Ratings downgrade no cause of alarm in Baltics

October 2, 2008

Riga – The long-term prospects for the economies of the three Baltic states were called into question Friday when London-based ratings agency Fitch downgraded its opinions on Estonia, Latvia and Lithuania. Fitch revised downward its foreign and local currency Issuer Default Ratings (IDRs) and its Country Ceilings for all three countries by one notch, while its overall Outlooks remain “Negative” for each country.
After a decade of strong growth, the economies of both Estonia and Latvia recently went into recession. Lithuania’s economy has so far escaped recession but is showing signs of a slowdown.
“The downgrade of the Baltic states reflects the risk that the deterioration in the European economic and financial environment will impose a more costly macroeconomic adjustment in the Baltic countries, given their large bank-financed current account deficits,” said Edward Parker, Fitch’s head of Emerging Europe sovereign ratings, in a company statement.
In August 2007, Fitch downgraded Latvia’s ratings by one notch, and during December-January it revised the Outlooks to “Negative” from “Stable” for all three countries, citing elevated financing risks.
“All three Baltic economies are in the top ten of those with the largest gap between outstanding bank credit and bank deposits relative to both GDP and total bank credit,” said Parker.
“The risk of a prolonged and deep recession cannot be wholly discounted,” he added.
However, Andris Vilks, chief economist with SEB Unibanka in Latvia and an adviser to the Latvian government, said that while the downgrade wasn’t surprising, ratings agencies tend to miss local subtleties.
“This continues the trend we saw last two weeks ago with Moody’s,” he told Deutsche Presse-Agentur dpa.
“The credit rating agencies deal with more visible goals, but there are also a lot of healthy signals. I would say the Baltics are more or less prepared and we understand that there are tough times ahead.”
“It’s mainly external trouble connected with the turbulence in the world financial markets. Plus there’s sluggish demand expected from EU countries, so we have a double shock at the present moment.”
“There is huge pressure for fiscal balance in all three Baltic states, which is something that is already being worked towards and in some cases has already been implemented,” Vilks said.