S&P cut Latvian, Lithuanian ratings

Baltic Business News
Marge Tubalkain-Trell
October 28, 2008

Rating agency Standard & Poor’s cut the long-term soverign ratings for Latvia and Lithuania. Estonia’s rating was kept unchanged. Outlooks for all thee Baltic countries were kept negative.

The ratings company cut Latvia’s ratings to BBB from BBB+, the second-lowest investment grade, while Lithuania’s rating was reduced to BBB+ from A-, one step higher, Bloomberg mediates S&P’s statement. Estonia’s ratings were kept unchanged at A.

Growth in the Baltic economies skidded after foreign-owned lenders tightened credit, real-estate prices dropped and domestic demand contracted. S&P’s rating cut follows similar action by Fitch Ratings Service on Oct. 3. All three Baltic economies risk contracting next year, S&P said.

“The decision to lower the ratings reflects our expectation that the new Lithuanian government, facing its first probable recession since independence, has few policy options but to increase fiscal deficits and raise its debt burden,” said Eileen Zhang, an analyst with S&P.

Latvia’s economy will probably shrink 0.5 pct this year and 2.4 pct in 2009, due to weak foreign demand, falling housing prices and rising funding costs for domestic banks, increasing the likelihood of government support for one or more of these banks, S&P said.

Lithuania’s economic growth will probably average 3.4 percent this year before stagnating or mildly’contracting in 2009, S&P said. Estonia’s economy will contract 1.8 percent this year and 2.4 percent in 2009, before recovering to 3 to 4 percent growth.

Latvia’s budget deficit will exceed 3 percent of GDP in 2009. The ratings could be lowered further if pressure on the exchange rate intensifies or the economy contracts faster than our expectations.”

“According to S&P Estonia’s strengths are reserves collected in previous years and government’s sufficiently strong budget. Also current account deficit is successfully diminishing,” Andres Sutt, vice president of Estonian central bank told arileht.ee.

He added that country’s economic policy for next three years must be aimed to euro adaption, which means it’s very important to have a good, balanced budget for 2010.

Sutt said Estonia’s need for foreign financing should be continuously diminishing next year and when external demand improves, Estonia’s economic growth will rely more on export.

“That gives us a basis to hope that rating’s negative outlook will be changed to stable,” said Sutt.

Rating agency Fitch lowered Estonia’s rating to level A- negative in Octoberr. Moody’s gave it’s last opinion in September this year and that was A stable.