Fitch Ratings has today downgraded the long-term foreign and local currency issuer default ratings and country ceilings of Baltic States Estonia, Latvia and Lithuania by one notch. The outlooks remain negative.
"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," Edward Parker, head of emerging Europe
sovereigns at Fitch, said.
The downgrades are as follows:
EstoniaLong-term foreign currency IDR: downgraded to 'A-' (A minus) from
'A'. Outlook remains Negative Long-term local currency IDR: downgraded to
'A' from 'A+'. Outlook remains Negative Short-term foreign currency IDR:
affirmed at 'F1'Country Ceiling: downgraded to 'AA-' (AA minus) from
'AA'
LatviaLong-term foreign currency IDR: downgraded to 'BBB' from 'BBB+'.
Outlook remains Negative Long-term local currency IDR: downgraded to 'BBB+'
from 'A-' (A minus). Outlook remains Negative Short-term foreign currency
IDR: downgraded to 'F3' from 'F2'Country Ceiling: downgraded to 'A' from
'A+'
LithuaniaLong-term foreign currency IDR: downgraded to 'A-' (A minus)
from 'A'. Outlook remains Negative Long-term local currency IDR: downgraded
to 'A' from 'A+'. Outlook remains Negative Short-term foreign currency IDR:
affirmed at 'F1'Country Ceiling: downgraded to 'AA-' (AA minus) from
'AA'
Fitch has long highlighted substantial current account deficits (CADs) and
external financing requirements, rapid bank credit growth and rising external
debt ratios as rating weaknesses in the Baltic States. 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 from the global credit shock.
The further deterioration in global and, especially European, financial
conditions and the likelihood of recession in the euro area have heightened the
risks for economies with large external financing needs and reliance on bank
financing. 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.
Reassuringly, a macroeconomic adjustment is under way in the Baltic States.
Credit growth has been easing for several quarters and Fitch forecasts Estonia's
CAD to narrow to 10.5 pct of GDP this year from 17 pct in 2007,
Latvia's to 15 pct from 23 pct, but Lithuania's to increase to 14.5
pct from 13 pct (though the trade deficit is narrowing). Nonetheless,
financing requirements remain substantial. Fitch projects 2009 gross external
financing requirements (CADs and medium- and long-term amortisation) plus
short-term external debt at around 400 pct of end-2008 foreign exchange
reserves in Latvia, 350 pct in Estonia and 250 pct in Lithuania, the
highest ratios in emerging Europe.
Furthermore, this rebalancing is taking a toll on the real economy. Real GDP
contracted in H108 (on a quarter-on-quarter seasonally adjusted basis) in
Estonia and Latvia, meaning they are in recession. This represents a "hard
landing" from year-on-year GDP growth of 8.1 pct and 11.6 pct,
respectively, in H107. In Lithuania, the slowdown, like the preceding economic
boom and imbalances, is less marked, but GDP growth still slowed to an
annualised 2.4 pct in H108, from 8.8 pct in 2007. Furthermore, 19
pct of its merchandise exports go to its Baltic neighbours and linkages
through common bank ownership are significant. In addition, all three countries
have suffered an inflationary shock: the latest 12-month harmonised consumer
price inflation rate for August is 15.6 pct in Latvia, 12.2 pct in
Lithuania (the two highest in the EU) and 11.1 pct in Estonia.
A hard landing and high inflation are making macroeconomic policymaking more
challenging. The slowdown in bank credit and GDP growth, and falls in property
prices are already having an adverse affect on budget balances and bank asset
quality, albeit from strong starting points. Strong public finances are a key
support to sovereign creditworthiness and provide headroom for governments to
help cushion the slowdown. At end-2007, government debt was just 2.7 pct of
GDP in Estonia, 9.7 pct in Latvia and 17.3 pct in Lithuania.
Relatively strong institutions and flexible economies should also help the
adjustment. Nonetheless, with limited policy tools available to manage the
adjustment given fixed exchange rate regimes - which Fitch expects to remain in
place - and the dominance of large foreign-owned banks, the risk of a prolonged
and deep recession cannot be wholly discounted, increasing the potential for
adverse economic and fiscal shocks. Kaja Koovits
Fitch Ratings has today downgraded the long-term foreign and local currency issuer default ratings and country ceilings of Baltic States Estonia, Latvia and Lithuania by one notch. The outlooks remain negative.