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The National Debt Of Latvia
Since gaining independence from the Soviet Union in 1990, Latvia has managed to keep its national debt low. But what counts as national debt? There are actually several different methods of calculating national debt and the most authoritative sources all use different standards, resulting in different figures.
The national debt of Latvia does not include any public sector debt, so personal debt and the debts of private companies are not brought into the calculation. There a many public sector debts in Latvia that also don’t get included in the national debt figures.
The core of the national debt, no matter which organization calculates it, is always “general government debt.” That means the debts of all levels of government in Latvia. However, only the debts that are represented by formal agreements are counted. That means bank loans and debt raised through the sale government securities.
Bank guarantees and international obligations are a gay area in the debt formula. Some organizations exclude these completel, and some include all guarantees issued by the government. Eurostat only counts obligations to EU institutions such as the European Financial Stability Facility and the European Investment Bank.
The debts represented by unpaid invoices and pension obligations are also not included in anyone’s calculations of the Latvian national debt.
Eurostat, the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OECD) all produce annual figures for Latvia’s national debt, but each organization presents different results. One common element between the three is that they all use the same metric to represent the debts of nations. This is called the “debt to GDP ratio,” which expresses a country’s debt as a proportion of its annual income (GDP).
The three different valuations for Latvia’s national debt are listed below. The IMF figure is for 2017, the OECD number is the debt figure for 2016. The Eurostat calculations are shown for both 2016 and 2017.
- IMF: 34.8% (2017)
- Eurostat: 40.5% 2016, 40.1% 2017
- OECD: 49.3% (2016)
There are different valuations used by these international bodies that alter the size of a country’s reported debt.
Latvian national debt valuation
The choice of debt instrument valuation method makes a big difference in the size of Latvia’s national debt. Eurostat uses a different valuation system to the IMF and the OECD. The three different types of valuation systems that can be used to compile the national debt are:
- Face value
- Nominal value
- Market value
The price that a bond is redeemed at is printed on its certificate. This is the face value. If a bond is index-linked the redemption value will be higher than the face value because the capital amount of the bond is revalued each year in line with a given index. This is the nominal value and it should be counted at the value of the year under calculation, not at its projected final value. The government of Latvia doesn;t issue index-linked bonds, so for debt calculation, nominal value is the same as face value.
Traders may be prepared to pay more than the face value of a bond in order to buy it. Often, once bonds circulate on the secondary market, they increase in value. So, this is how the market value of Lavian government bonds is determined.
The IMF and the OECD both use market value in their calculations of Latvia’s national debt. Eurostat and the government of Latvia both use nominal values when they work out national debt figures.
Latvia’s gross and net debt
There is one more variation in the expression of national debt. The total of government debts as described above can more accurately be called “gross debt.” There is an alternative type of debt figure, which is “net debt.” This version of national debt reasons that the true debt figure is really what a country needs time to pay back. If a government owns financial assets that could be old off, then the debt would be lower. Net debt reduces gross debt by deducting the value of state-owned assets from it.
IMF publishes both gross debt and net debt figures. For Latvia, the 2017 gross debt figure was 34.8% of GDP and the net debt of the country was 26.9% of GDP. The difference between the two figures shows that the Latvian government holds financial assets that have a value equal to 7.9% of the country’s GDP.
The 2008 financial crisis in Latvia
Like its neighbors, Lithuania and Estonia, Latvia experienced rapid economic expansion after gaining independence from the Soviet Union in 1990. The population of the country embraced consumerism, resulting in a high demand for imported goods and a deteriorating balance of payments. The country attracted inward investment, which resulted in asset price inflation, especially a property price boom. The global liquidity crisis of 2008 put the beaks on spending, causing property prices to collapse, which fed through to bankruptcies and a banking crisis. The dip in the country’ GDP can be seen in the graph below.
The government needed to reflate the economy and get growth back on track. Fortunately, the debt to GDP ratio of the country up to 2007 was very low. That gave the government a lot of room to borrow money to rescue the country’s failing banks. Government borrowing increased the national debt from 8% of GDP in 2007 to 18.2% the following year. Although this was an increase of more than 200 percent, it still left Latvia with a very low debt burden.
The graph below shows that the Latvian government continued to borrow heavily in order to keep the economy going.
The quick action of the Latvian government managed to get the economy back into expansion. The country’s debt to GDP ratio peaked at 46.8% in 2010. So, in just three years, the national debt of Latvia almost six times over. The hard and fast action meant that Latvia came out of recession much more quickly than id neighbors.
Four years of very large government deficits fixed the problem.
What is Latvia’s credit rating?
Latvia’s credit rating in the “A” category despite the almost reckless widening of the government’s budget deficits over a four year period. The recession actually did Latvia a lot of good in the long term. The shock of job losses curbed the general public’s appetite for spending and encouraged the nation to save. This greater level of self-control reduced the demand for imported goods and improved the country’s currency position.
Agency RATING OUTLOOK
Moody's A3 Stable
S&P Global A Stable
Fitch A- Stable
R&I A- Stable
Latvia could be well on its way to getting the top AAA credit rating.
Who manages Latvia’s national debt?
The Latvian government’s Ministry of Finance manages the income and expenditure of the government. That task includes the job of writing out the national budget each year. When the government decides to spend more than it gets in from taxes and charges, the result is an increase in the national debt. The direct management of the debt, including the issuance of government securities is the responsibility of the State Treasury.
How does the Latvian government raise loans?
The State Treasury sells government securities by an auction process. The Treasury maintains a list of approved buyers, called the primary dealers. The auction sale process is the primary market for government securities. The primary dealers sell on the allocations that they buy and that process creates the secondary market for government securities. Anyone can buy Latvian government bonds and bills on the secondary market.
The three types of debt instruments that the government of Latvia issues are:
- Treasury bills – securities with maturities of one year or less
- Medium-term notes – bonds with maturities of one to five years
- Bonds – securities with maturities of more than five years
Treasury notes do not pay interest. They are sold at a discount and repaid at full face value. Medium-term notes and bonds both pay a fixed rate of interest for their durations.
What facts should you know about Latvia's national debt?
- You could wrap $1 bills around the Earth 53 times with the debt amount.
- If you lay $1 bills on top of each other they would make a pile 1,475 km, or 917 miles high.
- That's equivalent to 0.00 trips to the Moon.