Analytics, Baltic, Economics, Rating

"The downturn is sharp in Estonia and Latvia and they are at risk of recession, heightening downward pressure on creditworthiness,'' Fitch analyst Eral Yilmaz, said in a statement today.

The economies of Latvia, Estonia and Lithuania are slowing after a credit-led boom following European Union entry in 2004, pushing down property prices and cutting real estate sales, reports LETA.

Estonia's economy contracted 1.4% in the second quarter of this year, and Latvia's GDP grew 0.2% after the two countries had the fastest growing economies in the EU in 2005.

Fitch said a prolonged economic slump could lead to ratings downgrades for Estonia, Latvia and Lithuania, which it rates A, BBB+ and A, or five grades above investment grade. The ratings company has negative outlooks for all three countries.

"A recession or protracted slowdown, particularly in conjunction with persistent high inflation, deteriorating competitiveness and problems in the banking sector, or devaluation of the Baltic currencies – which is not Fitch's central scenario – would likely lead to a downgrade,'' Fitch said in the statement.

"An orderly unwinding of macroeconomic imbalances would likely lead Fitch to revise the outlooks back to stable,'' Yilmaz said in the statement.

The ratings company said Latvia's economy would expand 1% this year, after growing 10.3% in 2007. Estonia's economy would contract 0.5% this year, after 7.1% the previous year and Lithuania's economy would slow to 4.5% this year compared with 8.8% in 2007.

All three countries are expected to have budget deficits of around 1% of GDP this year as the economy slows, Fitch said.

Estonia is to balance the budget in 2009, and Latvia and Lithuania will both have around a 1% budget deficit, the credit company said.

Latvia's economy will contract 0.4% this year and expand 0.5% next year, as domestic demand shrinks and export growth may slow, said Aidan Manktelow, an analyst at the Economist Intelligence Unit.

"The main internal risk for the economy is that domestic demand could fall by even more than expected, leading to weaker GDP growth outturns and delaying until 2010 the recover expected in the second half of 2009," Manktelow said.