Fitch Ratings raises outlook for Latvia

Calling improvements in Latvia’s economy encouraging, the London-based Fitch Ratings has revised its outlook for the country’s creditworthiness to stable from negative.

The ratings service also forecast that Latvia’s medium-term economic recovery will be led by exports, but noted that the country’s gross domestic product will remain “below-trend” until 2012.

Latvian Finance Minister Einars Repše expressed pleasure at the upgrade.

“This rating is very important for our foreign investors and for the international community, because it is a meaningful signal that affirms what Latvia has done to overcome the economic crisis,” Repše said in a press release.

Last year, rating services Fitch, Moody’s Investors Service and Standard & Poor’s all lowered their evaluations of Latvia’s creditworthiness. The country has been among the hardest hit in Europe in the wake of the global economic crisis. High unemployment spurred continued emigration, and the government was forced to drastically slash the national budget and raise taxes to avoid going bankrupt.

“Although Latvia’s fiscal deficit remains high, consolidation measures enacted to date have been substantial,” Douglas Renwick, associate director in Fitch’s sovereign group, said in a press release. “Fitch expects further budget tightening over the coming year, even if a change of government follows October’s elections.”

Latvian voters go to the polls Oct. 2 to elect a new parliament, which will approve a new government. Current Prime Minister Valdis Dombrovskis and his centrist Vienotība (Unity) coalition face strong competition in the election from the center-left and Russian-oriented Saskaņas Centrs (Harmony Centre) and the conservative Par Labu Latviju! (For a Good Latvia!). In all, 13 parties are vying for seats in the parliament.

Fitch noted that “further budget tightening measures will be required by the next government if public debt sustainability is to be restored.” While acknowledging that the Dombrovskis government might be forced out, the ratings service added that “there is a high degree of consensus across the Latvian establishment regarding the need for consolidation to fulfill the long-standing aim of adopting the euro.”

In March, Moody’s revised its rating of Latvia’s creditworthiness to Baa3 stable, up from Baa3 negative. The Baa3 rating overall is the lowest investment grade rating, just above “junk” status. Standard & Poor’s in February raised its rating of Latvia to BB stable from BB negative. A BB rating is still below investment grade in Standard & Poor’s evaluation system.