Market Snapshot: Latvia’s Growth Story

There are major changes ahead for Latvia. While accession negotiations with the OECD will begin soon, the country has also been given the go-ahead for joining the eurozone. Both herald increased access to capital markets and an upswing in investment and custody needs. This underscores Latvia’s growth in recent years, yet the country must still navigate ever-tightening regulation and integrating settlement infrastructure. Global Custodian asks key players in the region how these changes will pan out.

“Accession to the OECD would likely be a positive step as it could help boost confidence and stability in this market,” says Irene Mermigidis, head of Network Management at Clearstream, currently the only international central securities depository (ICSD) offering access to Latvia. “An OECD priority for its members is to help governments bring and maintain confidence in markets.”

Joining the OECD would also provide Latvia with the less tangible benefits of membership, according to Mārtiņš Kazāks, chief economist at Swedbank Latvia: “Latvia can benefit politically by being side to side with the world superpowers and getting an opportunity to voice its opinion … Latvia’s data would [also] be included in various studies, providing a more profound economic and social analysis about processes in Latvia.”

Meanwhile, joining the euro will also tie Latvia more closely with the fortunes of the other EU members. Many in Latvia find this to be alarming given the euro’s precarious situation (only one-third of Latvians polled supported the move), but the economic benefits may outweigh the risks.

“There are several economic reasons why it is good for Latvia to be part of the eurozone even though the euro area is experiencing a crisis right now,” says Ulf Noren, head of sub-custody at SEB, a sub-custodian in Latvia. “Remember that the Latvia lats [LVL] is pegged to the euro, so whatever is happening to the euro is happening to the LVL.” According to Noren, some of the benefits include an improved rating from the agencies, more trading partners and a shared currency that facilitates cross-border transactions.

Noren also foresees an improvement in investment, despite a fall in FX activity: “For the inbound business it will mean a reduction of perceived currency risk and bring the country as an investment market up a notch. From a revenue point of view, FX activity will fall, but we see no business impact of revolutionary proportions.”

Yet Latvia still has much to do to bring its capital markets up to par and to meet industry standards.

Mermigidis suggests “a clearer tax regime in Latvia vis-à-vis its capital markets.”

“In terms of wider opportunities in Europe, Latvia could further consider and advance its progress towards joining the future European harmonized settlement platform, TARGET2-Securities (T2S); its steps towards joining the euro can contribute towards this. Latvia can also benefit from its arrangement with Lithuania and Estonia for cross-border settlement whereby settlement can be facilitated in any one of the three Baltic CSDs in case of a different Baltic counterparty,” says Mermigidis.

Regional banks should first focus on “the introduction of more quality issuers so that volume can pick up,” according to Noren, due to the small size of the Baltic markets (the combined market cap is less than €15 billion). “Not a lot of privatization issues will be available but there are hopes that more companies that were possessed during the crisis will be floated.”

Infrastructure in the CEE region as a whole will be overhauled: Noren predicts that “we will see smaller structures also on the CSD side being acquired by larger CSDs or merging with equals, looking at regional HUB solutions à la the efforts made in [Commonwealth of Independent States].” But regulation may be a more pressing concern.

“Some [regulatory effects], due to the capital market structure, will be less dramatic than in the the rest of Europe, EMIR is one such example,” says Noren. “Luckily, Latvia has not signed up for the Financial Transaction Tax [FTT] so a market that already is suffering from lower liquidity numbers than many peer countries will not be further damaged by that. We see CSD Regulation (CSDR), Securities Legislation Law (SLL) and AIFMD (+UCITS) as having major impact and here our activities in Latvia will benefit from having a lot of analysis and preparations made by SEB.”