia 64 573 sq. km¹ Estonia, Lithuania, Belarus and Russia Riga 1.89 million¹ Euro EUR 15.43¹ EUR 29.33 billion¹ Services (74%¹) and Manufacturing (13%¹) Latvia Regains Independence 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 Aug 1991 Sep 2004 Mar 2004 2008 May 2011 - Dec 2012 Dec Jan Jan 2014 2015 Jan - Jun 2016 Jul 5 Latvia Becomes UN Member Latvia Joins 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) A+/A1 A/A2 A-/A3 BBB+Baa1 BBB/Baa2 -Moody's (A3 Stable) Fitch (A- Stable) BBB-/Baa3 BB+/Ba1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Key Strengths of Latvia's Sovereign Credit Profile Resilience to the Covid-19 shocks, diversity and growth of the Latvian economy in previous years Key Risk Factors of Latvia's Sovereign Credit Profile • Persistent possibility of geo-political tensions • • Predicted growth rate of the Latvian economy after the mitigation of Covid-19 pandemic . • Relatively low government debt to GDP level and moderate burden of debt service Record of fiscal consolidation and implementation of structural reforms, effective policymaking Membership of large international organizations and unions (EU, NATO, OECD, etc.) Government's achievements in reduction of risks in financial sector Source: S&P, Fitch and Moody's Latvia is a small and open economy, making it vulnerable to external shocks Latvia's challenges in demographic outlook and labour market, as well as comparably low income level Reputational risks in financial sector remain Low GDP per capita compared to other EU countries and higher level of net external debt Risk of structural shocks to the key sectors or weakening of international competitiveness More material and longer impact on economy from the Covid-19 pandemic and inability to reduce government debt to GDP level after mitigation of Covid-19 pandemic 6#7Key Events in 2021 7 1 On April 13, 2021 the Cabinet of Ministers approved the Latvia's Stability Programme for 2021 2024 - 8 2 On May 14, 2021 Moody's affirmed long-term foreign currency sovereign credit ratings at the A3 level with Stable outlook 7 3 On May 19, 2021 Financial Sector Signs Memorandum of Understanding to Improve Sustainability. Finance Latvia, the Financial and Capital Market Commission, the Bank of Latvia, Nasdaq Riga, the Latvian Leasing Association and the Latvian Insurers Association have agreed to collaborate to promote public understanding of the meaning and principles behind sustainability and sustainable finance 4 On May 27, 2021 the Parliament adopted covered bond law 5 On August 13, 2021 S&P affirmed foreign currency issuer rating ar A+ level with Stable outlook 6 On September 3, 2021 Fitch affirmed long-term foreign currency sovereign credit ratings at the A-level with Stable outlook From 11 October, 2021 an emergency situation is declared in Latvia for three months in order to stop the rapid spread of Covid-19 infection On November 12, 2021 in total 1 097 409 (around 66% of total population 12 years and older) inhabitants of Latvia have been fully vaccinated On 23 November, 2021, the Saeima adopted the Law on the Budget for 2022 and Medium-Term Budget Framework for 2022-2024#81. 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#9The economy is recovering rapidly from Covid-19 pandemic impact The Covid-19 pandemic had negative effect on economic growth, but in 2021 Q3 the economy exceeded pre-Covid-19 levels Real GDP Growth (seasonally adjusted data, %) GDP Growth Composition (%) 4.3 3.9 3.6 0.8 -0.2 -8.4 10.5 4.7 2.4 3.5 1.4 2.7 1.2 2.0 1.8 1.8 -1.5 -1.4 2014 2015 2016 2017 2018 2019 2020 2021 Q-o-q Y-o-y Source: Central Statistical Bureau of Latvia, 2021 Q3* Flash estimations (16.11.2021.) 1.9% 3.9% 2014 2015 Real GDP Growth (%) 4.0% 3.3% 2.4% 2.5% 2015 9.8 1.0 1.3 -4.4 -5.9 2016 2017 Public consumption 2018 2019 2020 2021 1Q-2Q Gross capital formation ■Net exports ■Private consumption Source: Central Statistical Bureau of Latvia (20.10.2021.) GDP Growth (2020, %) -3.6% EU Averadge (27 countries) -5,9% 2016 2017 2018 2019 -3.6% 2020 Finland Estonia Latvia AA+/Aa1/AA+ AA-/A1/AA- A+/A3/A- Belgium Czechia Austria France AA/Aa3/AA AA-/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA Source: Central Statistical Bureau of Latvia (20.10.2021) 9 Source: Eurostat (20.10.2021.)#10The 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 Unemployment: Headline Rate 80 80 75 70 0 65 660 Participation and Employment Rates (age 15-64, %) 55 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Headline unemployment Participation rate Employment rate Source: Eurostat (16.11.2021.) Source: Central Statistical Bureau of Latvia data (16.11.2021.) Real Productivity Growth Per Worker (2015-2020 average, %) Average Monthly Wage For Full-time Job (Y-o-y, %) 2.1 EU-27: 0,0% Latvia A+/A3/A- Estonia AA-/A1/AA- Czechia Austria France AA-/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA Belgium AA/Aa3/AA- Source: Eurostat (20.10.2021.) 10 12 10 10 8 6 4 2 0 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 ■Real Net Wages Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q1'16 Q2'16 Q3'16 Q4'16 ■Gross Nominal Wages Source: Central Statistical Bureau of Latvia data (20.09.2021.) Q1'17 Q2'17 Q3'17 Q4'17#11Inflation increase - Covid-19 post-restriction effect As the pandemic recedes and the economy recovers, consumer prices are stabilizing. The price level increases, primarily driven by rising world energy and food prices. 765432102 -1 -2 Inflation (HICP, annual rate of change %, for food and energy - contribution to changes, as percentage points) Jan-14 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 Energy Inflation Source: Eurostat (16.11.2021.) Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-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 Sep-21 Food, alcohol, tobacco Inflation excl. energy, food, alcohol, tobacco Inflation in Latvia (HICP, %) 3.2 2.9 2.8 3.0 2.9 2.4 2.62.3 2.7 2.7 2.8 1.8 1.3 0.8 0.2 0.1 -0.2 -0.7 -0.6 2014 2015 2016 2017 2018 Total inflation ■Goods inflation Source: Eurostat (10.02.2021.) 11 2019 ■Services inflation 0.1 -0.5 2020 Harmonised Index of Consumer Prices (September 2021, 12 months average %) EU-27: 1.7% 1.3% Czech Austria Estonia Belgium Finland France AA-/Aa3/AA- AA+/Aa1/AA+ AA-/A1/AA- AA/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA Source: Eurostat (20.10.2021.) Latvia A+/A3/A- Harmonised Index of Consumer Prices Projection 3.35% Estonia AA-/A1/AA- Czech AA-/Aa3/AA- Latvia A+/A3/A- (2021-2022, %) Source: European Commission, Autumn 2021 (16.11.2021.) EU:2.55 % Austria AA+/Aa1/AA+ Belgium AA/Aa3/AA- France AA/Aa2/AA Finland AA+/Aa1/AA+#12Exports of goods 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 2010 and 2020) 200 190 70 180 60 170 160 50 150 40 140 30 130 20 120 110 10 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Czechia Estonia Latvia Lithuania Slovenia ⚫Slovakia Estonia Latvia Czechia AA-/A1/AA- A+/A3/A- AA-/Aa3/AA- EU 27 Austria Belgium France Finland AA+/Aa1/AA+ AA/Aa3/AA- AA/Aa1/AA AA+/Aa1/AA+ Source: Eurostat (20.10.2021) High-Tech Exports (% of Total Exports) Source: Eurostat (20.07.2021.) Current Account Balance (%GDP) 2.9% 16 14 1.6% 1.3% 12 10 8 6 -0.6% -1.6% -2.8% -3.7% -0.2% -0.7% -1.9% 4 2 -6.5% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1'21 Q2'21 Germany Latvia Source: Bank of Latvia (20.09.2021.) Source: Eurostat (20.10.2021.) 12#131. 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#14Well 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 Capital Ownership of the Banking System (3Q 2021) • 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, the three largest banks are directly supervised by the ECB and are under the remit of the SRB 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 forbearance measures, accommodative monetary policy and greater regulatory flexibility Capital Adequacy (%) Source: Bank of Latvia 400% 350% 300% 250% 200% 150% 100% 50% 0% 2014 2015 2016 2017 2018 2019 2020 2021 TTTTTT 18 16 14 12 2222986 & 20 17% ■Domestic ■Nordic 29% Other 54% Liquidity Coverage Ratio Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2019 2020 2021 2018 Total capital ratio CET1 ratio Minimum requirement for total capital ratio (8%) Average LCR, LV Average LCR, EU Source: FCMC | Note: Tier 1 ratio matches CET 1 ratio. The minimum TCR requirement is the regulatory minimum and doesn't include capital buffer requirements and supervisory Pillar 2 requirements. Source: FCMC, EBA 14 Minumum requirement#15Lending remains subdued The recovery in growth of loan portfolio is delayed due to pandemic-related economic uncertainty • Loans to Domestic Clients (yoy) Key Highlights 8% Loans to domestic households and NFCs stand at 33% of GDP, down from almost 100% at the outset of the global financial crisis 6% 4% Lending had been subdued before Covid-19 outbreak and lending to NFCs is expected to remain weak in 2021. Housing loans have demonstrated growth (with one-effect effects due to the structural changes in July 2021) 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 and private forbearance measures have been limiting growth in credit risk in the short term -6% 2% 0% 2012 2013 2014 -2% -4% MM 20% 15% 10% 5% Total Loan Portfolio Quality 0% 2011 2012 2013 2014 Source: FCMC, Credit Register 2015 2016 2017 2018 2019 2020 Share of loan loss provisions in outstanding loans Share of loans over 90 days past due in outstanding loans 15 2021 -8% Source: ECB 152.2 2015 2016 2017 2018 2019 202 NFCs HHs *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 (%) 186.6 ■2011 Sept. ■2021 Sept. 140.2 93.4 76.8 65.5 114.0 88.0 Estonia Lithuania Latvia Euro Area Source: ECB#16Domestic 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% Loan-to-deposit ratio Growth Rates of Domestic and Foreign Client Deposits 25% Introduction of tougher AML/CFT requirements 250% 200% 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) 15% 5% - 5% - 15% - 25% - 35% Weaker CIS economies - 45% - 55% - 65% 2012 2013 2014 2015 2016 2017 2019 2020 2021 Annual growth rate of foreign client deposits (adjusted for exchange rate) Annual growth rate of domestic non-financial private sector deposits 2018 Source: Bank of Latvia Liabilities to foreign MFIS (EUR bn) 18 16 14 12.4 12 10 10.8 8 16 14 16.4 12 10 8 6 6 st 4 3.2 4 2 2 0 0 2015 2016 2017 2018 2019 Q1 Q2 2020 2020 2020 Q3 Q4 Q1 Q2 Q3 2020 2021 2021 2021 Domestic Foreign Source: Bank of Latvial 16 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#17Banking sector profitability remained resilient during the pandemic In 2021, profitability in the banking sector has almost recovered to pre-pandemic levels • Key Highlights In the first half of 2021, profitability of banks recovered swiftly as there were smaller expenses on provisions and no significant losses due to hedging compared to 2020 Uncertainty regarding the need for extra provisions remains, however outlook still seems favourable despite the new lockdown as ample fiscal support is available for households and businesses hit by containment measures, and the largest lenders have some room for manoeuvring (retained profits) 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 Net fee and commission income also increased by 10%, mainly from servicing payments and credit cards Administrative costs increased slightly (4%); however rising labour costs could increase pressure on banks' cost to income ratio over medium term As both ECB's and ESRB's recommendation on restriction of distributions has lapsed, banks are allowed to pay out dividends. Notwithstanding, banks are asked to maintain prudent approach to distributions 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% 2017* 2018 2019 2020 2021 1HY 2017* 2018 2019 2020 2021 0% 1HY 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 ― Interest rate on deposits Source: FCMC (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS *One-off adjusted data Source: Bank of Latvia 17 ― Interest rate on loans#18Parent 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 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 (01.01.2019 = 100, local currency) 180 170 Swedbank SEB Luminor Latvia branch* 160 DNB Nordea 150 140 Assets (EUR mil)* 8,305 4,317 3,606 130 CAR (%)* 33.5 22.8 120 110 ROE (%), annualized* 8.3 20.3 100 S&P Global long-term rating A+ A+ 90 80 Moody's long-term rating Aa3 Aa2 Baa1 70 60 Fitch long-term rating A+ AA- 50 2019 2020 2021 Source: Finance Latvia Association data, 2nd quarter 2021 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) 18#191. 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#20Fiscal Sustainability Remains Top Priority Prudent fiscal policy has produced low budget deficits well below the EU-27 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 Budget Balance (2020, % GDP) (% of GDP) 2015 2016 2017 2018 2019 2020 2021 2022 2023 1.0 0.2 0.0 -1.0 -0.4 -0.6 -0.8 -0.8 -0.8 -2.0 -1.4 -0.5 -1.4 -3.0 -1.9 -4.0 -5.0 -4.5 -2,1 -2.3 -3.6 -4.8 -6.0 -7.0 -6.6 -6.9 -8.0 -9.0 -10.0 ■Latvia ■ EU-27 -9.3 Source: Eurostat, Draft Budgetary Plan of the Republic of Latvia 2022, AMECO Autumn Forecast 2021 Spending Review Results (EUR, million) 200.0 172.8 150.0 70.6 100.0 50.0 102.2 47.5 0.0 2022 2023 Resources to common government priorities ■Internal resources for own sectoral priorities 20 Source: Ministry of Finance EU-27: (-6,9%) - 4.5 France Belgium Austria Czechia Finland Estonia AA/Aa2/AA AA/Aa3/AA AA+/Aa1/AA+ AA-/Aa3/AA- AA+/Aa1/AA+ AA-/A1/AA- Source: Eurostat Latvia A+/A3/A- 2022 Budget: Expenditure for priorities (EUR, million) 696,8 2022 • Labor tax rate reduction • Salary increase for medical personnel, teachers, officials the interior of system · Improving oncology health services 2023 457,2 (reimbursable medicines, infrastructure) 463,9 2024 Source: Ministry of Finance • Increasing funding for science Increasing the number of state-paid days of incapacity for work • Reduced value-added tax for books and printed press#21Government support package to mitigate Covid-19 crisis and its fiscal impact Total support to economy, EUR million and % of GDP 3500 I 10.9% ■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 3000 2500 2000 4.4% 1500 1000 500 6.0% 2.1% 0 2020 Asessment 2021 2021 Plan Actual performance 2022 Plan 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 ■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 500 0 -500 Impact on balance, EUR million and % of GDP -0.8% ■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 -1000 -3.3% -1500 -5.5% -2000 -2500 2020 Asessment 21 2021 Actual support -6.9% 2021 Estimate 2022 Estimate ■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 funds - Data source: Assessment of the Ministry of Finance as of November 7, 2021 according to the data from the State Treasury, State Revenue Service, Altum, State Social Insurance Agency, ministries etc. Actual performance till November 7, 2021, plan according government decisions till November 7, 2021. Amount may change during the course of 2021, subject to further government decisions and pandemic situation development.#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 Age-related Spending, Projected Change (2019-2070, % GDP) • state compulsory unfunded pension scheme (the 1st tier) Latvia's reformed pension system consists of three tiers: • • 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) -0.6 Estonia AA-/A1/AA- France Latvia AA/Aa2/AA A+/A3/A- Finland Austria Belgium Czech AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa3/AA- AA-/Aa3/AA- Source: European Commission Ageing Report, May 2021 Latvia's age-related spending is among the lowest in (2019, % GDP) EU 6.0 17.3% 5.0 14.8% 12.2% 12.3% 5.1 4.0 10.9% 4.5 9.5% 8.5% 3.0 6.1% 6.6% 7.3% 3.6 3.3 15.8 2.8 2.0 2.3 2.0 1.0 1.7 1.5 1.2 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Latvia A+/A3/A- Estonia Czech Belgium Finland Austria France AA-/A1/AA- AA-/Aa3/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 2021 22#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. 32 Portugal 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 33 34 2222222232 Slovenia Lithuania Czech Rep. Portugal 21 Slovakia Romania 24 Hungary Belgium Italy Bulgaria Source: World Economic Forum, The Global Competitiveness Report 2019, The Global Sustainable Competitiveness Report 2020#25Reform 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 Addressing labor market issues through education and employment policies; decreasing tax burden on labor; activating social benefit 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.) Business Environment Education, Research and Innovations SME access to financing, export Increasing the quality of education oriented programmes, reduction of and research, fostering investments in R&D and innovations 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 Improvement of the Business Environment is being implemented, etc. on • Smart Specialization Strategy is being implemented being Support programmes are 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 60 Whistleblower protection law in force since 1 May 2019 • Improvement in the insolvency process and tax compliance is being observed 40 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 • The new model is in force from 1st July 2021 NAS AUS CAN 80 OECD average 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 CHN ISR LATVIA#26EU Playing Key Role in Funding Structural Change in Latvia Targeted use of EU funds will promote competitiveness and stimulate economic growth as well as support necessary structural reforms. The Latvia's Cohesion policy allocation after 2020 together with grant allocations from new instruments (Recovery and Resilience Facility, REACT EU, Just Transition Fund of NextGen package) is 6,9 billion EUR. EU Funds After 2020 (Operational Programme to be adopted by the end of 2021) Operational Programme 2021-2027 ~ Recovery and Resilience plan (Adopted by the Council on July 13,2021) Recovery Fund Plan SMARTER EUROPE GREENER EUROPE CLIMATE 972 M € 19% 22% 1,1 billion € 676,2 MC 37% 4% JUST TRANSITION FUND 5% INVESTMENTS 225 M€ EUROPE CLOSER TO CITIZENS 263 M € 5,06 billion € 30% 000 SOCIAL EUROPE 20% CONNECTED EUROPE 1,0 billion € DIGITAL 20% TRANSFORMATION 365,2 MC 1,82 billion € 20% 2% 11% 10% RULE OF LAW 37 MC ECONOMIC REDUCING DISPARITIES 370 MC On 27 August, 2021, the Minister for Finance signed a financing agreement between the Republic of Latvia and the European Commission regarding the Recovery Fund. On 10 September, 2021, Latvia received pre-financing of 13% (EUR 237 million) of the total amount of the Recovery Fund. . . 1,5 billion € Source: Ministry of Finance; Data on 25.08.2021 TRANSFORMATION 196 MC HEALTH 181,5 MC Source: Ministry of Finance; Data on 25.08.2021 Measures to mitigate effects of the Covid-19 crisis As a result of CRII and CRII plus regulation flexibility, 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. By 19th October, 2021, project contracts amounting to a total of EUR 215 million has been already signed. REACT-EU envisages allocation of a top-up of indicatively € 264 million of EU funds to Latvia as part of European Commission's proposal for Recovery Plan for Europe. On 8 June 2021 the government approved amendments to the EU Funds Operational Programme, which will allow the use REACT- EU funding to mitigate the effects of the pandemic crisis and on July 2021 the EC has approved these amendments. 26#27Tax changes Key goals: decrease of income inequality and promotion of economic competitiveness Principles of the tax changes . 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 • • • 27 Increase 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 Main tax changes realised in 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 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 the minimum salary from EUR 430 to EUR 500 in 2021 Source: Ministry of Finance Main tax changes from 2022 (adopted by the Parliament (Saeima)) 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)#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#29Average EU (27 countries) 1,4% 0.7 Estonia Luxembourg Sweden Denmark Bulgaria Germany Latvia Lithuania Netherlands Source: Eurostat (October 2021) 29 Finland Czechia Ireland Slovakia France Malta Interest payments 2020, % GDP General government debt remains well below 60% of GDP Despite the recent increase due to fiscal impact of Covid-19 pandemic debt level is expected to be in line with Maastricht criteria in the medium term • • • Key Characteristics of Latvia's Government Debt General government debt was amongst the lowest in the EU at 43,5 % of GDP at the end of 2020 - the 3rd lowest in the Eurozone and the 7th 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 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 at Year End (EUR million, % GDP, ESA methodology) 52% 49% 49% 49% 43% 40% 39% 37% 37% 17 591 17 827 18 628 15 300 12 754 10 245 10 519 10 816 11 247 Austria Poland Romania Slovenia Belgium Croatia Spain Cyprus Hungary Portugal Greece Italy Estonia Luxembourg 19. Latvia - Lithuania Source: Eurostat (October 2021) 3.5 % of GDP Average Eurozone 97,3% 43.2-46.6 2016 2017 2018 2019 2020 2021 F 2022 F 2023 F 2024 F Source: Eurostat (actual data 2016-2020), forecast 2021-2024 (Medium Term Budget Framework Law 2022-2024) General Government Debt 2020, % GDP (Eurozone countries) Malta Netherlands Ireland Slovakia Germany Finland Slovenia Austria Belgium France Cyprus Spain Portugal Italy Greece 206.3#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 Covid-19 support measures in 2021 Borrowing activities in international capital markets in 2021 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 17, Latvia issued a new 10 year benchmark Eurobond in a total amount of EUR 1,25 billion. Yield was set at 0.105%. Evidenced the highest investor demand so far in terms of the number of investors and final orderbook size 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. Loans from international financial institutions and EU Mid YTM, % 0.6 0.4 0.2 Latvia`s Secondary Eurobond Market (mid yield to maturity, %) 0.26 0.45 0.02 0.11 0.0 -0.04 -0.11 -0.06 -0.25 -0.2 -0.14 -0.4 -0.32 -0.34 -0.40 -0.6 0.58 0.59 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 November 22, 2021, Bloomberg Outstanding Eurobonds (nominal amount, million) 2049 1.875% 19/02/2049 • In 2020 Latvia signed a loan facility for the funding of extraordinary government expenditure in order to mitigate the impact of the Covid-19 epidemic with Nordic Investment bank in amount of EUR 500 million. As of today the loan is fully disbursed. 2047 2.250% 15/02/2047 2036 1.375% 16/05/2036 2031 0.105% 17/03/2031 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 amount of EUR 192.7 million. 2029 0,003% 24/01/2029 2028 1.125% 30/05/2028 2026 0.375% 07/10/2026 2025 1.375% 23/09/2025 . According to Council Implementing Decision (EU) 2021/677 of 23 April 2021, the total amount of SURE support available for Latvia was increased to EUR 305,2 million. As of today SURE support is fully disbursed. 2024 2.875% 30/04/2024 2023 0.125% 14/04/2023 0 200 400 30 Source: The Treasury 600 800 1000 1200 1400 Eurobond issuances in international capital markets in 2021 TAPS of existing Eurobonds in domestic market Source: The Treasury (12.11.2021) 1600 1800#31Domestic Market Continues to Perform Strongly Demand in domestic market is very supportive trough challenging times, also during Covid-19 crisis Domestic Securities (LV ISIN) Outstanding by Original Maturity 4.9% (as on September 30, 2021, %) 4.0% 0.3% Millions Securities via Primary Dealer system 110 86 88.3 83 78.8 73 70.5 64 59.75 60.556.4 59 140 116.75116.25 116.1 120 92 100.25106 100 24.8% ■2 years bonds 80 60 5 years bonds 40 20 ■7 year bonds 0 10 years bonds TAP2028 TAP2025 TAP2028 TAP2025 Jan Savings bonds 40.5 TAP2028 TAP2026 TAP2025 TAP2031 TAP2031 TAP2025 TAP2028 TAP2031 TAP2029 TAP2029 TAP2028 TAP2029 TAP2029 TAP2031 33.5 TAP2031 TAP2025 Feb Mar Apr May June July Aug Sept 2021 Oct Nov Bids total, million EUR Sold amount (Eurobond TAPS in domestic market) Source: The Treasury 65.9% Government domestic (LV ISIN) securities outstanding by maturity (as on November 12, 2021, million EUR) 01.07.2027. 31.01.2025. 02.11.2023. 12.05.2023. LV0000570182 (0%) 27.10.2022. LV0000580058 (5.25%) 20.03.2022. LV0000570166 (0.5%) LV0000570158 (0.25%) LV0000570174 (0%) LV0000550101 (0%) Source: The Treasury Securities in the domestic market Primary dealer system operates since 11 February 2013. On 19 January 2021 Erste Group Bank AG received Latvia's primary dealer status. 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. On 14th of October 2020 for the first time GMTN programme Eurobonds TAPS were offered in auction in domestic market only (via Primary dealers). Currently re-openings of outstanding Eurobonds are offered on regular basis. 27.01.2022. 0 Source: The Treasury 31 LV0000570141 (0.375%) 100 200 300 400 500#3216 000 14 000 Debt structure by Instruments 12 000 (milion EUR) 10 000 Central Government Debt Profile Government debt portfolio is well managed according to the Central Government Debt and Cash Management Strategy 1800 8 000 1600 6 000 4 000 1400 Debt Redemption Profile 1200 (EUR million) 1000 2.000 0 800 600 400 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 3Q21 ■Other Domestic T-bills Domestic T-bonds Eurobonds Loans from financial institutions Source: The Treasury, September 30 2021 200 0 2021... 2022 2023 2024 2025 Parameters Debt Portfolio Management Strategy 30/06/2021 30/09/2021 2026 2027 2028 2029 2030 ■ Eurobonds EC loan (Program) ■Other external debt liabilities Source: The Treasury, on October 31, 2021 ■Eurobond Tap issues targeted for domestic investors ■SURE ■Domestic debt redemption 2031 2032-2035 2036 2037-2046 2047 2048-204 2050 >=2051 32 Maturity profile (%) • up to 1 year ≤ 25% 12.3 % 12.1% • up to 3 year ≤ 50% 33.7 % 31.7% Share of fixed rate (1) ≥ 60% 86.7 % 81.3% Macaulay duration (years) - 5.00 9.00 7.21 6.78 Net debt (2) currency composition 100% EUR with a deviation of +/- 100.17% 100.59% 5% Source: The Treasury 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) 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) Maintain a reserve of resources for funding for Covid- 19 mitigation and economic support measures • . Borrowing Instruments (ACTUAL scenario) Benchmark issuances in international capital markets Regular GMTN programme Eurobonds TAP auctions in domestic market (via Primary dealers) Alternative Instruments Possible loan under EU/ RRF facility Issuance in domestic market under LV ISIN Borrowing opportunities from international financial institutions Short-term loans from commercial banks Private Placement bond issuance Issuance in niche markets, USD Central Government financing estimation (ACTUAL scenario 2021-2023, EUR million) 31-October-2021 2021 Jan-Oct | Nov-Dec 2021 2022 2023 Central government budget balance, net lending and other -996 -1 804 -2 800 -2 013 -579 flows Outstanding central government debt redemption Of which: -1 413 -1 -1 414 -708 -1 593 Domestic debt repayment -91 -1 -92 -624 External debt repayment -1 322 -1 -1 322 -83 -519 -1 074 Total -2 409 -1 805 -4 214 -2 720 -2 173 Gross borrowing 2 612 874 3 486 2 450 2 100 Of which: International issuance 1 750 500 2 250 1 800 1 500 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 thanks to its flexible and resilient economy, a sustainable fiscal policy and the government's ability to react swiftly in emergency situations. Flexible and Resilient Economy → Government swift actions to stabilize the economy Belongs to the Core of Europe → EZ membership → Member of all the important international organizations Sustainable Fiscal Policy → General government debt level in line with Maastricht criteria Resilient towards external shocks → Proven track record in overcoming economic crisis in the past Predictable public policies and outstanding track record of successful structural reforms Banks Well Capitalised, Profitable and Liquid → Predominantly foreign owned, resident- serving banking sector →Comprehensive financial sector reforms Stable <<A>>> 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 35