Moody's: Latvian economy is stabilizing

08.02.2010, 13:56

Latvia’s economy is beginning to stabilize as exports recover and the country’s current-account turned to surplus, said Moody’s Investors Service that rates Latvia Baa3, its lowest investment grade, with a negative outlook.

“Latvia’s economy and government finances are now beginning to stabilize after being severely affected by the global financial crisis in 2009,” said Kenneth Orchard, a vice president and senior analyst at Moody’s, in an e-mailed statement.

“The strengthening regional economy is supporting Latvian production and exports, while the sharp swing in the current account balance suggests that the country’s ‘internal devaluation’ is working,” Orchard said.

“The EU is highly committed to preserving financial and social stability in Latvia, and it would probably increase its assistance if the crisis were to deepen further,” Moody’s said in the report.

Asking rates on the three-month Rigibor, the interbank lending rate, fell to 3.35% on Feb. 5, compared with a high of 29.8% on June 26 on speculation the country would be forced to devalue.

The current-account deficit, which swelled to a record 27.1% of GDP in the fourth quarter of 2006, has turned to surplus and Latvian exports stopped declining in November after falling for the previous 12 months, the statistics office said on Jan. 11.

After a 19% economic contraction in the third quarter, the government of Valdis Dombrovskis has appeased international lenders by implementing an austerity budget and restricting the deficit. Latvia turned to a group led by the EU and International Monetary Fund for a 7.5 billion-euro bailout in 2008 after its second-biggest bank failed.

The government opted to keep the lats pegged to the euro and avert a devaluation, aiming to boost competitiveness through wage cuts and deflation.

Standard & Poor’s rates Latvia BB, its second-highest junk rating, and Fitch Ratings rates the country BB+, its highest junk rating.