TALLINN - Estonia may be forced to postpone its adoption of the euro as its budget deficit for 2009 is likely to reach 4 percent of GDP, Fitch rating agency warned in December, reported Internet site bbn.ee. Fitch considers that Estonia is most likely to adopt the euro in 2012 after reducing its budget deficit to 2.9 percent of GDP in 2010.
The rating service said there remains “some uncertainty” about Estonia’s application for euro adoption. This would depend upon how the Maastricht inflation criterion would be interpreted, whether a sustainable price performance is consistent with deflation caused by a severe recession, shortly after the economy was in double digit inflation.
However, if the EU judges that the three percent of GDP reference value has only been exceeded “exceptionally and temporarily” and that Estonia’s medium-term budget plans to reduce the deficit to under three percent are credible, or if the Estonian government succeeds in delivering a budget deficit below the reference value in 2009, then Estonia could join the eurozone in 2011.
Latvia and Lithuania are likely to switch to the euro in 2015, Fitch asserts. It said that Latvian debt may increase to 61 percent of GDP by the end of 2011, and Lithuania’s may rise to 47 percent of GDP. Estonia, which ran budget surpluses during its economic boom years, will have the lowest government debt in the EU until 2011.
Latvia’s and Lithuania’s sovereign ratings remain under “downward pressure” as the Baltic States’ economic difficulties send deficits and debt levels higher. Latvia’s BB+ rating, the highest non-investment grade, and Lithuania’s BBB rating, two levels above junk, are more at risk of a downgrade than Estonia’s BBB+ rating, Fitch reported in December.
The Baltic countries’ ratings remain under pressure due to the extent of the recession, the risk of political fallout over multi-year fiscal austerity measures, the pace of the deterioration of bank asset quality and the continued risk of currency devaluation in Latvia.
Fitch sees some signs that the sharp decline in the economies might be bottoming out. The pace of economic contraction slowed in the second quarter last year from the previous quarter for all three Baltic States, while Lithuania saw quarter-on-quarter growth in the third quarter 2009.
It is, however, too early to claim a sustainable rebound has started. Although large current account deficits, which were a rating weakness for the countries, have reversed rapidly, and inflation rates and real wages are also coming down, more adjustment is needed. Fitch forecasts that gross external debt and external financing needs will still be large compared with regional and rated peers at the start of 2010.