Lending dynamics in Latvia among the weakest in the euro area, rates – one of the highest

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Lending dynamics in Latvia has long been one of the weakest in the euro area, and the loan-to-GDP ratio is currently the lowest. At the same time, credit institution interest rates for borrowers in Latvia are among the highest in the euro area. They are related to both demand and supply side factors, incl. credit market segmentation, a number of structural problems in the economy (eg high shadow economy, undercapitalisation of non-financial corporations, weaknesses in the legal environment) has not been well thought out.

Although progress is being made gradually in some areas, the overall situation is not improving rapidly, experts say.

The persistently weak lending is mutually linked to the persistently weak investment. According to the annual study “Foreign Investment Index” of the Riga Graduate School of Economics and the Council of Foreign Investors in Latvia, it was 2.7 on a 5-point scale in 2020, but it is gradually improving.

From the point of view of foreign investors, the biggest barriers to investment are demographic trends, mediocre quality of education and science, insufficient investment incentives and labor supply. According to a survey of 370 Latvian companies conducted by the European Investment Bank, insufficient funding is an important barrier to investment, but several other factors have been identified as more important. These are the availability of skilled labor, low demand for goods and services (these aspects are linked to demographic trends), energy prices, tax policy and business regulation. Thus, weak credit problems can be solved in connection with the improvement of the investment climate, central bank experts emphasize.

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