Latvian banks and foreign investments
JSC Latvian Credit Bank
After the restoration of independence, a programme of stabilisation and reforms was started in Latvia, the purpose of which was rapid liberalisation of prices, reduction of subsidies, privatisation of state property, restriction of government expenses, and the establishment of a liberal trade and payment regime.
In 1996 the Gross Domestic Product (GDP) increased by 3.3 per cent, but in 1997, by 6.5 per cent. This year the GDP is forecast to increase by an additional six per cent.
Inflation has decreased from approximately 1000 per cent in 1992, to seven per cent at the end of 1997, and is still decreasing in 1998.
The total fiscal deficit of the Government in 1996 was reduced to 1.3 per cent of GDP. In 1997 the State budget was balanced, even with one per cent surplus. For 1998 Parliament has approved a balanced budget as well.
The total government debt is about 13.5 per cent from GDP (including foreign debt of about 7.5 per cent of GDP) and practically doesn't increase.
The rates of state short-term bonds have reached the level complying with the rates of market economy states - five to seven per cent. Recently, two year state bonds with interest rate seven to nine per cent were issued.
The respectable credit rating agency, Moody's, has approved the achievements of Latvia in the sphere of stabilisation of macroeconomics, the establishment of a stable banking system, and a stable basis for the future development of the Republic. Moody's has assigned Latvia a Baa2 estimation for long-term loans in foreign currency, and like Standard and Poor's a year ago, it has acknowledged Latvia as a state favourable for investments.
The guarantees and rights of foreign investors in Latvia are protected by the Law On Foreign Investment in the Republic of Latvia. The aim of the Law is promotion and protection of foreign investment, and it encourages the inflow of foreign capital into Latvia. The Law also guarantees that foreign investors may freely export and import capital.
The Law on Foreign Investment was adopted on 5 November 1991 and considerably amended the general principles and legal framework applying to foreign investments.
Latvia has concluded agreements on mutual promotion and protection of investments with 25 countries, with international tax conventions to prevent double taxation effective in 16 countries.
In 1997 the total foreign investments in Latvia amounted to 635 million LVL (about US$1,07 billion). It is slightly more than in Estonia and Lithuania, but considerably less than in several other countries of Central and Eastern Europe.
Total foreign investments in Latvia at the end of 1997 were 2,146 million LVL, direct foreign investments 750 million LVL (that is 243 million LVL more than at the end of 1996). For the most part, foreign investments are formed of direct investments, which means permanent interest in the operation of enterprise and management influence.
The direct foreign investments in 1997 were 7,6 per cent of GDP (in 1996 - 7,4 per cent). In 1997 the ratio of Latvia was the best among transition economic states, in accordance with the International Monetary Fund (IMF) and the World Bank.
One of the main foreign investment ratios is investment in equity capital of enterprises. During 1997 foreign companies invested 154 million LVL in equity of Latvian enterprises. By the end of 1997 the foreign investments in equity of Latvian enterprises amounted to a total of 532 million LVL. In terms of statistics, foreign investors consider the following branches to be the most attractive:
- transport, storehouse economy and communications (183 million LVL or 34 per cent);
- industry (148 million LVL or 28 per cent);
- financial intermediaries (106 million LVL or 20 per cent).
During 1997 the largest investments made were in industry (83 million LVL), financial intermediaries (42 million LVL) and transport, storehouse economy and communications (12 million LVL).
A strict monetary policy and the development of financial institutions in Latvia has facilitated the inflow of capital. In just six years the local currency, lats, is stable against SDR. Meanwhile, the Riga Stock Exchange has operated for more than two years. Insurance companies have stabilised. A significant share of foreign capital reaches Latvia through banks, but also by means of investment, trust deals, deposits, etc, in Latvian commercial banks. Latvian banks can provide consultations and a wide-range of other services to potential investors in Latvian economics.
The most significant ratios of the banking sector - assets, own capital, deposits and loans - have remarkably increased, and there is evidence of a complete recovery of the banking sector following the banking crisis of 1995. At the end of 1997 the total assets of Latvian banks amounted to 1.8 billion LVL, but total own capital was 219.6 million LVL. In 1997 the total assets of the banks increased to 62 per cent, the total own capital was 48 per cent, deposits were 57 per cent, and loans were 75 per cent. This year the banks finished with a 53 per cent increase in profit. Latvian banks are audited by international audit companies in accordance with International Standards on Auditing. For the most part, banks have strengthened their capital base, their shareholders are serious investors, and the banks are gaining profit. It proves that strict laws and bank supervision facilitates placement of foreign investments in Latvian commercial banks.
During the meetings of the European Bank of Reconstruction and Development (EBRD), this year taking place in Kiev, Ukraine, several foreign investors, namely 'Long-Term Credit Bank, 'The Bank of Tokyo-Mitsubishi' in Japan, 'Swiss Bank Corporation' in Switzerland and 'Merrill Lynch' from the United States (US), showed interest in granting loans to Latvia. These financial institutions were mainly interested in investing in state bonds.
The EBRD will expand investments in the private sector of Latvia. Charles Frank, Acting President of the EBRD said that at present, there are several projects in Latvia, including railway transit Ventspils-Tukums-Jelgava-Rezekne. Besides the EBRD, the European Investment Bank (EIB) and 'Latvijas Dzelzcels' (Latvian Railway) will also take part in this project. The EBRD also plans to credit the privatised enterprises to invest in their equity and improve management, in order to provide competitiveness of an enterprise in the western market.
The EIB also plans to increase investments in Latvia. At present, projects for $60 million are in preparation.
The EIB usually participates in projects together with other investors. At present the Bank has projects for European Currency Unit (ECU) 51 million in Latvia, which includes investments in the Latvian Investment Bank, the project of Riga water supply and sewage reconstruction, and the harbour of Ventspils. Other projects for ECU90 million are being reviewed.
As the bank with 90 per cent foreign share capital during five years of operation, A/S 'Latvijas Kreditbanka' (Credit Bank of Latvia), has invested in foreign financial resources in Latvian business by servicing G-24, the IMF, and PHARE loans in the amount of $12 million, and by financing and developing numerous business projects in Latvian economics.
JSC 'Latvian Credit Bank'
7 Antonijas str.
Riga, LV-1920
Latvia
Tel: +371 722 66 31
Fax: +371 782 10 94
S.W.I.F.T. CLATLV2
E-mail: cred@mail.bkcv.lv
