Economic Situation in Latvia

Latvia's banking sector remained financially sound in 2007. Despite the emerging signs of moderation in the growth of Latvia's economy, this was evidenced by still high earnings and profitability indicators as well as good quality of loans. In the second half of 2007, the government's anti-inflation plan, a more prudent bank lending policy and developments in the global financial markets facilitated deceleration of lending growth rates; domestic demand gradually subsided, and real estate prices experienced a change of trend- the steep growth was replaced by a moderate decline. From the financial stability aspect, the new trends are positive and welcome; however, considering the macroeconomic imbalances in the Latvian economy, serious risks to financial stability need to be reckoned with.