Financial Sector Transformation
R&I re-affirms Republic of Latvia at “A-”, stable outlook
On 4 February, Japanese credit rating agency R&I reaffirmed its “A-” foreign currency issuer rating on the Republic of Latvia. R&I first raised Latvia’s rating to “A-” in January 2018. Their outlook remains stable.
The agency positively evaluated Latvia’s solid economic growth, which was 4.6% in 2017 and projected to be 4.2% in 2018, and expects that private consumption and absorption of EU funds will drive further growth.
R&I has said that it will pay particular attention to the new government’s fiscal policy and the process of drafting a new budget. They expect that the new government will follow the existing fiscal policy framework and that the budget plan in 2019 will be almost the same as in 2018.
R&I also noted that the liquidation of ABLV Bank and the significant decrease in non-resident deposits did not affect Latvia’s economy and that the Latvian financial system is stable.
Change management in the banking sector
On 5 February, Pēters Putniņš, the Chairman of the Financial and Capital Market Commission (FCMC), said that the Latvian financial sector is now strongly dominated by local deposits and that banks will now focus on domestic markets.
The Financial and Capital Market Commission (FCMC) has collected Q4 2018 data on the transformation process of Latvian banking sector. The FCMC believes this process, begun in 2016, has now entered its final phase.
A number of complex measures implemented in 2018 have substantially changed the Latvian banks' customer base and enabled the introduction of new business models with a further focus on the servicing and attraction of domestic and European Union (EU) customers. These measures include a decisive move away from high-risk foreign clients resulting in a sharp reduction in the volume of foreign deposits, and ending service to unwanted shell companies.
According to the FCMC data, the Latvian banking sector now exhibits a number of positive indicators:
- Domestic and EU deposits constitute 91% of deposits
- The share of non-EU foreign deposits has shrunk from 35% to 9%, while domestic deposits continue growing steadily for several years, reaching 13 billion euro by the end of 2018 (compared to 12.3 billion euro in Q3 2018)
- Euro has established its position as the prevailing currency of the Latvian financial system. Foreign customers’ payments in USD have declined by more than 20 times since 2014, hitting the all-time low level in H2 2018
12.02.2018. – FinCEN proposes special measures against ABLV Bank
11.07.2018. – ECB revokes license of ABLV Bank
Adjusted Financial Sector Development Plan of Latvia
On 12 February, the government reviewed the report prepared by the Ministry of Finance on the fulfilment of the Financial Sector Development Plan for 2017 - 2019, as well as the changes to be introduced to the plan.
The changes in the plan foresee a greater focus on a comprehensive management of AML/CFT risks and enforcing international standards to reduce financial crime.