In the run-up to the COVID-19 pandemic Latvia experienced stable economic growth, with growth rates exceeding the EU average. From 2011 to 2019, GDP grew by 3.3% per year on average. In 2019, the growth of the economy became more moderate. GDP grew by 2% in 2019. In 2020, the COVID-19 pandemic had a significant impact on the global and Latvian economies. In the 2nd quarter, GDP in Latvia decreased by 8.9% compared to the same period in 2019. However, this appears to be a comparatively mild decline, as in EU-27 GDP contracted by 13.9% over the same period. In Q3 and Q4 of 2020, the economic decline slightly slowed down. Overall, in 2020, GDP decreased by 3.6%, compared to 2019. The development of the economy in the medium term depends on the situation in the external environment and the pace of reform implementation. The further development of the Latvian economy will be closely related to export opportunities; therefore, the largest risk to Latvia's growth is related to the development of the global economy, especially the evolution of the COVID-19 pandemic. Also, the further development of the EU's common economic space is vitally important. Latvia's medium-term economic benefits will be mainly based on macro-economic stability (as a result of which Latvia's credit ratings have improved), the efficiency of the planned EU support programmes, and improvements in the business environment.
In Latvia, 99.8% of economically active merchants and commercial companies are SMEs, 92.1% of which are micro-enterprises.
SME loans dominate the banking sector’s lending to non-financial corporations (NFCs). As SMEs play an important role in the domestic economy, SME loans represented 73% of total loans to domestic NFCs in 2020. The outstanding amount of banking sector loans to SMEs decreased in 2020 by 7%; however the total banking's sector loan portfolio to NFCs decreased even further, by 8.5%. To a large extent, this is attributed to structural changes in the Latvian banking sector (for instance, the withdrawal of the credit institution's licence). Excluding one-off effects, the SMEs loan stock slightly declined (-3.2% year-on-year). In 2020, the new lending (flow) to SMEs was noticeably lower than in 2019 (by 20.5%), despite the increase of total new business lending to NFCs by 5.8%.
In 2019, venture and growth capital experienced a 33.7% y-o-y growth rate caused by the increase of finance allocated to equity. The high allocation to equity is explained by significant higher investment returns compared to the previous year. In light of the quantitative easing strategy, pursued by the European Central Bank (ECB), which took place in a low interest rate environment, market actors and investors have been searching for higher yields, including in riskier areas such as venture capital. The availability of cheap capital, low interest rates and the relative narrowing of classic investment opportunities increased investor tolerance above medium levels, thus stimulating alternative investment opportunities. However, in 2020 venture and growth capital decline by 6.29% year on year, reflecting the uncertainties and instabilities caused by the COVID-19 pandemic and its impact on the economy.
As a response to the COVID-19 crisis, the state promoted access to funding (through its micro-lending, start-up, and loans programme) for firms lacking the financial credibility (collateral, net worth, cash flow and credit history) that is necessary to access funding from commercial banks or private investors.
Currently, state support programmes are introduced via the JSC Development Finance Institution Altum (ALTUM), a state-owned development finance institution offering aid and financial tools to various target groups. ALTUM develops and implements state aid programmes to compensate for market shortcomings that cannot be resolved by private financial institutions. In response to the COVID-19 outbreak, in 2020, ALTUM introduced several support programmes through working capital loans, other loans and credit guarantees.
