Latvia's Economic and Financial Outlook

The Role of Banks Serving Foreign Clients is Shrinking Banks owned by strong Nordic parents, funded through domestic deposits, lending to Latvia-based clients are the core of Latvia's banking system. Banks funded through foreign currency deposits play a small role in Latvia's economy. The Role of Foreign Clients Servicing Banks in Latvia Total Banking Assets Total Domestic Lending Total Domestic Deposits 25% 15% Growth Rates of Domestic and Foreign Client Deposits Introduction of tougher AML/CFT requirements 5% 7% 7% -5% 20% -15% -25% - 35% - 45% Weaker CIS economies - 55% -65% 2012 2014 Source: Bank of Latvia May 2019 2013 2015 2017 Annual growth rate of foreign client deposits (adjusted for exchange rate) Annual growth rate of domestic non-financial private sector deposits 2016 2018 2019 Source: Bank of Latvia Economic Impact of ABLV Bank Liquidation in February 2018 Bank Liquidity Ratios Well Above CRR IV Requirement • There have not been obvious spill-overs to the resident serving sector, which is dominated by subsidiaries of Scandinavian banks, due to their lack of interconnectedness 500% 450% 400% 350% NRDs fell mostly in the first half of 2018, in the second half of 2018 and 2019 NRDs have stabilized; the liquidity and capital ratios of foreign clients serving banks remain high 300% 250% 200% • The reduction of NRDs has markedly lowered Latvia's short-term external debt without undermining the country's economy, fiscal position, or financial system 150% 100% Funds covering guaranteed deposits were transferred from ABLV and currently 80% of deposits have been paid out 50% 3Q 4Q 2016 1Q 2017 Q2 Q3 Q4 1Q 2018 Q2 Q3 Q4 1Q 2019 • NRDs have been decreasing without denting confidence of domestic depositors Banks servicing FCs** Domestically active banks* Minimum requirement for LCR 18 Source: Bank of Latvia, *Fitch (Latvia sovereign risk from ABLV Bank failure appears limited, 27.02.2018.) Source: FCMC

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