Economy and Banking Sector of Latvia

Located in Northern Europe, Latvia is one of the Baltic States and a memberof the European Union since 2004.

Latvia is a developed country with high-income economy.Main industries of Latvian economy are processed foods and wood products, textiles, processed metals, pharmaceuticals, railroad cars, and synthetic fibers.

Latvia banking and financial system has been developing rapidly since 1991when Latvia declared its independence from the Soviet Union.Latvian banking sector is relatively small, highly concentrated,with high share of foreign capital. Most of the foreign-controlled banks are originated from Scandinavian countries (Denmark, Finland, Norway and Sweden); most of the domestic banks are privately owned. The majority of Latvian banks operate as universal banks, however there are also specialized banks, focused solely on wealth management or corporate banking. More than a half banks in Latvia provide their products and services to non-residents (offshore banking).

Location Northern Europe
Population (2016)1 968 957 ↓ (-0.01%)
EU Status member since 2004
Economy
National Currency EUR (Euro) since 1 January 2014
GDP 
    Nominal GDP (2015)24.4 bln EUR ↑ (+0.01%)
    Nominal GDP per Capita (2015)12 300 EUR ↑ (+0.02%)
    Real GDP Growth (2015)2.7 % ↑ (2014: 2.4 %)
Inflation Rate 
    CPI, MoM (Dec 2016)0.6 % ↑ (Nov 2016: 0.1 %)
    CPI, YoY (Dec 2016)2.1 % ↑ (Nov 2016: 1.2 %)
    CPI, Year Average (2016)0.1 % ↓ (2015: 0.2 %)
Unemployment Rate (2015)9.9 % ↓ (2014: 10.8 %)
Government Bond Yield (Dec 2016)0.90 % ↑ (Nov 2016: 0.56 %)
Credit Ratings (as of Sep 2016)
    FitchA- high credit quality, outlook stable
    Moody'sA3 upper medium grade, outlook stable
    S&PA- upper medium grade
Taxation
Withholding Tax 0.0 - 10.0%
Double Taxation Agreements 57 signed agreements
Information Exchange 
    Exchange on Request 2 signed agreements
    Automatic Exchange starts in September 2017
FATCA IGA in effect since 27 June 2014, Model 1
Banking Sector
Financial Market Development 4.2 (max 7.0) rank: 52nd out of 138 countries
    Banks' Soundness 4.8 (max 7.0) rank: 69th out of 138 countries
Banking Industry Country Risk 8(1 - lowest risk, 10 - highest risk)
    Economy Risk 7
    Industry Risk 8
Deposit Guarantee Scheme 
    Maximum Protected Amount 100 000 EUR
Country Ceiling for Deposits 
    Local Currency (Euro)Aaa prime
    Foreign CurrencyAaa prime
Deposit Rates (Nov 2016, EUR)0.33 % ↓ (Oct 2016: 0.37 %)
Banking Sector Structure 
    Number of Banks58
    Recent Changes (2016) new banks: 0, closed banks: 4
    Consolidated Assets (2015) 32 217.47 mln EUR ↑ (+4.03%)
Major Banks
 Swedbank  Rietumu Banka
 ABLV Bank  DNB banka
 SEB banka  Citadele banka
 List of Banks in Latvia

Latvian Economy

National Currency

Latvia joined the Euro Area on 1 January 2014. The preceding national currency, Latvian lat (LVL), was replaced by Euro.

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GDP

According to Eurostat, nominal GDP of Latvia in 2015 was 24.4 bln EUR.

Latvia outperforms the European Union in terms of real GDP growth with the average annual differential coming to 2.1% over the past 10 years (2005 - 2015). In 2015 real GDP growth was 2.7% which was above the Euro Area average (1.6%) and above the European Union average (1.9%). Real GDP growth in 2016 - 2021 are IMF's estimates.

Real GDP Growth in Latvia.
Chart 1. Real GDP Growth in Latvia. Source: Eurostat, International Monetary Fund.

In 2015, nominal GDP per capita in Latvia was 12 300 EUR.

Latvia has a below-average level of wealth in terms of per-capita GDP at purchasing power parity (PPP); this economic welfare indicator has, on average, fell behind that of the European Union by -28.6% over the past 10 years (2005 - 2015). GDP per capita at PPP in 2016 - 2021 are IMF's estimates.

GDP Per Capita at Purchasing Power Parity in  Latvia; European Union = 100.
Chart 2. GDP Per Capita at Purchasing Power Parity in Latvia; European Union = 100.
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Inflation Rate

According to Eurostat, inflation rate in Latvia in 2016 expressed as annual percentages of average consumer prices was 0.1% which was below the Euro Area average (0.2%) and below the European Union average (0.3%). Inflation rates in 2017 - 2021 are IMF's estimates.

Inflation Rate in Latvia.
Chart 3. Inflation Rate in Latvia. Source: Eurostat, International Monetary Fund.
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Taxation in Latvia

Withholding Tax

Withholding taxes are imposed at source of income and are often applied to dividends, interest, royalties, rent and similar payments. The rates of withholding tax are often reduced by double taxation agreements.

Withholding tax rates applied on payments of interest and dividends in Latvia are shown in Table 1.

Dividends Interest
Natural person, resident 10.010.0
Natural person, non-resident 10.010.0
Table 1. Withholding tax rates in Latvia.
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Double Taxation Agreements

Double Taxation Agreement (DTA) is an agreement between two or more countries for the avoidance of double taxation.

Latvia signed DTAs which already came info force with the following jurisdictions (for agreements which came into force after 01 January 2013 the date of coming into force is given in brackets):

 Albania
 Armenia
 Austria
 Azerbaijan
 Belarus
 Belgium
 Bulgaria
 Canada
 China
 Croatia
 Czech Republic
 Denmark
 Estonia
 Finland
 France
 Georgia
 Germany
 Greece
 Hungary
 Iceland
 India (Dec 2013)
 Ireland
 Israel
 Italy
 Kazakhstan
 Korea, Republic of
 Kuwait (Apr 2013)
 Kyrgyzstan
 Lithuania
 Luxembourg
 Macedonia
 Malta
 Mexico (Mar 2013)
 Moldova, Republic of
 Montenegro
 Morocco
 Netherlands
 Norway
 Poland
 Portugal
 Romania
 Russian Federation
 Serbia
 Singapore
 Slovakia
 Slovenia
 Spain
 Sweden
 Switzerland
 Tajikistan
 Turkey
 Turkmenistan
 Ukraine
 United Arab Emirates (Jun 2013)
 United Kingdom
 United States
 Uzbekistan
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Information Exchange

There are 3 ways for jusrisdictions to exchange information on tax matters:

  • spontaneously;
  • on request;
  • automatically.

Spontaneous exchange of information is provision of information that is forseeably relevant to another party without a request being previously sent.

Tax Information Exchange Agreements (TIEAs) enable exchange of information on request relating to a specific tax investigation, either criminal or civil.

Latvia signed TIEAs which already came info force with the following jurisdictions (for agreements which came into force after 01 January 2013 the date of coming into force is given in brackets):

 Guernsey (Oct 2013)
 Jersey (Dec 2013)

Automatic information exchange allows jurisdictions to exchange information automatically, without having a specific tax investigation.

Latvia signed the automatic information exchange agreement on 29 October 2014 and committed to start the automatic information exchange in September 2017.

Further Information:
Automatic Exchange of Information on Financial Accounts
Countries Which Will Not Automatically Exchange Account Information

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FATCA

Foreign Account Tax Compliance Act (FATCA) which became law in the United States in March 2010, focuses on reporting made by foreign financial institutions about financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. The FATCA-reporting is facilitated by Intergovernmental Agreements (IGAs).

Latvia has FATCA agreement with the U.S. in effect since 27 June 2014 (Intergovernmental Agreement Model 1). Financial institutions operating in Latvia are required to identify U.S. taxpayers by January 1, 2017 and to report the information for 2017 and the subsequent years. The agreement is reciprocal: Latvian financial accounts hold in U.S. financial institutions will be reported to Latvian authorities.

Further Information:
FATCA and European countries

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Latvian Banking Sector

Financial Market Development

According to World Economic Forum's Global Competitiveness Report 2016-2017, financial market development in Latvia is scored 4.2 out of maximum 7.0 and ranked 52nd out of 138 analysed economies. Soundness of banks is scored 4.8 bringing Latvia into the 69th place, trustworthiness and confidence of financial market is scored 4.8 (37th place).

Financial Market Development in Latvia.
Chart 4. Financial Market Development in Latvia. Source: WEF.
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Banking Industry Country Risk

Banking Industry Country Risk Assessment (BICRA) is a methodology designed by Standard&Poor's "to evaluate and compare global banking systems". A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). The BICRA methodology has two main analytical components: "economic risk" and "industry risk". Each of the components is then further divided into 3 "factors" that result in an economic and industry risk score for each country.

Latvia is included into group '8' with economic risk scored '7' and industry risk scored '8'.

BICRA Group 8
Economic risk 7
    Economic resilience high
     Economic imbalances high
    Credit risk in economy very high
Industry risk 8
    Institutional framework very high
    Competitive dynamics high
    Systemwide funding very high
Government support assessment supportive

Table 2. BICRA for Latvia. Source: S&P's.

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Deposit Guarantee Scheme

Deposit Guarantee Schemes compensate certain deposits held by depositors of a bank that becomes unable to meet its obligations.

From a depositor's point of view it is important to know:

  • if the depositor is eligible within the terms of the deposit guarantee scheme;
  • if the depositor's bank is a participant in the deposit guarantee scheme;
  • if the depositor's type of deposit is covered by the deposit guarantee scheme.

All these details about deposit guarantee scheme in Latvia are summarised in Table 3.

Scheme Participantsall credit institutions operating in Latvia, branches of non-EU banks, branches of Latvian banks abroad
Scheme Exemptionsbranches of EU-banks (covered by their home countries)
Eligible Depositorsnatural persons, legal entities
Covered Accountsdeposits, current account balance, salary accounts, savings accounts etc.
Maximum Protected Amount100 000 EUR
Paid In CurrencyEUR

Table 3. Deposit guarantee scheme in Latvia.

Further Information:
Deposit Guarantee Schemes in Europe

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Country Ceiling for Deposits

Moody's country ceilings for deposits specify the highest rating that can be assigned to local- or foreign- currency denominated deposit obligations of a bank or other deposit taking institution domiciled within that country.

Local currency (Euro) deposit ceiling for Latvia is set to Aaa (prime), foreign currency deposit ceiling is Aaa (prime).

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Deposit Rates

In Nov 2016, an agreed annualised deposit rate in local currency (Euro) of new contracts with agreed maturity up to 1 year between credit institutions and households was 0.33% which was below the Euro Area average (0.44%).

Deposit Rates in Latvia.
Chart 5. Deposit Rates in Latvia. Source: ECB.

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Banking Sector Structure

Currently there are 58 credit institutions operating in Latvia.

Recent structural changes (2013 - 2016) of the banking sector of Latvia are summarised in Table 4.

2013201420152016
Number of Opened Banks0130
Number of Closed Banks1514

Table 4. Recent structural changes in the banking sector of Latvia.

All the credit institutions operating in Latvia can be classified into several categories. Table 5 summarises the number of banks in each category.

CategoryNumber of Banks
Banks16
Branches of foreign banks7
Central banks1
Credit unions34

Table 5. Number of banks by category in Latvia.

The list of the most recently opened banks in Latvia is provided in Table 6.

NameStart Date
 Rīgas kooperatīvā krājaizdevu sabiedrība (new)October 2015
 Latvijas lauksaimnieku krājaizdevu sabiedrība (new)July 2015
 AS LHV Pank Latvijas filiāle (closed)February 2015
 Nordea Bank AB Latvijas filiāle (new)February 2014

Table 6. The most recently opened banks in Latvia.

There are 7 branches of foreign banks from 4 different countries in Latvia. Table 7 shows the number of branches grouped by the country of origin.

Country of OriginNumber of Branches
 Sweden3
 Estonia2
 Finland1
 Denmark1

Table 7. Number of branches of foreign banks in Latvia grouped by country of origin.

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