Latvia's Credit Ratings

This in Bloomberg Today:

Latvia's Economy to Slow on Credit Restrictions, Fitch Says

By Aaron Eglitis

July 4 (Bloomberg) -- Latvia's economy, the fastest growing in the European Union, will slow as government restrictions on credit begin to take effect, Fitch analyst David Heslam said.

The economic growth rate, which expanded by 11.2 percent in the first quarter, will gradually decline as credit becomes more difficult to get, Heslam, a director in Fitch's Emerging Europe Sovereign team, said by telephone from London yesterday.

Latvia's economy has expanded by more than 10 percent in the last eight quarters as a cheap credit increased domestic demand for imports, widening the current-account deficit. Fitch, which lowered Latvia's outlook to negative on April 5, said the economic imbalances may slowly improve as credit tightens.

``Government measures should prove to be effective and lead to a slowdown,'' Heslam said. The effect on the pace of growth should be ``moderate,'' he said.

Measures to slow inflation by restricting credit growth were adopted on March 6, including creation of a database and requiring that lending be based only on legally declared income.

The government also passed a capital gains tax on real estate, and will slow fiscal spending by balancing the budget this year and planning for surpluses in following years.

``It's a fairly good start, but they could have been more aggressive,'' Heslam said.

The cuts in fiscal spending may lead to a surplus this year, he said.

Latvia's current-account deficit narrowed to 25.7 percent of gross domestic product in the first quarter, from a record 26.3 percent in the fourth quarter. The size of the deficit should remain high in the meantime as companies move to replace plant and equipment, Helsam said.

`Structure Changing'

``We expect it to remain high, with upgrades being a large part of it.,'' he said. ``We see the structure changing.''

The annual inflation rate slowed to 8.2 percent in May, behind only Hungary's 8.5 percent in the European Union. Rising consumer prices forced the Baltic state to abandon its 2008 timetable to adopt the euro. The date may now be in five years at the earliest, Heslam said.

``Fairly recently, the prospect of euro adoption has shifted out for more than a year or two,'' he said. Latvia won't meet the inflationary criteria to switch currencies before 2012, he said.