Credit outlook improves for Latvia

RIGA - Latvia’s credit rating outlook was raised to ‘positive’ from ‘stable’ at rating agency Standard & Poor’s, based on the Baltic nation’s growing competitiveness and lower dependence on external financing, reports Bloomberg. S&P affirmed Latvia’s long-term rating at BB+, one level below investment grade, analyst Frank Gill said in a statement from London on March 9. A positive outlook means the credit evaluator is more likely to raise the grade than to cut it or keep it unchanged.

 “The Latvian economy is rebalancing rapidly toward being considerably less dependent on external financing,” S&P said. “The current account has moved into surplus over the last two years, with the trade deficit, which excludes services, falling by two-thirds and net income turning positive as foreign banks have written off some investments.”
A moderate current account deficit is projected for Latvia. S&P says in the report that Latvia’s exports in 2010 were approaching the pre-crisis level of 2008, and the economic growth was faster than in 2009.

Latvia’s gross domestic product grew an annual 3.7 percent in the last three months of 2010, the quickest pace of expansion in three years as exports and industrial production picked up. The country has passed austerity measures equal to about 16 percent of GDP since the crisis began in 2008 and plans more in a supplementary budget this year to comply with its 7.5 billion euro international bailout loan package from a group led by the European Commission and the IMF.

Unit-labor costs have declined an estimated 25 percent during the recent crisis as evidence of improving competitiveness, S&P said. The budget deficit this year is expected to shrink to 5.1 percent, compared with an 8.2 percent deficit last year, it added.
“This evaluation is very meaningful for the potential development of Latvia’s economy,” Finance Minister Andris Vilks said in an e-mailed statement. The government needs to pass a quality supplementary budget so that the credit rating may be raised in the “near future,” Vilks said. Latvia may sell as much as 1.5 billion euros of bonds this year should the credit rating be raised to investment-grade, Vilks said in an interview on Jan. 18.
“It is our view that the government will likely meet its goal of reducing the budget deficit to below 3 percent by 2012,” S&P said in the e-mailed statement. Euro adoption may be delayed until at least 2015 due to rising consumer prices in the country, the ratings company said.

Prime Minister Valdis Dombrovskis (Unity) said that this is yet another confirmation of the stabilization of Latvia’s financial system and the successful policies that have been implemented to overcome the economic crisis, reports LETA. “As we know, Latvia was successful in achieving stability in the financial market last year. The recovery of Latvia’s economy has been acknowledged abroad by international ratings agencies. The improvement of Latvia’s outlook will positively influence the availability of credit for the country’s residents and businesses,” the prime minister emphasized.
Gross government general debt is expected to stabilize at 47 percent of GDP, say analysts.

Moody’s Investors Service rates the country Baa3, its lowest investment grade, with a stable outlook. Fitch Ratings has a BB+ rating for Latvia, one level below investment grade, with a stable outlook.