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Fitch Ratings downgrades Estonia, Latvia and Lithuania

09 April 2009 09:07 (UTC +04:00)

Bakuâ€“ APA-Economics. Fitch Ratings lowered its credit ratings on Estonia, Latvia and Lithuania, saying falling property prices, deteriorating bank asset quality and rising unemployment will put pressure on the Baltic nations’ governments to reduce spending to pay back creditors.
The Baltic states, which are all members of the European Union, became independent from the crumbling Soviet Union in 1991. The three countries enjoyed an economic boom in recent years, with domestic demand bolstered by rising wages and easy credit, but worries have risen about eastern Europe’s economic problems. Latvia’s government was toppled in February, making it the third European government after Iceland and Belgium to fall amid the economic crisis.
As such, Fitch on Wednesday lowered its long-term foreign and local currency and the short-term foreign currency issuer default ratings on the three countries by one notch each. The long-term foreign currency issuer default ratings stand at investment grade BBB+ for Estonia, BBB for Lithuania and junk level BB- for Latvia.
The downgrade of Estonia’s and Lithuania’s ratings reflects deterioration in economic prospects which will increase pressure on their macroeconomic frameworks, Fitch said. It also reflects their vulnerability to negative developments in Latvia, which is seen as being in a more dire position as the country turned to the International Monetary Fund for a EUR7.5 billion (US $10 billion) loan package.
Fitch is expecting the Latvian economy to contract by 12% in 2009, making it harder for the country to reach its target budget deficit of 4.7% of gross domestic product. If policies remain unchanged, Fitch expects the budget deficit could rise to 10% of GDP in 2009.
Given the deterioration in economic prospects in Estonia and Lithuania, Fitch said it will be harder for their governments to implement their adopted budget deficit targets of 2.9% and 2.1% of GDP, respectively. Both nations are trying to keep their budget deficits below 3% of GDP so they can adopt the euro as soon as possible.
Fitch now expects the Lithuanian economy to contract by 10% in 2009, compared with its forecast of a 5% contraction in December, when it last downgraded the nation’s foreign currency issuer default rating to BBB+. The government has already agreed to cut its budget expenditures and is planning to submit proposals for further cuts in June, but public protests against the government and a public backlash might make further budget cuts difficult, Fitch said.
The Estonian economy, meanwhile, contracted by 3.6% in 2008 and is expected to contract by 10% in 2009. Fitch said the government is set to propose new expenditure-cutting measures by the end of April, but the plans to improve the budget could be difficult to implement, leading to a budget deficit rising above the nation’s 2.9% of GDP target. Source: DOW JONES NEWSWIRES