
Fitch said in a statement that the collapse of the Latvian coalition government could delay the adoption of budget amendments to maintain Latvia's budget deficit at 5 percent of GDP, as required by the IMF under a 7.5 billion euros loan program agreed in December 2008.
Fitch believes that a failure to maintain budget controls could delay the disbursement of international funds to Latvia, and lead to renewed pressure on the lat.
While Latvia
has a history of short-lived coalition governments, the collapse of the
four-party coalition government headed by Prime Minister Ivars Godmanis has
come during a period of severe economic stress, said Fitch.
Fitch has estimated a contraction of around 10 percent in 2009 which implies
that the government will have to take supplementary measures to meet its target
budget deficit of 5 percent of GDP. The current Latvian budget is based on the
assumptions of a 5 percent contraction of the economy in 2009 and an inflation
rate under 6 percent.
Failure to agree to Prime Minister Godmanis' proposal to cut expenditure by
reducing the number of ministries was a contributing factor to the government's
collapse, said Fitch.
The rating agency believes that Latvia's new government will include parties from the present coalition and that there is little appetite to shift policy away from the requirements of the IMF program.
"Nevertheless, the extent of the recession and economic pain from the austerity measures being felt by the country increases the risk of a popular backlash and could thwart the sustained implementation of the IMF program," said Fitch.
Fitch noted that deposit withdrawals from the Latvian banking system were
continuing: 16 percent of total non-resident deposits have been taken out of
the system since the beginning of December. Around a quarter of the withdrawals
were from Parex Banka, where a deposit freeze on large private depositors is
still in place.