VILNIUS - According to a July 23 report released by the international rating agency Standard & Poor's, the outlook on the sovereign debt ratings of Estonia, Latvia and Lithuania remains negative due to the continued risk of a hard landing these economies face.
S&P analyst Eileen Zhang said that the situation in Lithuania was better than in Latvia or Estonia as it is approximately 12-18 months behind in the business cycle compared with its neighbors and hasn't yet reached the overheated stages experienced by the Latvian and Estonian economies. The analyst however warned that the situation could worsen in Lithuania in the future.
Standard & Poor's affirmed Estonia's ratings at A/Negative/A-1 (respectively the long-term credit rating/ economic outlook/ short-term credit rating), Latvia's at BBB+/Negative/A-2, and Lithuania's at A-/Negative/A-2.
A sharp economic slowdown could increase unemployment, increase private sector bankruptcies, and significantly worsen the public sector balance sheet, says Zhang though she added that this is not what S&P is expecting.
Toward the end of 2007 the credit-fueled boom in Estonia and Latvia came to an end, the agency says in its re-cap. By the fourth quarter, fixed investment in Estonia was already contracting, a trend that continued into the first quarter of 2008 as residential construction activity dropped. A similar reversal of domestic demand was taking place in Latvia as well.
A hard landing can still be avoided. S&P says that export growth in all three Baltic states remains quite strong, suggesting that producers are enjoying some success at reorienting their focus towards external markets.