Latvia’s long-term sovereign rating was cut to BBB+ from A- by Fitch Rating Service on Friday.
“The Latvian economy is severely overheating and Fitch considers the policy reaction of the government to be insufficient to restore the economy to a sustainable growth path,” the company said in its press release. It added: “With euro adoption delayed until at least 2013, the support that potential EMU membership provides to Latvia’s overstretched external finances has diminished.” The news is likely to deal a further blow to the government’s plan to combat rising inflation unveiled earlier this year. The plan aims to curb inflation by gently reining in its own spending and encouraging the public to save more and spend less, especially in the overheated property market. “As such, it is not a roadmap to enable the country to meet the Maastricht inflation criterion in the short term,” the agency said.
Latvia’s large current account deficit, rapid private sector credit growth and high inflation rate show that the economy is overheating, the agency said it its press release. Latvia claims the highest current account deficit in EU at 21% of GDP in 2006 and almost 26% in Q1 of 2007. The country’s private sector grew over 60% in both 2006 and 2005, the agency said. Latvia has a substantial and rapidly rising external debt burden and a large external financing need, which leave it vulnerable to external financing risks, the agency said. Annual inflation in Latvia jumped to 9.5% in July, the highest figure among the 27 European Union countries, the Latvian Statistics Bureau announced earlier this month. The inflation remained above 6% since Latvia joined the EU in 2004. Latvia’s annual average inflation - a different measure from the rolling 12-month rate - was 6.5% in 2006 and experts suggest it will reach 8% this year.
“Even under the framework of the (anti-inflation) plan, the Bank of Latvia expects the current account deficit to fall below 20% only in 2009, while the Ministry of Finance expects that the plan will only lower inflation marginally during the next two years, by 0.5% in 2008 and 2009,” the agency said. “Latvia’s gross external debt burden will therefore continue to rise in the medium-term, worsening comparisons with rating peers.” The strict EU criteria for adopting the euro say that countries must have an average annual inflation rate no higher than the average of the three lowest rates in the EU, plus 1.5%. Latvia exceeds the requirements. (monstersandcritics.com)