Fitch included the Baltic duo in a sweeping downgrade that also included Bulgaria and Romania. Lithuania had already been given a thumbs down back in December 2007 when it too was downgraded to negative from stable.
"Current account deficits in the Baltic States, Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards," said Edward Parker, Fitch's Head of Emerging Europe sovereigns.
"External deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The Negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment."
Fitch estimates 2007 current account deficits (CADs) at 25% of GDP in Latvia, 19.5% in Bulgaria, 16% in Estonia, 14% in Romania and 13.7% Lithuania. Along with Georgia (rated 'BB-' (BB minus)/Stable), Fitch estimates these to be the highest CADs out of all of the 105 Fitch-rated sovereigns.
Concerns over substantial CADs, external financing requirements and rapid credit growth have heightened over the past twelve months as macroeconomic imbalances have widened.
The recent global 'credit crunch' has exacerbated matters further, leading Fitch to conclude that the economic prospect for the Baltic region is weakening.
Inflation remains high, weakening euro area GDP growth will adversely affect exports and delays to euro adoption timetables are further factors identified by Fitch as worries.
The latest move continues a steady decline in Fitch's ratings for the region. It downgraded Latvia's long-term foreign currency to 'BBB+' from 'A-' in August, and revised the outlook on Lithuania's long-term foreign currency to Negative from Stable in December.
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