Standard & Poor’s downgrades Latvia and Estonia

Standard & Poor’s downgrades Latvia and Estonia
# 11 August 2009 13:07 (UTC +04:00)
Baku. Vahab Rzayev – APA-Economics. Standard & Poor’s Ratings Services on Monday downgraded the Baltic nations of Estonia and Latvia, citing challenges the region is facing as it deals with a steep recession after years of growth from foreign investments, WSJ reported.
Recession-hit Estonia has amassed a big current account deficit after lapping up cheap credit during the lending boom spurred on by Nordic banks earlier this decade. Already a member of the European Union, Estonia plans to adopt the euro were undertaken, in part, to avoid facing the same devaluation danger as neighbor Latvia. S&P warned current economic challenges could delay its efforts to adopt the currency.
In 2009, fixed investment in Estonia is set to contract 25% to 30%, as foreign capital is exiting sectors such as construction and retail. The worsening credit conditions are contributing to the country’s economic pressures and compounding difficulties the government faces as it seeks to maintain revenue while the tax base is decreasing.
But unlike many of its peers, Estonia entered the recession with larger fiscal reserves, and the public sector’s reliance on external financing is low. For those reasons, S&P said Estonia is unlikely to need to borrow in international markets over the next few years.
As a result of those concerns, S&P lowered its ratings on Estonia by one notch to A-. The ratings outlook is negative, reflecting the likelihood of another downgrade if current economic adjustment fails to improve competitiveness.
For its part, Latvia - which has an economy of less than $25 billion - took an outsized role in the global economic crisis. The International Monetary Fund expects Latvia’s economy to contract 18% this year and 4% in 2010. S&P noted Latvia faces political and economic challenges due to pressures on public finances and its lending program with the European Union and the IMF. Those groups stepped in to ensure Latvia doesn’t default on loans with Swedish banks, which could further damage the European banking system.
S&P lowered its ratings by one notch to BB, putting the rating two steps into junk. The outlook is negative.
In March, S&P cut its ratings on the third Baltic nation, Lithuania, by one notch to BBB. That’s two steps above junk.
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