RIGA - Latvia’s credit rating outlook was raised to “stable” by Fitch Ratings after the government got under control a spiraling budget deficit and stabilized the economy following the European Union’s deepest recession, reports Bloomberg. The improvement means Fitch is more likely to leave Latvia’s BB+ rating unchanged than raise or lower it, Fitch said today in a statement. The rating, one step below investment grade, puts Latvia on par with Romania, Turkey and Colombia.
Latvia’s economy is bouncing back from last year’s 18 percent slump, on top of the previous year’s 5 percent drop, as manufacturing and exports advance. Prime Minister Valdis Dombrovskis’ government implemented tax increases, spending and wage cuts equal to 10 percent of GDP to keep the budget deficit at 9 percent of GDP and meet the terms of a 27 month 7.5 billion-euro loan package led by the EU and IMF.
“Financial and economic stabilization in Latvia and an improvement in the country’s external liquidity supports the revision of the rating outlook to stable,” Douglas Renwick, associate director of Fitch’s sovereign group, said in the statement.
The yield on Latvia’s 5.5 percent bond due March 2018 was trading last week at 5.45 percent. That compares with a high of about 12 percent in March 2009. The cost of insuring Latvia’s debt against default fell to 332 basis points (3.32 percent) last week, down from 1,200 basis points.
“This is very important news for the improvement of Latvia’s investment environment,” Martins Kazaks, chief economist at Swedbank’s Latvian unit, said in an e-mail. “From a macroeconomic viewpoint the situation has really improved.”
Government debt is expected to peak at 51 percent of gross domestic product in 2012, Fitch estimated. That compares with an average of 84.7 percent for the countries sharing the euro, according to the European Commission.
Latvia may adopt the euro in 2014 “at the earliest,” Fitch said.
Second-quarter GDP expanded a seasonally adjusted 0.1 percent from the previous three months after growing 0.3 percent in the first quarter from the previous quarter. Fitch estimates GDP will contract 2 percent this year before expanding 2 percent in 2011 and 3 percent in 2012.
“The economy is now in a fragile state, with the recession technically over but a painful adjustment still underway, which Fitch expects to continue over the medium term,” the company said in a separate report.
The country, which lets its currency float 1 percent around the midpoint of a range fixed to the euro, has seen its competitiveness improve. Unit labor costs fell 22.7 percent from a year earlier in the first quarter, according to Fitch.
Standard & Poor’s rates Latvia BB, two levels below investment grade, with a stable outlook. Moody’s Investors Service rates the country Baa3, its lowest investment grade, with a stable outlook.
“Given the scale of the output and budgetary collapse in 2009, the economy has demonstrated considerable resilience,” Fitch said. “The real exchange rate is adjusting and the currency peg is no longer under immediate threat.”