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Nov. 2 (Bloomberg) -- Latvia’s 2012 budget, which envisages a continuation in spending cuts, will test the government because of the high number of new lawmakers following September elections, Moody’s Investors Service said.
Further fiscal consolidation, which has brought the Baltic nation closer to joining the euro region, may trigger an upgrade to its Baa3 credit rating, the lowest investment grade, Moody’s said today in an e-mailed report from London. Reversing spending cuts and tax increases may lead to a downgrade, it added.
“Preparing and passing the 2012 budget will be the test for the coalition as around 40 percent of the new parliament are first-time members,” Moody’s wrote. The new government, which was confirmed in an Oct. 25 vote, “reaffirms our view on institutional strength,” the ratings company said.
Latvia raised taxes and slashed spending equivalent to 17 percent of gross domestic product after turning to a group led by the European Commission and the International Monetary Fund for a 7.5 billion-euro ($10.3 billion) bailout loan in 2008. It plans further spending cuts next year to trim the budget deficit to 2.5 percent of GDP before adopting the euro in 2014.
Latvia’s economy grew 5.6 percent in the second quarter, the quickest in 3 1/2 years, and may grow 4.5 percent this year, according to government estimates. GDP may expand 2.5 percent next year, the government forecasts.
--Editors: Andrew Langley, Jennifer Freedman
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