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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 Flexible and resilient economy with strong and coordinated respone to economic challenges to recover from the shocks faster 3 Broadly-diversified exports, important factor underpinning healthy current account balance Fiscal discipline, deeply embedded, mitigates the level of drop and keeps Latvia within the line of the Maastricht criteria Small number of Covid-19 cases did not caused significant direct expenditures and a serious impact on the health care sector. The Covid-19 pandemic has effect on economic growth but it is expected to rebound in 2021. 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: Disciplined Approach Holds Stable Credit Profile 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 2019 Nominal GDP 2019 Main economic sectors 1Q/2020 Source: Central Statistical Bureau of Latvia 64 573 sq. km¹ Estonia, Lithuania, Belarus and Russia Riga 1.91 million¹ Euro EUR 15.93¹ EUR 30.48 billion¹ Services (66%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 2016 Jan - Jun 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 Latvia's dynamisms and flexibility of economy, strong banking sector and institutional strength as key factors bolstering its creditworthiness. Long-term Foreign Currency Rating Development A+ (Stable) S&P Moody's A3 (Stable) 2012 -Fitch A- (Stable) 2013 2014 2015 2016 2017 2018 2019 A+/A1 A/A2 A-/A3 BBB+Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 2020 • The Felxibility and dynamisms of the economy Key Strengths of Latvia's Sovereign Credit Profile Prudent fiscal policy and contained vulnerabilities of financial system Key Risk Factors of Latvia's Sovereign Credit Profile • External financing risks and persistent possibility of geo-political tensions with Russia continue to constrain the ratings Latvia is a small and highly open economy, making it vulnerable to external shocks • A low level of government debt relative to GDP • • Record of fiscal consolidation and implementation of structural reforms Increase in general government debt and deterioration in external finances • Challenges in demographic outlook and labor market . Membership of large international organiationa and unions (EU, NATO, OECD, etc.) • Reputational risks in financial sector remain • Strong banking sector, with markeable acccomplishmets in field of figthing money laudering and financig terrorism Source: S&P, Fitch and Moody's 6#7Key Events in 2019/2020 7 1 On February 21, 2020 S&P upgraded foreign currency issuer rating to the historically highest level - from A to A+ with outlook: Stable 2 On February 21, the Financial Action Task Force (FATF) concluded Latvia has successfully established a new financial crime prevention system and will not be subject to 'enhanced surveillance' or inclusion in the so- called 'gray list' 7 3 On March 12, 2020 the Prime Minister publishes the Declaration of Emergency Situation due to the spread of the Covid-19 4 From March 19, 2020 number of measurements to limit the spread of Covid-19 and to mitigate consequences have been adopted by the Government 5 On April 10, 2020 Fitch affirmed foreign currency issuer rating to the 'A-' level changing outlook to negative 6 On April 30, 2020 the Cabinet of Ministers approved the Latvia's Stability Programme for 2020-2023. On August 21, 2020 S&P affirms foreign currency issuer rating to the level A+ with outlook: Stable 8 On October 9, Fitch affirmed long-term foreign currency sovereign credit ratings at the 'A-' level, revising outlook to stable#8Strong and coordinated response to economic challenge Approved support measures for the Covid-19 crisis Total amount of support EUR, billion % of GDP Share of the total package 3.1 11.1 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 0.2 0.8 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, aallowances 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, Latvian Council of Sworn Notaries for the purchase of a server, allowances for prison administration staff, building insulation, human capital, support for passenger and freight carriers, support for the sports sector, demography, Institutions and officials subordinate to the Ministry of the Interior, support for the cultural sector Support related to EU fund 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; Data on September 20 8 0.2 0.5 1.2 4.3 0.8 2.8 0.8 2.7#91. Overview: Portrait of an Ascending Sovereign Credit 5 2.The Economy: Flexible and Resilient Economy 9 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 14 20 20 23 28 34#10The Covid-19 pandemic has negative effect on economic growth in 2020 but it is expected to rebound in 2021 Private consumption has the largest negative impact in the first half of 2020. In accordance with credit rating agencies GDP will grow already in 2021. Real GDP Growth (seasonally adjusted data, %) GDP Growth Composition (%) 1.4 1.8 1.0 0.7 4.1 4.4 3.7 3.7 3.2 3.6 4.03.3 4.8 5.23.6 3.9 1.6 2.4 2.1 3.0 2.4.5 4 0.8 1.0 0.8 0.3 2.3 1.4 0.6 0.9 1.8 03 0.5 0.5 0.6 1.4 1.4 1.8 1.6 04 -0.7 -1.5 -1.5 -1.8 -1.0 -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 2014 2015 2016 Q-o-q 2017 Source: Central Statistical Bureau of Latvia (12.10.2020.) 6.5% 4.3% 2.3% 1.1% 2018 Y-o-y Real GDP Growth (%) 4.0% 4.0% 3.3% 2.4% 2.1% 2019 2020 5.1% 3.1% -7.5 2014 2015 ■Private consumption 2016 Public consumption 2017 2018 Gross capital formation 2019 2020 Q1-Q2 ■Net exports Source: Central Statistical Bureau of Latvia (12.10.2020.) GDP Growth (2019, %) 2.1% EU-27: 1.5 % -7.0% Estonia Czech Republic AA-/A1/AA AA-/Aa3/AA- Latvia A+/A3/A- France Austria Belgium Finland AA/Aa2/AA AA+/Aa1/AA+ AA/Aa3/AA- AA+/Aa1/AA+ 2017 2018 2019 2020F 2021F 2022F Source: Eurostat (7.10.2020.) 2011 2012 2013 2014 2015 2016 Source: Central Statistical Bureau of Latvia (30.09.2020), MoF forecasts 10#11The labour market has negatively affected by the Covid-19, is expected to return to growth in the second half of the year The government took swift actions to mitigate the unemployment growth during Covid-19 crisis; productivity growth is on the rise. 20 20 15 10 Unemployment: Headline Rates Headline unemployment 80 80 75 15 70 0 65 60 Participation and Employment Rates (age 15-64, %) 5 55 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Headline unemployment Participation rate Employment rate Source: Central Statistical Bureau of Latvia data (24.08.2020.) Source: Eurostat (23.09.2020.) Real Productivity Growth Per Worker (2014-2019 average, %) Average Monthly Wage For Full-time Job (Y-o-y, %) 10.0 9.0 2.7 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Latvia A+/A3/A- Czech AA-/Aa3/AA- Estonia AA-/A1/AA- France AA/Aa2/AA Belgium AA/Aa3/AA- Austria AA+/Aa1/AA+ Q1'16 Q2'16 Q3'16 Q4'16 ■Gross Nominal Wages Source: Central Statistical Bureau of Latvia data Q1'17 Q2'17 Q3'17 Source: Eurostat (20.04.2020.) 11 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Real Net Wages Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20#12Due to economic challanges inflation has dropped bellow 2% Inflation is mainly affected to the declining demand due to the measures introduced to curb the spread of Covid-19. 4 32HOT 1 0 -1 -2 Jan-14 Mar-14 Inflation Jul-16 Sep-16 Nov-16 Jan-17 (HICP, %) 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 Energy Inflation Source: Eurostat (23.09.2020.) Inflation In Latvia 0.8 2.9 J 0.2 2.4 0.1 1.8 Food, alcohol, tobacco. Inflation excl. energy, food, alcohol, tobacco (HICP, %) 2.9 2.8 3.0 3.2 2.6 2.7 2.7 2.8 2.3 - 0.2 - 0.7 - 0.6 2014 2015 2016 2017 ■Goods inflation Source: Eurostat ■Total inflation 12 2018 ■Services inflation 2019 Harmonised Index of Consumer Prices (August 2020, 12 months average %) 1.0% EU-27: 1% Czech Austria Latvia AA-/Aa3/AA- AA+/Aa1/AA+ A+/A3/A- Source: Eurostat (23.09.2020.) France Finland Belgium AA/Aa2/AA AA+/Aa1/AA+ AA/Aa3/AA- AA-/A1/AA- Estonia Harmonised Index of Consumer Prices Projection 1.2% (2020-2021, %) EU:0,95% Czech AA-/Aa3/AA- Latvia A+/A3/A- Estonia Austria AA-/A1/AA- AA+/Aa1/AA+ Belgium Finland AA/Aa3/AA- AA+/Aa1/AA+ AA/Aa2/AA France Source: European Commission, Summer 2020 (24.08.2020.)#13Exports of goods in 2020 Q1 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 Exports 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 14 12 10 8 6 -0.6% 4 -1.6% 2 -2.8% 0 -3.7% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Latvia Germany 2012 2013 Source: Eurostat 13 Source: Bank of Latvia 1.6% 1.3% -0.3% -0.6% 1.0% 3.8% 2014 2015 2016 2017 2018 2019 Q1'20 Q2'20#141. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 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#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, two banks are directly supervised by the ECB and three banks under the remit of the SRB In the short term negative effects of Covid-19 outbreak on the financial stability are mitigated by the government support package for businesses (incl. loan guarantees and subsidized loans) and households, ultra- accommodative monetary policy and greater regulatory flexibility A private moratorium signed by major lenders allowed bank clients who were experiencing temporary financial difficulties due to Covid-19 to defer their mortgage principal payments 6 months (businesses) or 12 months (individuals). Businesses and households may have applied for loan principal deferrals before 30 September 2020. Capital Adequacy (%) Capital Ownership of the Banking System (20 2020) Source: Bank of Latvia 17% ■Domestic ■Nordic 29% Other 54% Liquidity Coverage Ratio 64208642086420 26 24 22 18 16 14 12 10 22221TITL 400% 350% T 300% 250% 200% 150% 100% 50% 2011 2012 2013 2014* 2015 2016 2017 2018 2019 2020 0% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total capital ratio CET1 ratio Minimum requirement for total capital ratio (8%) 2016 2017 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 Pillar 1 minimum Total capital ratio is 8%. Since 28 May 2014 the FCMC also applies a 2.5% capital conservation buffer. 15 Average LCR, LV 2018 Average LCR, EU 2019 Minumum requirement 2020 Source: FCMC, EBA#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) • Loans to domestic households and NFCs stood at 34% of GDP in June 2020, down from almost 100% at the outset of the global financial crisis 8% 6% . Lending had been subdued before Covid-19 outbreak and is expected to remain in negative territory 4% • • 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 are limiting growth in credit risk in the short term To facilitate continuation of prudent consumer and mortgage lending practice by banks in the longer term, the overall LTV restrictions of 90% (95% for participants of guarantee program) are supplemented with a DTI X6, DSTI 40%, maturity cap for mortgage 30Y and for other loans 7Y, LTV 70% for buy-to-let mortgages (effective from July 2020) Total Loan Portfolio Quality -6% -8% Source: ECB why 2% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 -2% -4% 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 (%) 20% 15% 10% 5% 0% 2011 2012 2013 2014 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 Source: FCMC, Credit Register 16 161.5 184.9 141.1 99.9 82.4 73.2 2011 Q2 ■ 2020 Q2 113.8 91.8 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 Loan-to-deposit ratio 300% 250% 200% 150% 100% 50% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Domestic Total Source: Bank of Latvia 16 14 12.4 12 10 10.8 8 6 Deposits (EUR bn) Growth Rates of Domestic and Foreign Client Deposits 25% 15% Introduction of tougher AML/CFT requirements 5% - 5% - 15% - 25% - 35% Weaker CIS economies - 45% - 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 Source: Bank of Latvia Liabilities to foreign MFIS (EUR bn) 16 115 14 14.0 12 10 8 6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 4 3.2 3.3 3.5 3.4 3.2 3.2 3.2 3.5 st 4 • 2 2 0 0 2015 2016 2017 Q1 Q2 2018 2019 Q3 Q4 Q1 Q2 Q4 Q1 Q2 2018 2018 2019 2018 2019 2019 2020 2020 Q3 Domestic .-Foreign Source: Bank of Latvia 17 Source: Bank of Latvia Liabilities to foreign MFIS incl. parent banks#18Banking sector profitability challenged by the pandemic Ability to generate profits in the short-term subdued due to effects of COVID-19. According to preliminary data, in the first eight months of 2020 banks' total profit decreased mostly due to COVID-19 related provisions and revaluations of securities • Largest lenders entered the COVID-19 crisis with sound profitability Key Highlights 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 Q2 ROE slumped to 3.2% (in 2019 EU average was 5.7% and in 2020 Q2 - 0.5%) However, as the ongoing pandemic impairs the financial situation of borrowers, banks are starting to face effects on their profitability. Decrease in banks' net interest income (-2.2%) and net commission fee income (-7.5%)) has been moderate in the first half of 2020, while the largest part of impact on banks' profitability resulted from COVID-19 related expenses on provisions and revaluation of securities portfolios Largest domestic lenders publicly announced that they would refrain from dividend pay-out ROE ROA 8% ◆ ROE - EBA average ◆ ROA (rhs) 7% 14% 12% 1.4% 6% 1.2% 5% 10% 1.0% 4% 8% 0.8% 6% 0.6% 3% 4% 0.4% 2% 2% 0.2% 1% % 0.0% 0% 2017* 2018 2019 2020 Q2 2017* 2018 2019 2020 Q2 Source: FKTK (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS *One-off adjusted data 18 Interest Spread on Outstanding Loan Amounts 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 mother 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) 150 140 Swedbank SEB Luminor Latvia branch* 130 DNB Nordea 120 Assets (EUR mil)* 7,052 4,041 3,518 110 CAR (%)* 31.1 21.1 100 90 ROE (%)* 9.9 7.1 80 S&P Global long-term rating A+ A+ 70 Moody's long-term rating Aa3 Aa2 Baa2 60 Fitch long-term rating A+ AA- 50 2019 Source: Association of Latvian Commercial Banks - financial reports, 2st quarter 2020 Banks' investor relations (ratings at group level) In January 2019 Luminor Bank Latvia became a branch of Estonian Luminor Bank. Bank ratings (at Group level) STOXX Europe 600 Banks Swedbank 2020 SEB DNB Nordea#201. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 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#21Pension 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 amount 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 2020 till 1st January 2021 retirement age is 63 years and 9 months. From 1st January 2020, a person has the right to choose to whom to transfer the capital accumulated in the 2nd tier, in case he or she dies before the granting of the old-age pension, i.e.: ⚫ transfer the state pension to the special budget (then the capital will be taken into account when calculating the survivor's pension); • add accumulated capital to another person's 2nd tier pension; ⚫ leave for inheritance in accordance with the procedures specified in the Civil Law. Source: The State Social Insurance Agency The 2nd Tier Pension Net Assets (EUR billion, % GDP) Age-related Spending, Projected Change (2016-2070, % 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-/Aa3/AA- Source: European Commission Ageing Report, May 2018 Latvia's age-related spending is among the lowest in EU (2016, % GDP) 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 16.4 2015 2016 2017 2018 2019 Latvia A+/A3/A- Czech AA-/Aa3/AA- Estonia AA-/A1/AA- Belgium Austria Finland France AA/Aa3/AA AA+/Aa1/AA+ AA+/Aa1/AA+ AA/Aa2/AA 2nd tier pension net assets (% of GDP) 2nd tier pension net assets (EUR billion) Source: Financial and Capital Markets Commission, Central Statistical Bureau of Latvia 21 Source: European Commission Ageing Report, May 2018#22Fiscal Sustainability Remains Top Priority Prudent fiscal management has produced small budget deficits well below the EU-28 average over the past 8 years. The spread of Covid-19 and the restrictions for mitigating the consequences thereof are expected to significantly impact the economy and fiscal indicators of Latvia. General Government Budget Balance (% of GDP) Budget Balance (2019, % GDP) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1.0 0.2 0.0 -1.0 -0.2 -0.8 -2.0 -1.2 -1.1 -0.8-0.7 -0.81 -1.4 -1.6 -1.4 -1.7 -3.0 -2.4 -2.9 -4.0 -3.3 -5.0 -4.3 -6.0 -7.0 ■Latvia EU-28 -8.0 -9.0 22 - 1.9 EU-28: (-0.8%) -3.9-3.6 France Belgium AA/Aa2/AA AA/Aa3/AA Finland Estonia Latvia Czech Austria AA+/Aa1/AA+ AA-/A1/AA- A+/A3/A- AA-/Aa3/AA- AA+/Aa1/AA+ -7,6 -8.3 Source: Eurostat Source: Eurostat, AMECO Spring forecast 2020, Informative report «On the forecasts of macroeconomic indicators, revenues and general government budget balances in 2021-2023», approved on 18th August 2020 Spending Review Results (EUR, Million) 2020 Budget: Expenditure for priorities (EUR million) 335,5 2020 Salary increase for the medical personnel, teachers, officials of the justice system • Minimum remuneration rate increase for the academic staff • Enforcement of the Constitutional 2021 341,6 • judgments in the field of welfare Court • Implementation of the housing guarantee support program 60.0 53,6 50.0 13.1 38,4 40.0 11.4 30.0 20.0 40.5 27.0 10.0 0.0 . 339,9 2022 2021 2022 Source: Ministry of Finance Resources to common government priorities Internal resources for own sectoral priorities Source: Ministry of Finance · Compensatation 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#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- 18 Latvia A+/A3/A- Finland AA+/Aa1/AA+ Austria AA+/Aa1/AA+ France AA/Aa2/AA Czech AA-/Aa3/AA- Belgium AA/Aa3/AA- Source: World Bank, Doing Business 2020 19 20 20 27 22 32 32 41 Adjusted Top Statutory Tax Rate on Corporate Income (2019, %) 30 25 20 20 20 19 46 32 32 Czech AA-/Aa3/AA- Latvia A+/A3/A- Finland Estonia 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 2019 24 64 World Bank Worldwide Governance Rankings 64 = 86 81 79 80 75 70 61 52 52 Control of Corruption Rule of Law Regulatory Quality Government Effectiveness Political Stability and Absence of Violence ■Latvia 2008 Source: World Bank, 2018 Rankings ■Latvia 2018 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 2 Finland 7 Estonia 9 Latvia 10 Croatia 13 Slovenia 16 Czech Rep. 22 Slovakia 23 Belgium 24 Portugal 26 Romania 28 Lithuania 30 Italy 31 Hungary 32 Bulgaria Source: World Economic Forum, The Global Competitiveness Report 2019, The Global Sustainable Competitiveness Report 2019#25. Reform Policies Laying Foundation for New Growth Model Structural reforms help strengthening Latvia's growth potential. Labour Market, Social Policy and Healthcare Business Environment access to financing, export oriented programmes, reduction of Addressing labour market issues through education and employment SME 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.) 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 for 2014-2020 Payments to final beneficiaries 2.3 mln EUR; 52% • 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 3.6 billion EU funds are already contracted for investment projects. Source: Ministry of Finance Claimed to the EC Received payments from the EC 2.0 mln EUR; 46% 1.8 mln EUR; 41% Source: Ministry of Finance; Data on 30.09.2020 EU funds investment progress is transparent and can be followed: www.esfondi.lv 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 CRII plus regulation flexibility, result of CRII and on 19 May 2020, the government approved the proposals for reallocating nearly €500 million of EU fun ds 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. Proposal for Recovery and Resiliance Facility indicates additional € 2,01 billion (in current prices) funding in form of grants for recovery and stretghening of the economy. 26#27Tax changes are planned from 2021 until 2023 Key goals: promotion of the country's social sustainability and economic competitiveness The informative report "On the Development Directions of Tax Policy, Promotion of the State's Social Sustainability and Economic Competitiveness" has reviewed by the Cabinet of Ministers on September 2, 2020* Proposed main directions of tax changes Increase the income threshold up to which the differentiated non-taxable minimum applied Reduce the rate of mandatory state social insurance contributions Introduce a minimum social contribution object for employees whose monthly income does not reach the amount of the minimum wage Reorganize the micro-enterprise tax regime Gradually increase excise duty on tobacco products and changes in vehicle taxes, etc. Increase the minimum salary from EUR 430 to EUR 500 in 2021 * The government is in the process of agreeing to approve certain tax changes 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 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 5 10 9 14 20 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 23 28 7. Conclusion 34#29Estonia EU-28: 1.6% Sweden Luxembourg Norway Bulgaria Czechia Denmark Source: Eurostat 29 Latvia Germany Netherlands 0.7 Lithuania Finland Romania Slovakia France Ireland Malta Austria Interest payments 2019, % GDP Poland Slovenia Belgium General government debt will increase but remain below 60% in medium term • Despite the projected debt increase in the medium term it is expected to be in line with Maastricht criteria Key Characteristics of Latvia's Government Debt General government debt is 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 Latvia enjoys one of the lowest debt servicing costs across the region, significantly lower than the EU and Eurozone averages General Government Debt Year End (EUR million, % GDP, ESA methodology) 47% 46% 46% 45% 40% 39% 37% 37% Since March 2014 Latvia participates in the European Stability Mechanism, which provides additional financial stability to its members 13 341 13 804 14 530 14 911 10 245 10 519 10 816 11 247 Croatia United.. Spain Hungary Cyprus Greece Portugal Italy 8.4 Estonia Lithuania Luxembourg Latvia Malta 36.9 Slovakia Netherlands Source: Eurostat (24.08.2020.) T T 2016 2017 2018 2019 2020 F 2021 F 2022 F 2023 F Source: Eurostat (actual data 2016-2019), baseline scenario (Oct-2020) General Government Debt (Eurozone countries 2019, % GDP) Ireland Finland Germany Slovenia Austria 84.3 Euro area Spain Cyprus France Belgium Portugal Italy Greece 176.6#30Borrowing Strategy focused on prefunding and refinancing Budget deficit and debt repayments make the most part of borrowing requirement in medium term. Government Gross Borrowing (EUR million) TOTAL 2 960 1 087 TOTAL 1 422 TOTAL 1 150 TOTAL 1 330 534 TOTAL 1903 TOTAL 1 500 156 737 1 873 621 888 529 593 2017 2018 2019 2020F 2021F ■Total gross borrowing Pre-funding reserve Source: The Treasury Mid YTM, % 1 747 1 500 2022F 0.9 Latvia Secondary Eurobond Market (mid yield to maturity, %) 0.5 0.32 0.1 -0.10 -0.06 -0.11 -0.18 -0.3 -0.25 -0.42 -0.47 -0.34 -0.38 -0.51 -0.7 -0.97 -1.1 0.12 LATVIA EUR Eurobond LATVIA domestic bonds 0.46 0.41 LATVIA USD Eurobond 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 Borrowing activities in international capital markets in 2020 On March 26, Latvia re-opened its outstanding Eurobond maturing 7 October 2026 by issuing EUR 550 million: Yield was set at 0.406% and total amount outstanding EUR 1,5 billion On April 6, Latvia priced a new 3 year benchmark Eurobond in the international capital markets in a total amount of EUR 1 billion • Eurobond maturity 14 April 2023 Yield was set at 0.209% Coupon was set 0.125% Both transactions partly covered planned nescessary funding for 2020 including support measures to overcome Covid-19 crisis. Source: Data as of 23 October 2020, Bloomberg 30#31Domestic Market Continues to Perform Strongly and is reliable Demand in domestic market is very supportive trought challanging times and grew during Covid-19 crisis. Domestic Securities Outstanding by Original Maturity (as on September 30, 2020, %) Domestic T-Bond Competitive Multi-Price Auctions 0.3% 8.9% 4.7% 250 200 23.6% 2 years bonds 150 5 years bonds 100 ■7 year bonds 50 0 10 years bonds Savings bonds 5-y 5-y 5y 5y 5y 5y 5y 5y 2y 2y 2y 2y 2y 5y 2y 5y 2y 5y 2y 5y 2y 7y 5y 7y 7y 7y Oct Sep June Nov Dec Feb Mar Apr May 2019 2020 IAmount sold, million EUR Bids total, million EUR Jul Source: The Treasury 62.6% Government domestic securities outstanding by 04.02.2021. 27.01.2022. maturity (as on September 30, 2020, millinon EUR) LV0000580041 (6.625%) LV0000580058 20.03.2022. 27.10.2022. (5.25%) 12.05.2023. 02.11.2023. 31.01.2025. 01.07.2027. 0 LV0000570141 (0.375%) LV0000570182 (0%) 100 LV0000570158 (0.25%) LV0000570166 (0.5%) LV0000550101 (0%) LV0000570174 (0%) 200 300 400 500 • 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. T-Bond auctions Primary dealer system operates since 11 February 2013. Domestic debt securities outstanding constituted EUR 1 699,3 million as of 30 September, 2020. The Treasury maintains regular domestic debt securities auctions in 2020 offering medium and long term T-bonds. Long term segment overall 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 7 year T-bond program was opened in the July 1, 2020. Coupon was fixed at the 0.000%. 2 year T-Bond programme was taped on regular basis, with rising demand. Currently 2 year T-Bond Programme is one of the most liquid programms. On 14 October 2020, for the first time GMTN programme Eurobonds (with maturity on 7 October 2026) were offered in auction in domestic market only. The weighted average yield rate was fixed at negative level (-0.326%). Source: The Treasury 31#32USD! EUR Central Government Debt Profile International Loan Programme has been largely refinanced in international capital markets, while government debt redemptions remain moderate. Debt structure by Instruments (milion EUR) Debt Redemption Profile (EUR million) 1 600 12 000 1 400 1 200 10 000 1 000 800 8 000 600 400 T 6.000 4.000 2 000 200 0 Oct- Dec 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2035 2036 2037 2047 2048->=205( -2046 2049 0 1Q15 ■ Other Source: The Treasury, September 2020 3Q15 1Q16 3Q16 1Q17 3Q17 Domestic T-bills ■Domestic T-bonds 1Q18 3Q18 Eurobonds 1Q19 3Q19 ■Loans from financial institutions 1Q20 3Q20 ■Domestic debt redemption EC loan (Program) Source: The Treasury, October 2020 Outstanding Bonds in the International Markets (nominal Other external debt liabilities Eurobonds World Bank loan (Program) Debt Portfolio Management amount, million) 2049 1.875% 19/02/2049 2047 2.250% 15/02/2047 2036 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 2.625% 21/01/2021 2020 0.500% 15/12/2020 2021 5.250% 16/06/2021 200 400 600 800 1000 1 200 1 400 Source: The Treasury 32 Parameters Strategy 30/06/2020 30/09/2020 Maturity profile (%) up to 1 year ≤ 25% 22.6% 23.5% • up to 3 year ≤ 50% 38.6% 39.1% Share of fixed rate (1) ≥ 60% 80.4% 78.4% Macaulay duration (years) 5.00 9.00 6.93 6.50 Net debt (2) currency composition 100% EUR with a deviation of +/- 5% 100.06% 100.53% 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 General Financing Requirement Central Government Budget Balance Net Lending Other Flows at the Treasury`s Accounts Outstanding Central Government Debt Redemptions (domestic and external) Refinancing Borrowing Instruments (BASE scenario) Benchmark issuances in global capital markets Continuing issuances in domestic market Loans from international financial institutions (NIB, EK SURE) Alternative Instruments Niche capital market instruments (JPY, CHF, etc.) Loans from international financial institutions (EIB, CEB, etc.) Private placements (reverse enquiries) Central Government financing estimation (2020-2022, EUR million) 2020 30-September-2020 2020 |Jan-Sep | Oct-Dec | 2021 2022 Central government budget balance, net -152 -1 174 -1 326 -1 512 -990 Pre-funding Strategy For lending and other flows Outstanding central government debt -755 -561 -1 315 -1 426 -707 redemption Of which: Domestic debt repayment -113 External debt repayment -641 -1 -560 -114 -1 201 -624 -83 Total -906 Gross borrowing 2 315 -1 735 645 -2 641 -2.937 -1 697 2 960 1 903 1 500 Of which: International issuance 1 550 0 1 550 1 200 600 Note: Indicative in the planned period Debt -92 -1 334 33 The borrowing volume could be increased in case of: Budget execution Necessity to cover additional expenses in relation to the Covid - 19 impact#341. Overview: Portrait of an Ascending Sovereign Credit 2. The Economy: Flexible and Resilient Economy 3. Banking Sector: Well-Capitalized and Liquid 4. Fiscal policy: Disciplined Approach Holds Stable Credit Profile 5. New Reform Push: Targets Productivity and More Inclusive Growth 6. Government Debt and Funding Strategy 7. Conclusion 5 10 9 14 20 23 28 34#35Investment Highlights The strong banking sector, flexible and resilient economy, the Governments ability to the swift reaction in emergency situations leads to the ability to react and overcome external shocks. Latvia previously has showed a strong ability to recover from the crisis and the Governments swift actions and decisions taken during the Covid-19 crisis will, as experts have expressed, lead to recovery in 2021. 35 Flexible and Resilient Economy →government swift actions to stablise the economy Sustainable Debt Levels and Prudent Fiscal Management → Investor attractiveness Belongs to the Core of Europe → EZ membership → Member of all the important international organizations 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 → Predominately foreign owned, resident- serving banking sector →Comprehensive financial sector reforms Stable Credit Ratings Investors confidence boosted by institutional, fiscal and macroeconomic strength Diversified Export → Strong ICT and business services export growth in 2019 →continued growth in wood and wood products in 2019.