LONDON - Rating agency Fitch maintained its wary estimation of Latvia on July 23rd by giving the country's Long-term Issuer Default outlook as 'Negative'.
"The Latvian economy is clearly undergoing a sharp slowdown after an extended period of overheating," said Eral Yilmaz, Associate Director in Fitch's sovereigns group, "However, persistent high inflation rates and continued wage growth, coupled with the scale of the imbalances in Latvia's external finances, suggest that it is too early to determine which path of adjustment the Latvian economy will follow and the risks remain on the downside."
Though Fitch sees some positives in a narrowing of the current account deficit and a slowing of credit growth, Latvia remains a worry because of its high imbalances.
"At 23% of GDP in 2007, Latvia's current account deficit was the highest of 105 Fitch-rated sovereigns, while its gross external debt burden stood at 142% of GDP. At 80% in 2008, Latvia's liquidity ratio is below the 'BBB' range median of 166% while its external financing need in 2008 (forecast at 152% of official reserves) is the second-highest in central and eastern Europe," the Fitch report says, adding that adoption of the euro now looks unlikely until 2014.
It also casts doubt on government plans for a budget surplus of 0.05% for 2008. Fitch estimates that a deficit of 0.9% looks a more likely bet."Latvia faces a challenging and uncertain 12 months as it undergoes a rapid macroeconomic adjustment," Fitch says.
"A recession or protracted slowdown, particularly in conjunction with persistent high inflation, deteriorating competitiveness, and problems in the banking sector would likely lead to a downgrade. A devaluation of the currency - which is not Fitch's central scenario - would also likely lead to a downgrade."
