S&P offers crumbs of comfort

  • 2008-07-24
  • By Mike Collier
LONDON - Standard & Poor's Ratings Services has joined rival Fitch in delivering a negative verdict on the Baltic states' sovereign credit ratings, albeit with a faint tinge of hopefulness, particularly with regard to Lithuania's future prospects.

On July 23rd, S&P affirmed its sovereign credit ratings as" Lithuania (A-/Negative/A-2), Estonia (A/Negative/A-1), and Latvia (BBB+/Negative/A-2). Standard & Poor's also published an accompanying article, titled "The Baltic Hangover: No More Double Vision," giving the reasons for its downbeat assessment but offering a few crumbs of comfort to investors.

"The outlook on all three Baltic sovereigns remains negative due to the continued risk of a hard landing for the Baltic economies," S&P credit analyst Eileen Zhang said. "In our view, a hard landing constitutes a sharp economic slowdown that is substantial enough to reduce employment, increase private sector insolvencies, and significantly worsen the public sector balance sheet. This isn't our baseline scenario, however, and in fact parent bank support remains very robust, while there is minimal evidence of large-scale layoffs in each of the three economies."

Toward the end of 2007, in the wake of the global credit crunch, the credit boom in Estonia and Latvia was already coming to an end. By the fourth quarter, fixed investment in Estonia was contracting, a trend that continued in the first quarter of 2008 as residential construction activity stagnated. A similar reversal of domestic demand was visible in Latvia, highlighted by the collapse of car sales and property-related consumer durables. But S&P believes Lithuania distinguishes itself from the other Baltics in that its business cycle is 12-18 months behind Estonia and Latvia.

"The intrusion of the global credit crunch at a somewhat earlier stage in Lithuania's business cycle may ultimately prove to be a blessing," S&P believes.

"What is comforting is that export growth in all three Baltics remains quite strong, suggesting that, while challenges to long-term competitiveness remain, producers are enjoying some success at reorienting their focus towards external markets," Ms. Zhang said.

"The question remains whether this is mostly a nominal rather than a volume effect. If the former explanation turns out to be the case, then headline GDP growth performance in all three Baltics will almost certainly be disappointing. On the other hand imbalances are clearly unwinding, which is lowering the Baltics' external financing needs and putting their economies on a more sustainable path."