Financial Sector Assessment : Republic of Latvia

Abstract

Latvia has a well-developed financial
 sector, but in the aftermath of the 2008-09 global financial
 crisis, access to finance has become a major constraint for
 the development of private enterprises. Credit to the
 private sector in Latvia, at above 100 percent of Gross
 Domestic Product, or GDP, is one of the highest in Eastern
 Europe, after significant growth over the last decade.
 However, in the aftermath of the 2008-09 financial crisis,
 credit growth has been negative (average annual growth of -7
 percent between FY2009-2011) and access to finance has
 become one of the most significant obstacles for growth
 according to enterprises (close to 30 percent of firms
 identify it as an obstacle in 2009, versus 2 percent before
 the crisis). This contributed to a significant decline in
 the volume of private investment, which dropped by 48
 percent between 2008 and 2010. Credit constraints are more
 severe in specific segments, including smaller firms. In
 response to these challenges, the Government has supported
 credit to the private sector through various instruments,
 some of which may need to be reviewed. Support has been
 provided through various financial instruments aimed at
 enhancing the accessibility and affordability of credit and
 implemented trough public bodies and commercial financial
 intermediaries. It will also be important to ensure the
 programs create adequate incentives for financial
 intermediaries to expand services to underserved markets in
 a sustainable manner, and that the programs lever the
 established capacity and expertise of robust commercial
 lenders, minimizing competition with such lenders.