The financial situation of households in Latvia is facing continued deterioration, according to the latest Financial Stability Report of the Bank of Latvia. While the overall financial situation of households is still considered good, the long-term and rapid rise in costs, coupled with increasing credit interest rates, is impacting the solvency of households.
In the first half of 2023, household disposable income is projected to grow at a slower pace than consumer prices, similar to the trends observed in 2022. This puts additional burden on households, especially borrowers, who are also facing a significant increase in loan interest rates. As a result, the risks of insolvency are increasing significantly for a small number of households.
Non-financial corporations, on the other hand, have not experienced a general deterioration in their financial indicators, and their debt servicing capacity remains good. However, some non-financial companies are facing challenges due to fluctuations in energy resource prices, increased costs, rising interest rates, and a decline in the purchasing power of citizens.
The rising costs are forcing many households to review their spending habits and making it difficult for them to save. The combination of rising prices and interest rates may lead to an excessive debt burden for up to 12% of households, particularly impacting less affluent households.
Despite these challenges, a large portion of households, especially borrowers, still have low insolvency risks. This is evident from their ability to repay housing loans or a portion of it faster. Additionally, the balance of household deposits in banks remains high, although its growth is slowing down. Household savings, along with steadily growing income from employment and state support measures implemented in 2022/2023, contribute to the overall good solvency of households.
Furthermore, the level of indebtedness of Latvian households in relation to GDP is one of the lowest in the European Union, standing at 16.9% at the end of 2022. This results in generally low interest payments on household loans, with MFIs accounting for 0.54% relative to GDP and non-bank lenders at 0.38% relative to GDP.
While the financial situation of households in Latvia is still considered relatively good, the continued rise in costs and increasing credit interest rates pose challenges to their solvency. It is important for households to carefully manage their finances and adapt to the changing economic conditions to ensure their long-term financial stability.
How can policymakers and financial institutions address the increasing financial challenges faced by households in Latvia
Increasing for households in Latvia.
The Financial Stability Report highlights that the main factors contributing to the deteriorating financial situation are rising living costs and higher credit interest rates. The report states that while the overall financial situation of households is still considered good, the long-term and rapid increase in expenses is putting a strain on their solvency.
In terms of disposable income, the report predicts that in the first half of 2023, it will grow at a slower pace than consumer prices, a pattern seen in 2022 as well. This means that households will have less purchasing power to cover their expenses, resulting in added financial pressure.
Furthermore, borrowers are facing a significant rise in loan interest rates, which further exacerbates the financial challenges they are already facing. This combination of growing living costs and higher interest rates increases the risk of insolvency for households.
The Bank of Latvia stresses the importance of monitoring and addressing these issues to ensure the stability of the financial system. Measures to alleviate the financial burden on households, such as tighter control on living expenses and providing support for borrowers, might be necessary to mitigate the risks of insolvency.
Overall, the financial situation of households in Latvia is facing continued deterioration due to the rising costs of living and increased credit interest rates. It is imperative for policymakers and financial institutions to take appropriate measures to address these challenges and support the stability of households’ finances.
