Analytics, Financial Services, Investments, Latvia, Rating

"Latvia's economy and government finances are now beginning to stabilise after being severely affected by the global financial crisis in 2009. 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," says Kenneth Orchard, Vice President-Senior Credit Officer in Moody’s Sovereign Risk Group and author of the report.

Moody’s also recognises that substantial assistance from the IMF and EU has led to a marked decline in Latvia's financial stress. In particular, the potential risk of a disorderly devaluation has declined significantly. 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, informs LETA.

"However, there remains uncertainty around the timing of Latvia's recovery. The economy is forecast to contract around 2% in 2010 as the private sector continues to deleverage and the government tightens the budget. Credit growth is constrained as the banking sector copes with a surge in non-performing loans," Orchard adds.

National elections, scheduled for October 2010, also cloud the outlook for economic policy, the report explains.

Moody’s believes Latvia's economic growth is likely to remain weak for another two to three years. The rating agency anticipates, however, that continued progress nonstructural reforms and fiscal consolidation will enable the country to restore economic health. Euro adoption would likely follow in 2014-15, which would eliminate balance of payments risks and boost confidence in financial stability.

"However, any policy slippage could lead to a return of external imbalances, economic stagnation and renewed devaluation speculation," Orchard cautions.

The issuance of this credit report by Moody’s Investors Service is an annual update to the markets and is not a formal action to alter the credit rating of the issuer.