Although slightly affected by the coronavirus, Latvia was nevertheless economically damaged and experienced a severe recession in 2020, which should be followed this year by a recovery (+3.5% according to the European Commission‘s forecasts). Coface points out that the recession is due in particular to an 8% fall in consumption, which accounts for 58% of GDP, and is expected to increase by 5% but is bound by the process of reducing household leverage that has been going on since the end of the 2008 crisis. Household debt now accounts for 22% of GDP and 42% of net disposable income. In turn, investment slowed in 2020 but will be supported by a €2.2 billion plan announced in May for the implementation of infrastructure projects by 2023, as well as European funding. Riga’s recovery builds on construction and European support.

Since March 2020, the government has announced a series of measures to support the incomes of households and the sectors most affected, for a total of around 3 billion euros, or 11% of GDP. However, demand is likely to remain limited for some measures, such as state-guaranteed loans, which will reduce initially the planned spending. The government deficit has necessarily worsened due to the implementation of this plan but is expected to be reduced in 2021. Public debt has also increased by several percentage points of GDP and is expected to continue to rise. Public accounts will benefit from European support, including EUR 5 billion under the European Recovery and Resilience Facility, of which 70% will be disbursed by 2022, and EUR 7.97 billion from the Multiannual Financial Framework 2021-2027, of which 14% will be distributed later this year.

Exports (wood products, metals, machinery, and equipment) fell by about 5% in 2020 as international trade slowed, but are expected to rebound later this year. Wood exports, which account for 20% of exports, have fallen as a result of the global construction recession but will benefit from the recovery in pulp prices. Unlike other sectors, agriculture, which accounts for just over 3% of GDP, has not been seriously affected by the crisis. The industry fell by 7%, although some sectors, including electronics and chemical production, managed to resist. The secondary sector is therefore expected to grow by 5%, driven mainly by the recovery in construction thanks to the growing demand for housing and major infrastructure projects, including Rail Baltica, an ambitious European rail project to connect Helsinki and Warsaw, whose cost to Latvia is estimated at 2 billion euros (7% of GDP). Services fell sharply during the crisis (-8%) but they are expected to grow by 5%, driven by strong results in financial and business services.

The current account recorded an unusual surplus in 2020, as, despite the decline in exports linked to tourism and transport, and the collapse of transit traffic with Russia, the main destination of rail freight transport, the service surplus exceeded the deficit in goods, hit by the sharp decline in imports (fossil fuels, oil, and capital goods). The trade balance (goods and services), which recorded a timid surplus in 2020, is expected to return to negative, as the recovery in consumption and investment will lead to a recovery in imports. The financial account will continue to be affected by the fact that foreign direct investment inflows are lower than outbound investments. Gross foreign debt, of which almost 80% is owned by the private sector, has been drastically reduced in recent years and reached 122% of GDP in 2020.