Latvia's Export Product Portfolio in 2020: Trends and Opportunities

1. How might Latvia’s export product porfolio look in 2020 Pēteris Strautiņš DNB banka November 24, 2011

2. Performance Latvia’s exportsare a success story • Despite not always favourable macro conditions (including real estate boom), exports of goods and services have increased continuously since 2000 (except 2009) • Exports were up 79.6% in real terms in 2010 vs. 2000, growth has continued in 2011 (by 14.6% in H1) • Exports diversified steadily, the share of transport services and timber fell from 48% to 30%, diversification continued in 2011 Why growth will continue – main reasons: • Good ratio of labour skills & costs • Product portfolio is diversified and is becoming more sophisticated • Macroeconomic stability is being restored

3. How export portfolio has changed since 2000 2000 2010 * non-food agriculturals

4. Main directions and drivers in the future Main directions of change • Increasing volume • Increasing diversity Main drivers • Increasing labour costs • Gradual absorption of agricultural land resources • Accumulation of capital by exporting businesses • Growing manufacturing competence • Brand building • Cumulative impact of serendipitous discoveries, positive Black Swans, bright ideas, unexpected synergies and just plain luck

5. Expected changes in portfolio in 2020 vs. 2010 In absolute terms all main export products can (and probably will) grow, including light industries

6. Let the thousand flowers bloom There are a few markets where Latvia is a well established player • High-end plywood (globally) • Some small and very small niches in electronics and data transmission equipment (globally) • High quality branded food products (Baltics and CIS) • Some diagnostic groups inpharmaceuticals (Baltics and CIS) LV entrepreneurs will pick up opportunities as they come along – as well as create them • Relatively new, fast growing markets (MikroTiks and its Wi-Fi solutions) • Overlooked technological opportunities in “traditional businesses” (Innovative concrete floors by Primekss) • Markets where people constantly wish to explore new offerings out of pure curiosity (“Bio-cosmetics” start-ups - Madara, Attirance and others) • Selling “just” high quality products at a good price in less saturated markets – Middle East, BRICs, Africa (Pure Food) Given the good quality/cost ratio of Latvia as manufacturing location, established manufacturers will set up operations here (Bucher Schoerling, Brabantia)

7. Obstacles to overcome It is difficult to confront large, resourceful companies in established businesses Latvia’s image has improved, but there is still a long way to go Macro & financial stability is much better than in 2009, but a lot of work still needs to be done Education system is still resisting change Road infrastructure in regions could become an increasing problem Country is racing against time to create opportunities for people who are prone to leave

8. Some plain advice Good industrial policy generally means working with probabilities • It is impossible to overestimate the importance of “unplanned” (at policy-making level) success in places no one could predict it • The export product structure should not be created by diktat from above • There have been and there will be many “counterintuitive” success stories • However the probability of such breakthroughs will largely depend on well planned improvements in education, infrastructure Understanding the dynamics of export product portfolio will be one of key competences of financial sector • Many observers with different viewpoints, experiences, prejudices will see more opportunities and spread risks • Success in financing exports will largely determine the success of banks

9. Thank you!