The fiscal deficit will grow next year

Oct 26, 2000
Jorgen Johansson

Fitch rates 69 countries and Latvia has the largest current account deficit as compared to gross domestic product. - 10.2 percent in 1999.

Sharon Leech, an economist in the sovereign ratings department at Fitch IBCA, said, however, that the current fiscal policies are encouraging in that they aim at a reduction of the fiscal deficit over the near term and reflect a cautious stance over the longer-term.

"Certainly this approach should not place unmanageable pressure on the general government debt stock since it is currently quite modest," Leech said. "However, the decision to relax the 2000-2001 targets could make it more difficult to reduce the current account deficit, which is large."

Finance Minister Gundars Berzins said a lower fiscal deficit would, of course, be preferred, but the current deficit fits in the Maastricht criteria, and "there is no way this endangers Latvia's finance or economic stability."

Latvia currently rates at a BBB on a 16 grade scale where AAA is the best and B- calls for some serious changes in finance policies.

Estonia landed just above Latvia with a BBB+, and Lithuania is lagging behind with a BB+.

Zoja Medvedevskiha, head of the Bank of Latvia's monetary policy department, said there's no doubt the government's decision to increase the fiscal deficit will put pressure on Latvian imports.

"The deficit on the fiscal bank account will not look good for the country," Medvedevskiha said. "We have had a tight fiscal policy for years."

Berzins said there are two main independent global factors forcing Latvia to increase the fiscal deficit - the fall of the euro and the increase in oil prices.

"The oil price increase is one of the main reasons why we have to decrease the forecast of the income about 20.6 million lats ($32.7 million) from excise tax on fuel products," Berzins said. "The income from excise tax on fuel is higher this year compared to last but lower than planned."

Leech mentioned that frequent changes of governments leads to an unstable business climate in the country.

"The worry for investors is that this could threaten the pace, if not the direction, of structural reforms," Leech said. "Businessmen also seem to feel that corruption is a bigger problem than in neighboring Estonia for example, as recent surveys show, and there are concerns over the apparent close links between politics and business."

Medvedevskiha said she does not see any threats economic development in the country, but added "we have to be cautious."

Leech said the long-term foreign currency rating rates the risk that a government will default on its foreign currency bonds while local currency ratings relate to local currency debt.

"Because the government has powers of taxation and foreign exchange control, the sovereign rating will generally act as the ceiling for all other rated entities in the country," Leech said.

Medvedevskiha said the government is under a lot of pressure to allocate funds for welfare and other ministries.

"The need for financing is very high," Medvedevskiha said. "The government is trying to return to a fiscal balance."

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