LATVIA Law and Practice Contributed by: Jānis Kārkliņš, Edijs Brants, Pauls Zeņķis and Kristens Vorslavs, BERG
BERG Blaumana iela 16/18-2 Riga LV-1011 Latvia Tel: + 371 672 052 41 Email: info@berg.com.lv Web: www.berg.com.lv
1. Loan Market Overview 1.1 The Regulatory Environment and Economic Background Impact of Recent Economic Cycles
1.2 Impact of Global Conflicts Global conflicts have had a significant, albeit indi- rect, influence on the Latvian loan market, shaping its direction, terms, and overall trends. Heightened geo- political tensions, particularly the Russian invasion of Ukraine and broader global trade frictions, have gen- erated uncertainty, weakened external demand and dampened domestic lending activity. Despite falling inflation and gradual interest rate cuts by the ECB, Latvian banks have maintained a cautious stance, marked by high collateral requirements, subdued credit supply, and some of the highest lending rates in the euro area. While households have benefited from declining mortgage markups, corporate borrowers – especially export-oriented firms – continue to face structural bar- riers such as high refinancing costs and limited com- petition in the lending market. Thus, although mon- etary easing has created conditions more favourable to lending, the geopolitical environment and structural constraints have prevented a full recovery in credit growth. Overall, conflicts have reinforced caution and risk aversion in Latvia’s financial sector, slowing the transmission of more accommodative monetary policy into broader lending activity, and leaving the loan market constrained despite otherwise enabling
The direction and trends of the Latvian loan market have been significantly influenced by recent economic cycles and the evolving regulatory environment. While the decline in interest rates and favourable income dynamics created enabling conditions for lending, particularly evident in the housing loan segment where lending markups decreased, broader growth remained constrained. Weak external demand, rising labour costs outpacing productivity, and heightened geopolitical uncertainty have dampened both invest- ment activity and banks’ willingness to extend credit, resulting in persistently subdued corporate lending and some of the highest interest rates in the euro area. Regulatory Environment While recent legislative amendments and policy initia- tives – such as measures aimed at reducing refinanc- ing costs and fostering greater competition within the banking sector – have contributed to a modest improvement in borrowing conditions, persistent structural constraints within the Latvian economy continue to hinder the prospects for sustainable and broad-based credit market expansion. Furthermore, evaluation done by the Bank of Latvia of the govern- ment’s recent tax reform concludes that its impact is predominantly temporary, stemming primarily from an increase in private consumption driven by higher net wages, and that it is unlikely to generate meaningful structural progress or strengthen the long-term com- petitiveness of the Latvian economy.
macroeconomic conditions. 1.3 The High-Yield Market
The traditional capital market segments in Latvia, including the stock and bond markets, remain rela- tively small compared to other euro area countries.
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