IMF headquarters in Washington D.C.
Fitch said in a statement that the collapse of the Latviancoalition government could delay the adoption of budget amendments to maintain Latvia's budgetdeficit at 5 percent of GDP, as required by the IMF under a 7.5 billion eurosloan program agreed in December 2008.
Fitch believes that afailure to maintain budget controls could delay the disbursement ofinternational funds to Latvia,and lead to renewed pressure on the lat.
While Latviahas a history of short-lived coalition governments, the collapse of thefour-party coalition government headed by Prime Minister Ivars Godmanis hascome during a period of severe economic stress, said Fitch.
Fitch has estimated a contraction of around 10 percent in 2009 which impliesthat the government will have to take supplementary measures to meet its targetbudget deficit of 5 percent of GDP. The current Latvian budget is based on theassumptions of a 5 percent contraction of the economy in 2009 and an inflationrate under 6 percent.
Failure to agree to Prime Minister Godmanis' proposal to cut expenditure byreducing the number of ministries was a contributing factor to the government'scollapse, said Fitch.
The rating agency believes that Latvia's new government willinclude parties from the present coalition and that there is little appetite toshift policy away from the requirements of the IMF program.
"Nevertheless, the extent of the recession and economicpain from the austerity measures being felt by the country increases the riskof a popular backlash and could thwart the sustained implementation of the IMFprogram," said Fitch.
Fitch noted that deposit withdrawals from the Latvian banking system werecontinuing: 16 percent of total non-resident deposits have been taken out ofthe system since the beginning of December. Around a quarter of the withdrawalswere from Parex Banka, where a deposit freeze on large private depositors isstill in place.
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