Latvia

GDP (US$ Billion)

30.32 (2017)

World Ranking 99/192

GDP Per Capita (US$)

15,547 (2017)

World Ranking 54/192

Economic Structure

(in terms of GDP composition, 2017)

Services
(64.40%)
Industry
(20.00%)
Agriculture
(3.00%)

External Trade (% of GDP)

119.2 (2016)

Currency (Period Average)

Euro

0.89 per US$ (2017)

Political System

Unitary multiparty republic

Overview

Latvia's economy is primarily 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. 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.

Sources: World Bank, Fitch Solutions

 

Major Economic/Political Events and Upcoming Elections

March 2015
The North Atlantic Treaty Organisation (NATO) reinforced its presence in the Baltic States and its forces conducted major military drills in the region.

 

December 2015
The 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.

 

October 2018
The Pro-Russia Harmony party emerged as the largest bloc in parliament after elections.

 

Sources: BBC country profile – Timeline, Fitch Solutions

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
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: March 22, 2019

External Trade

Merchandise Trade

 

Graph: Latvia merchandise trade
 
Graph: Latvia merchandise trade
 
 

Source: WTO
Date last reviewed: March 22, 2019

Graph: Latvia major export commodities (2018)
 
Graph: Latvia major export commodities (2018)
 
Graph: Latvia major export markets (2018)
 
Graph: Latvia major export markets (2018)
 
Graph: Latvia major import commodities (2018)
 
Graph: Latvia major import commodities (2018)
 
Graph: Latvia major import markets (2018)
 
Graph: Latvia major import markets (2018)
 

Sources: Trade Map, Fitch Solutions
Date last reviewed: March 25, 2019

 

Trade in Services

 

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

Source: WTO
Date last reviewed: March 22, 2019

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). 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 mainland China and a few other Asian nations to protect domestic industries. A number of mainland Chinese-origin products are subject to the EU's anti-dumping duties, including bicycles, bicycle parts, ceramic tiles, ceramic tableware and kitchenware, fasteners, ironing boards and solar glass. On November 13, 2016, the European Commission (EC) imposed a provisional anti-dumping duty on imports of some of the primary and semi-processed metals from mainland China. As of November 2018, the EU did not apply any anti-dumping measures on imports originating in Hong Kong.

  • In 2016, the EC 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 in China, which means many Latvian manufacturing and retail businesses face additional risks when importing finished or intermediate goods from this trading partner.

  • The EU is party to some 50 free trade agreements (FTAs) and, consequently, access to other markets of the countries concerned is currently mediated through those agreements. The EU's scheme on generalised system of preferences entered into effect on January 1, 2014. Under the scheme, tariff preferences have been removed for imports into the EU from countries where per capita income has exceeded USD4,000 for four years in a row. As a result, the number of countries that enjoy preferential access to EU markets was reduced from 176 to less than 80. While China remains a beneficiary with many of its exports, such as toys, electrical equipment, footwear, textiles, wooden articles, and watches and clocks have already been 'graduated' from the preferential treatment.

Sources: WTO - Trade Policy Review, Fitch Solutions

Trade Agreement

Multinational Trade Agreements

Active

  1. The EU: Latvia is a member of the EU (which comprises 28 member states) and follows the 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. The EU is Latvia's largest trading partner, accounting for 71% of exports and 78% of imports 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 EFTA states 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-Japan Trade Agreement: The agreement entered into force on February 1, 2019, creating the largest open trade zone in the world. The EU and Japan trade deal 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) creates 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. The total trade volume of goods and services between the EU and Japan is EUR86 billion. The key parts of the agreement 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. Japan is the EU's second largest trading partner in Asia after China. EU exports to Japan are dominated by motor vehicles, machinery, pharmaceuticals, optical and medical instruments, and electrical machinery.

  4. 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 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 EC 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.

  5. EU-Canada Comprehensive Economic and Trade Agreement (CETA): CETA is expected to strengthen trade ties between the two regions after it came 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.

  6. EU-Southern African Development Community EPA: An agreement between the EU and the Southern African Development Community (SADC) states (Botswana, eSwatini, Lesotho, Mozambique, Namibia, South Africa, Angola, Comoros, Democratic Republic of the Congo, Madagascar, Malawi, Mauritius, Seychelles, Tanzania, Zambia and Zimbabwe) was reached on June 10, 2016 with Botswana, eSwatini, Lesotho, Namibia and South Africa. Mozambique joined in February 2018. The agreement became the first regional EPA in Africa to be fully operational. The other members of SADC are negotiating EPAs with the EU as part of other regional groupings.

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-United States (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 United States, against the backdrop of rising global trade tensions.

  3. EU-Vietnam FTA: In July 2018, the EU and Vietnam agreed on final texts for the EU-Vietnam FTA and the EU-Vietnam Investment Protection Agreement (IPA). As of January 2019, the final text of the agreement has been finalised and is awaiting signature and conclusion.

Sources: WTO Regional Trade Agreements database, Fitch Solutions

Investment Policy

Foreign Direct Investment

 

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

Source: UNCTAD
Date last reviewed: March 22, 2019

 

Foreign Direct Investment Policy

  1. The Investment and Development Agency of Latvia (LIAA) aims to promote business development by facilitating foreign investment. LIAA supports companies in Latvia trading internationally as well as overseas businesses seeking partners or locations in Latvia. A business can be registered in Latvia in a single day.

  2. The Latvian government actively encourages foreign direct investment (FDI) and works with investors to improve the country's business climate. To strengthen these efforts, LIAA 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.

  3. 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.

  4. The Latvian government meets annually with the Foreign Investors Council in Latvia, which represents large foreign companies and chambers of commerce, with the express purpose of improving the business environment and encouraging foreign investment.

  5. 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
    • The cross-border provision of insurance and private pension services

  6. In March 2017, Latvia 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.

  7. 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, ITA, US Department of Commerce

 

Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive Programme Main 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, value-added tax (VAT), and excise tax.

- Main benefits for companies operating in free ports and SEZ are as follows:
  •  80% rebate on real estate tax
  •  80% rebate on corporate income tax (CIT)
- Corporate income tax rebate for large-scale investment projects:
  • 25% of total initial long-term investment up to EUR50 million
  • 15% of the part of the total initial long-term investment exceeding EUR50 million
- 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.
Incentives for research and development - The Horizon 2020 programme offers a large variety of funding opportunities for research and innovation activities

- Horizon 2020 is divided into three pillars corresponding to its main priorities:
  • Excellent science
  • Industrial leadership
  • Societal challenges

Sources: US Department of Commerce, Government websites, Fitch Solutions

Taxation – 2019
  • Value Added Tax: 21%
  • Corporate Income Tax: 20%

Source: State Revenue Service

 

Important Updates to Taxation Information

  • Due to the CIT reform, the approach to calculating CIT has changed fundamentally as of January 1, 2018.Under the new regime all undistributed corporate profits are exempt. This exemption covers both active and passive types of income. It also covers capital gains arising on the sale of all types of assets, including shares and securities, except for the sale of immovable property by non-residents.

  • Amendments to the CIT Act that are applicable as of January 1, 2019 prescribe that a Latvian company owning a substantial share in a foreign company (owning more than 50% of a foreign company's shares directly or indirectly or being entitled to more than 50% of its profit) should pay CIT on profit in proportion to that share if the foreign company is a non-genuine (artificial) arrangement established to obtain CIT advantage and no substantial business is carried on by the CFC. If these criteria are met, then any profit made by a CFC that is based or incorporated in a tax haven will be taxable in Latvia from the first eurocent, while a CFC registered elsewhere will not attract CIT unless its profits reach EUR750,000 and/or passive income exceeds EUR75,000.

 

Business Taxes

Type of Tax Tax Rate and Base
CIT 20%
Capital Gains Tax Included as part of income tax for resident companies

For non-resident companies without a permanent establishment in Latvia, a final withholding tax at a rate of 3% is applicable to the proceeds obtained from the sale of real estate as well as the sale of shares of a company.
Withholding Tax 0%; interest, dividends and royalties payable to persons resident in black-list jurisdictions are subject to a 20% withholding tax.
Social security contributions 35.09% (24.09% as the employer's portion and 11% from the employees salary)
VAT/GST (standard)
 
- 21%
- A reduced rate of 12% or 5% is applied to certain goods and services
Real Estate Tax 1.5%; 3% on unused agricultural land
Branch Profit Tax 20%
Stamp duty 2%

Source: State Revenue Service
Date last reviewed: March 22, 2019

Foreign Worker Requirements

Foreign Worker Permits

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

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.

Sources: Government websites, Fitch Solutions

Risks

Sovereign Credit Ratings


 
Rating (Outlook) Rating Date
Moody's A3 (Stable) 14/07/2017
Standard & Poor's A (Stable) 21/09/2018
Fitch Ratings A- (Stable) 26/10/2018

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

 

Competitiveness and Efficiency Indicators


 
World Ranking
 
2017 2018 2019
Ease of Doing Business Index 14/190 19/190 19/190
Ease of Paying Taxes Index 15/190 13/190 13/190
Logistics Performance Index N/A 70/160 N/A
Corruption Perception Index 40/180 41/180 N/A
IMD World Competitiveness 40/63 40/63 N/A

Sources: World Bank, IMD, Transparency International

 

Fitch Solutions Risk Indices


 
World Ranking
2017 2018 2019
Economic Risk Index Rank N/A 57/202 42/202
Short-Term Economic Risk Score 70.2 71.0 70.4
Long-Term Economic Risk Score 61.9 63.4 68.1
 
Political Risk Index Rank N/A 38/202 37/202
Short-Term Political Risk Score 72.1 71 72.3
Long-Term Political Risk Score 77.3 77.3 77.3
Operational Risk Index Rank N/A 36/201 36/201
Operational Risk Score 66.2 66.0 65.8

Source: Fitch Solutions
Date last reviewed: March 22, 2019

 

Fitch Solutions Risk Summary

ECONOMIC RISK

The extent of deleveraging required in the domestic banking system, as well as the necessary adjustment to household balance sheets, will ensure that the transition towards strong growth and economic stability will remain a slow and challenging process. In the meantime, the banking sector is likely to remain weak, weighed down by the proliferation in non-performing loans in the aftermath of the credit bubble.

OPERATIONAL RISK

Latvia's geographical position, providing strategic access to the EU and Russia and Central Asia to the east means that the country has the potential to act as a regional hub for a wide range of services-based industries. 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.

Source: Fitch Solutions
Date last reviewed: February 12, 2019

 

Fitch Solutions Political and 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: March 22, 2019

 

Fitch Solutions Operational Risk Index


 
Operational Risk Labour Market Risk Trade and Investment Risk Logistics Risk Crime and Security Risk
Latvia Score 65.8 57.5 67.5 71.5 66.6
Central and Eastern Europe Average 61.8 55.0 63.5 66.3 62.5
Central and Eastern Europe Position (out of 11) 5 4 5 5 7
Emerging Europe Average 57.1 54.1 59.1 58.6 56.8
Emerging Europe Position (out of 31) 6 8 6 6 11
Global Average 49.6 49.7 49.9 49.0 49.8
Global Position (out of 201) 36 47 36 32 47

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 Index Labour Market Risk Index
 
Trade and Investment Risk Index Logistics Risk Index Crime and Security Risk Index
Estonia 71.1
 
59.1
 
76.4
 
72.1
 
77.0
 
Czech Republic 70.9
 
57.7
 
67.9
 
73.7
 
84.5
 
Poland
 
69.6
 
55.6
 
69.4
 
75.0
 
78.4
 
Lithuania 68.4
 
55.2
 
71.5
 
75.6
 
71.5
 
Latvia 65.8
 
57.5
 
67.5
 
71.5
 
66.6
 
Hungary 64.0
 
55.6
 
62.0
 
66.9
 
71.3
 
Slovakia 63.3
 
49.7
 
66.5
 
63.4
 
73.5
 
Belarus 57.1
 
56.5
 
58.5
 
63.4
 
49.9
 
Russia 56.5
 
63.6
 
58.6
 
63.0
 
40.9
 
Moldova 46.6
 
39.8
 
51.1
 
52.2
 
43.4
 
Ukraine 46.5 54.9
 
48.8
 
52.0
 
30.5
 
Regional Averages 61.8
 
55.0
 
63.5
 
66.3
 
62.5
 
Emerging Markets Averages 46.7
 
48.1
 
45.5
 
47.4
 
46.0
 
Global Markets Averages 49.6
 
49.7
 
49.9
 
49.0
 
49.8
 

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: March 22, 2019

Hong Kong Connection

Hong Kong’s Trade with Latvia

Graph: Major export commodities to Latvia (2018)
 
Graph: Major export commodities to Latvia (2018)
 
Graph: Major import commodities from Latvia (2018)
 
Graph: Major import commodities from Latvia (2018)
 

Note: Graph shows the main Hong Kong exports to/imports from Latvia (by consignment)
Date last reviewed: March 22, 2019

Graph: Merchandise exports to Latvia
 
Graph: Merchandise exports to Latvia
 
Graph: Merchandise imports from Latvia
 
Graph: Merchandise imports from Latvia
 

 

Note: Graph shows Hong Kong exports to/imports from Latvia (by consignment)
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Source: Hong Kong Census and Statistics Department
Date last reviewed: March 22, 2019


 
2017
 
Growth rate (%)
Number of Latvian residents visiting Hong Kong 2,856 -8.8

Sources: Hong Kong Tourism Board, United Nations Department of Economic and Social Affairs – Population Division, Fitch Solutions


 
2017
 
Growth rate (%)
Number of European residents visiting Hong Kong 1,929,824 -0.2

Sources: Hong Kong Tourism Board, United Nations Department of Economic and Social Affairs – Population Division, Fitch Solutions
Date last reviewed: March 22, 2019

 

Commercial Presence in Hong Kong


 
2017
 
Growth rate (%)
 
Number of EU companies in Hong Kong N/A
 
N/A
 
- Regional headquarters
- Regional offices
- Local offices

 

Treaties and agreements between Hong Kong and Latvia

  • The agreement between the Government of mainland China and the Government 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 mainland 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.

Sources: Hong Kong Department of Justice, Fitch Solutions

 

Chamber of Commerce or Related Organisations

Baltic Hong Kong Trade Association (Latvia)

Email: lukaboss@gmail.com

Tel: (371) 2 707 8731

Website: www.facebook.com/BHKTA/

Please click to view more information.

Source: Federation of Hong Kong Business Associations Worldwide

 

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

 

Visa Requirements for Hong Kong Residents

Hong Kong residents do not need a visa for Latvia for a period of up to 90 days.

Source: Hong Kong Immigration Department

Date last reviewed: March 22, 2019

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