Latvia

Latvia

Latvia: Market Profile

Picture: Latvia factsheet
Picture: Latvia factsheet

1. Overview

Latvia’s economy is based on service industries, including transportation, information technology, and financial services. At the same time, the construction industry plays an important role, as well as wood, food, and light industries (e.g. textiles). Tourism is growing rapidly. However, the transition towards stronger growth and economic stability will remain challenging, due to the extent of deleveraging required in Latvia’s domestic banking system, as well as the necessary adjustment to household balance sheets.

Source: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

March 2015
NATO reinforced its presence in the Baltic States and its forces conducted major military drills in the region.

December 2015
Government of Laimdota Straujuma resigned after a series of clashes with coalition parties over European Union (EU) migrant quotas and the 2016 budget.

February 2016
Maris Kucinskis took over as prime minister at the head of the existing coalition.

Source: BBC country profile – Timeline

3. Major Economic Indicators

Graph: Latvia real GDP and inflation
Graph: Latvia real GDP and inflation
Graph: Latvia GDP by sector (2017)
Graph: Latvia GDP by sector (2017)
Graph: Latvia unemployment rate
Graph: Latvia unemployment rate
Graph: Latvia current account balance
Graph: Latvia current account balance

e = estimate, f = forecast
Source: International Monetary Fund, World Bank
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Latvia merchandise trade
Graph: Latvia merchandise trade

Source: WTO
Date last reviewed: August 21, 2018

Graph: Latvia major export commodities (2017)
Graph: Latvia major export commodities (2017)
Graph: Latvia major export markets (2017)
Graph: Latvia major export markets (2017)
Graph: Latvia major import commodities (2017)
Graph: Latvia major import commodities (2017)
Graph: Latvia major import markets (2017)
Graph: Latvia major import markets (2017)

Source: Trade Map, Fitch Solutions
Date last reviewed: September 20, 2018

4.2 Trade in Services

Graph: Latvia trade in services
Graph: Latvia trade in services

Source: WTO
Date last reviewed: August 21, 2018

5. Trade Policies

  • Latvia joined the World Trade Organisation (WTO) in February 1999, and in May 2004 it joined the EU.
  • Latvia applies the EU's Common External Tariff (CET), which means goods manufactured and imported from within the EU are not subject to customs charges. The average tariff rate is just 1.5%, which is among the lowest globally. The duties for non-European countries are also relatively low, especially for manufactured goods (4.2% on average); however, textile, clothing items (high duties and quota system) and food-processing industry sectors (average duties of a 17.3% and numerous tariff quotas) still see protective measures. Most of the country's major trade partners are within the EU, hence risks are less pronounced.
  • The EU has imposed various anti-dumping measures on a wide range of products, predominantly in the areas of textiles, parts, steel, iron, and machinery on goods coming from China and a few other Asian nations to protect domestic industries.
  • On November 13, 2016, the European Commission (EC) imposed a provisional anti-dumping duty on imports of some primary and semi-processed metals from China. The rate of duty is between 43.5%-81.1% of the net free-at-Union-frontier price before duty depending on the company. In the same vein, the rate of duty for similar goods from Belarus is 12.5% of the net, free-at-Union-frontier price before duty.
  • In 2016, the EC also introduced an import licensing regime for steel products exceeding 2.5 tonnes. The regulation will be active until May 15, 2020.
  • In March 2016, the EC imposed a definitive countervailing duty (8.7% or 9%) on imports consisting largely of textiles products originating in India.
  • A multitude of issues persists with regard to the respect for Intellectual Property Rights (IPR) in China, which means many Latvian manufacturing and retail businesses face additional risks when importing finished or intermediate goods from this trading partner.
  • In Q215, the EC issued regulations on trade restrictions on cattle, beef, watermelons and prepared tomatoes with Turkey. This will help to protect domestic agriculture and regional farming businesses.
  • On January 1, 2017, the European Union imposed additional import duties on certain fruit and vegetables if the quantity of the subject goods exceeds the trigger volume level within the specified application period.
  • On November 15, 2017, the European Commission allocated a total value of EUR62 million (USD74.4 million) for funding promotional campaigns of EU agricultural products implemented in the internal market for the year 2018. The budget consists of various promotional topics of EU goods in the internal market with an additional focus on the promotion of fruit, vegetables and sheep/goat meat.

Source: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

Membership of the Eurozone will reduce transaction costs and eliminate foreign exchange risk for inter-bloc trade and investment. This will provide scope for Latvia to expand and diversify its export markets, as well as attracting more foreign investment over the longer term.

6.2 Multinational Trade Agreements

Active

  1. The EU: Latvia is a member of the EU that comprises 28 member states, and it follows EU's common external trade policy and measures. All EU member states adopt common external trade policy and measures. As such, the Latvian trade policy is largely identical to that of the wider regional bloc. The EU updated its trade policy (and, by extension, its import tariffs, customs, duties and procedures) in 2017.

  2. European Economic Area (EEA)-European Free Trade Association (EFTA) (Iceland, Liechtenstein, Norway and Switzerland): The EEA unites the EU Member States and the three EFTA States (Iceland, Liechtenstein, and Norway) into an Internal Market governed by the same basic rules. These rules aim to enable goods, services, capital, and persons to move freely about the EEA in an open and competitive environment, a concept referred to as the four freedoms. While this agreement enhances trade flows between these countries, only Switzerland is a major trading partner to the EU.

  3. EU-Turkey Customs Union: the EU and Turkey are linked by a Customs Union agreement, which came into force on December 31, 1995. Turkey has been a candidate country to join the EU since 1999, and is a member of the Euro-Mediterranean partnership. The customs union with the EU provides tariff-free access to the European market for Turkey, benefitting both exporters and importers. Turkey is the EU's fourth largest export market and fifth largest provider of imports. The EU is by far Turkey's number one import and export partner. Turkey's exports to the EU are mostly machinery and transport equipment, followed by manufactured goods. At present the Customs Union agreement covers all industrial goods, but does not address agriculture (except processed agricultural products), services or public procurement. Bilateral trade concessions apply to agricultural as well as coal and steel products. In December 2016, the European Commission proposed the modernisation of the Customs Union and to further extend the bilateral trade relations to areas such as services, public procurement and sustainable development.

  4. EU-Canada Comprehensive Economic and Trade Agreement (CETA): CETA is expected to strengthen trade ties between the two regions, having come into effect in September 2017. Some 98% of trade between Canada and the EU is duty-free under CETA. The agreement is expected to boost trade between partners by more than 20%. CETA also opens up government procurement. Canadian companies will be able to bid on opportunities at all levels of the EU government procurement market and vice-versa. CETA means that Canadian provinces, territories and municipalities are opening their procurement to foreign entities for the first time, albeit with some limitations regarding energy utilities and public transport.

Ratification Pending

  1. EU-Japan Trade Agreement: In July 2018, the EU and Japan signed a trade deal that promises to eliminate 99% of tariffs that cost businesses in the EU and Japan nearly EUR1 billion annually. According to the EC, the EU-Japan Economic Partnership Agreement (EPA) will create a trade zone covering 600 million people and nearly a third of global GDP. The result of four years of negotiation, the EPA was finalised in late 2017 and is expected to come into force by the end of the current mandate of the EC in 2019. The total trade volume of goods and services between the EU and Japan is EUR86 billion. The key parts of the agreement will cut duties on a wide range of agricultural products and it seeks to open up services markets, in particular financial services, e-commerce, telecommunications and transport. As of August 2018, the agreement is awaiting ratification by the European Parliament and the Japanese Diet, following which it could enter into force in 2019. At the same time, negotiations with Japan continue on investment protection standards and investment protection dispute resolution. Japan is the EU’s second-biggest trading partner in Asia after China. EU exports to Japan are dominated by motor vehicles, machinery, pharmaceuticals, optical and medical instruments, and electrical machinery. The agreement awaits ratification from all parties concerned.

  2. EU-SADC Economic Partnership Agreement (Botswana, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Angola, Comoros, Democratic Republic of the Congo, Madagascar, Malawi, Mauritius, Seychelles, Tanzania, Zambia and Zimbabwe): An agreement between EU and SADC delegations was reached in 2016 and is awaiting ratification, with 13 of the 35 needed states having ratified the agreement as of April 2018.

  3. EU-Central America Association Agreement (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panama, Belize, and Dominican Republic): An agreement between the parties was reached in 2012 and is awaiting ratification (29 of the 34 parties have ratified the agreement as of April 2018).

Under Negotiation

  1. EU-Australia: The EU, Australia's second largest trade partner, has launched negotiations for a comprehensive trade agreement with Australia. Bilateral trade in goods between the two partners has risen steadily in recent years, reaching almost EUR48 billion in 2017, while bilateral trade in services added an additional EUR27 billion. The negotiations aim at removing trade barriers, streamlining standards and putting European companies exporting to or doing business in Australia on an equal footing with those from countries that have signed up to the Trans-Pacific Partnership  or other trade agreements with Australia. The Council of the EU authorised opening negotiations for a trade agreement between the EU and Australia on May 22, 2018.

  2. EU-US (Trans-Atlantic Trade and Investment Partnership): This agreement was expected to increase trade and services, but it is unlikely to pass under a Trump administration in the US.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Latvia FDI stock
Graph: Latvia FDI stock
Graph: Latvia FDI flow
Graph: Latvia FDI flow

Source: UNCTAD
Date last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

  1. The Latvian government actively encourages foreign direct investment (FDI) and works with investors to improve the country's business climate. To strengthen these efforts, the Latvian government introduced the POLARIS process, a mechanism designed to create an alliance between the public sector (including national and local governments), the private sector (including national and international companies), and major Latvian academic and research institutions to encourage FDI and spur economic growth.

  2. The commercial environment is generally friendly to foreign companies, and EU directives are implemented and observed. The Latvian government has adopted modern laws establishing copyrights, patents, and trademarks and the means of enforcing their protection. In 2012, the government adopted a number of favourable rules on the taxation of interest, dividends, and intellectual property, thus fostering the holding company regime in Latvia.

  3. The Latvian government also meets annually with the Foreign Investors Council in Latvia (FICIL), which represents large foreign companies and chambers of commerce, with the express purposes of improving the business environment and encouraging foreign investment.

  4. Latvia reserves the right to enact policies and legislation that discriminate against foreign investors in the following areas: control of defence industries; manufacturing and sale of narcotics, weapons and explosives; control of newspaper, television and radio broadcasting stations, or news agencies; recovery of all renewable and non-renewable natural resources including resources found on the continental shelf; fishing; hunting; air transportation services and port management; ownership and control of land; brokerage or real property; gambling and lotteries; private security and surveillance services; auditing services; the cross-border provision of banking and financial services; and the cross-border provision of insurance and private pension services.

  5. In March 2017, Latvia also passed new legislation that, on the basis of national security concerns, requires governmental approval prior to transfers of significant ownership interests in the energy and media sectors.

  6. With these limited exceptions, physical and legal persons who are citizens of Latvia or of other EU countries may freely purchase real property. In general, physical and legal persons who are citizens of non-EU countries (“third-country nationals”) may also freely purchase developed real property. However, third-country nationals may not directly purchase certain types of agricultural, forest, and undeveloped land.

Sources: WTO – Trade Policy Review,The International Trade Administration (ITA), U.S. Department of Commerce

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
There are five free trade areas in Latvia. Free ports have been established in Riga and Ventspils, and special economic zones (SEZ) have been created in Liepaja, a port city in western Latvia, and Rezekne, a city in the middle of the eastern Latvian region that borders Russia. Latvia has also established an additional SEZ in part of Latgale, the poorest region in Latvia, which borders Russia and Belarus.- Somewhat different rules apply to each of the five zones.

- In general, the two free ports provide exemptions from indirect taxes, including customs duties, VAT, and excise tax.

- The SEZs offer additional incentives, such as an 80%-100% reduction of corporate income taxes and real estate taxes.

- To qualify for tax relief and other benefits, companies must receive permits and sign agreements with the appropriate authorities: the Riga and the Ventspils Port Authorities, for the respective free ports; the Liepaja SEZ Administration; the Rezekne SEZ Administration; or the Latgale SEZ Administration.

- The SEZs are expected to be in place until 2035.

8. Taxation – 2018

  • Value added tax: 21%
  • Corporate income tax: 15%

Source: PwC 2018

8.1 Important Updates to Taxation Information

Due to the corporate income tax (CIT) reform, the approach to calculating CIT has changed fundamentally in 2018. Under the new model, taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax15% on profits
Capital Gains Tax15%
Dividends15%
Social security contributions (all employers)23.60%
VAT/GST (standard)- 21%

- A reduced rate of 12% is applied to certain products and services, such as medical goods, baby food, supplies of books, mass media, inland public transportation services, hotel services (accommodation) and supplies to individuals of heating.
Real Estate Tax2%
Branch Profit Tax15%
Stamp Duty2%

Source: PwC Tax Summaries 2018, Fitch Solutions
Date last reviewed: September 20, 2018

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

EU nationals, citizens of EEA member states and citizens of Switzerland enjoy the right of free movement within the EU.

9.2 Work Permits

Under Latvian Immigration Law, foreign citizens can enter and reside in Latvia for temporary business activities for up to three months in a six-month period. For longer periods of time, foreigners are required to obtain residence and work permits.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
A3 (Stable)14/07/2017
Standard & Poor'sA (Stable)21/09/2018
Fitch Ratings
A- (Stable)27/04/2018

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
17/18914/19019/190
Ease of Paying Taxes Index
27/18915/19013/190
Logistics Performance Index
43/160N/A70/160
Corruption Perception Index
44/17640/180N/A
IMD World Competitiveness37/6140/6340/63

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank58/202
Short-Term Economic Risk Score62.770.269.4
Long-Term Economic Risk Score59.561.962.8
Political Risk Index Rank38/202
Short-Term Political Risk Score72.172.171
Long-Term Political Risk Score77.177.377.3
Operational Risk Index Rank37/201
Operational Risk Score65.966.265.1

Source: Fitch Solutions
Date last reviewed: August 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
The Latvian economy, in the second quarter of 2018, expanded at the second-fastest pace in six years. The pick-up in expansion was seemingly driven by strong growth dynamics on the domestic front as tighter labour market conditions in Q2 likely bolstered household consumption. Retail sales accelerated, propped up by lower unemployment, which dropped to the lowest level in nearly a decade in Q2, and a robust growth in wages, which probably carried over on the back of a strong performance in Q1 2018. Furthermore, the booming construction sector reflected robust investment activity growth, which continued to benefit from solid foreign capital inflows and upbeat confidence among domestic investors. On the external front, growth in exports remained elevated in the face of strong demand from EU countries, despite losing some momentum from the beginning of the year. Nevertheless, the ongoing deterioration in the external economic and geopolitical environment is likely to generate some headwinds to growth.

OPERATIONAL RISK
The commercial environment is generally friendly to foreign companies, and EU directives are implemented and observed. Sustained private consumption growth fuelled by an improving labour market and a solid increase in fixed investment, coupled with a more effective absorption of EU structural funds, bode well for the country’s long term outlook. Telecommunication and electricity services are modern, and the real estate market provides modern housing and business venues. The legal system, tax structures, and trade and other regulations have been significantly modified to meet EU standards as most EU directives have been transposed into Latvia’s national legislation. However, the small size of its population will limit appetite among foreign firms to invest in order to cater to the domestic market.

Source: Fitch Solutions

10.5 Fitch Solutions Political & Economic Risk Indices

Graph: Latvia short term political risk index
Graph: Latvia short term political risk index
Graph: Latvia long term political risk index
Graph: Latvia long term political risk index
Graph: Latvia short term economic risk index
Graph: Latvia short term economic risk index
Graph: Latvia long term economic risk index
Graph: Latvia long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Latvia Score65.157.568.467.966.6
Central and Eastern Europe Average61.155.063.463.662.5
Central and Eastern Europe Position (out of 11)54557
Emerging Europe Average56.754.158.457.456.8
Emerging Europe Position (out of 31)686711
Global Average49.749.850.049.349.9
Global Position (out of 201)3747344047

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Latvia vs global and regional averages
Graph: Latvia vs global and regional averages
Country
Operational Risk IndexLabour Market Risk Index

Trade and Investment Risk Index

Logistics Risk IndexCrime and Secruity Risk Index
Estonia71.059.177.270.577.0
Czech Republic70.657.7
70.070.284.5
Poland
68.955.6
69.272.378.4
Lithuania67.455.2
71.871.371.5
Latvia65.157.5
68.467.966.6
Hungary63.255.663.462.471.3
Slovakia62.949.767.760.773.5
Belarus57.156.559.262.749.9
Russia56.063.656.263.440.9
Moldova
45.339.849.248.743.4
Ukraine45.154.945.649.530.5
Regional Averages61.155.063.463.662.5
Emerging Markets Averages46.8
48.0
47.545.846.0
Global Markets Averages49.749.8
50.049.349.9

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Latvia

Graph: Major export commodities to Latvia (2017)
Date last reviewed: August 28, 2018
Graph: Major export commodities to Latvia (2017)
Date last reviewed: August 28, 2018
Graph: Major import commodities from Latvia (2017)
Date last reviewed: September 12, 2018
Graph: Major import commodities from Latvia (2017)
Date last reviewed: September 12, 2018
Graph: Merchandise exports to Latvia
Date last reviewed: August 28, 2018
Graph: Merchandise exports to Latvia
Date last reviewed: August 28, 2018
Graph: Merchandise imports from Latvia
Date last reviewed: September 12, 2018
Graph: Merchandise imports from Latvia
Date last reviewed: September 12, 2018

Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions


2017
Growth rate (%)
Number of Latvian residents visiting Hong Kong2,856-8.8

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824-0.2

Source: Hong Kong Tourism Board, Fitch Solutions

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of EU companies in Hong Kong2,053
N/A
- Regional headquarters4592.5
- Regional offices685-2
- Local offices9094.1

Source: Hong Kong Census and Statistics Department

11.3 Treaties and agreements between Hong Kong and Latvia

  • The Agreement between the Government of the People's Republic of China and the Government of the Republic of Latvia on the Promotion and Protection of Investments came into force in February 2006 and intends to create favorable investment conditions for investors from both countries.

  • The Double Taxation Agreement (DTA) between China and Latvia was signed on June 7, 1996 and has entered into force in both countries on January 27, 1997.

  • Latvia has a DTA with Hong Kong that entered into force in November 2017.

Source: Hong Kong Department of Justice, Fitch Solutions

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Latvian Honorary Consulate in Hong Kong
Address: 22/F Lyndhurst Tower, No. 1 Lyndhurst Terrace, Central, Hong Kong
Email: sk@violethillpartners.com
Tel: (852) 2877 5638
Fax: (852) 2877 6708

Source: Embassy of the Republic of Latvia in Hong Kong

11.5 Visa Requirements for Hong Kong Residents

HKSAR passport holders do not need a visa for Latvia for a period of up to 90 days.

Source: Hong Kong Immigration Department
Date last reviewed: September 20, 2018