Latvia’s credit rating was raised to investment grade by Standard & Poor’s for the first time since 2009 because of the Baltic nation’s efforts to narrow its budget deficit.
S&P increased its assessment one step to BBB-, the lowest investment grade, from BB+, assigning a stable outlook. That’s on a par with Azerbaijan and Croatia. S&P joined Fitch Ratings and Moody’s Investors Service in rating the country’s debt investment grade.
“The rating on Latvia balances our view of the government’s proven political commitment to fiscal discipline and the economy’s considerable flexibility,” S&P analysts Ivan Morozov and Eileen Zhang said today in an e-mailed statement from London. Latvia “cut the general government deficit to 3.5% of gross domestic product in 2011 from 9.8% in 2009.”
Latvia’s economy expanded 5.5 percent last year, buoyed by export and industrial growth, after shrinking almost a quarter in 2008-2009. The Baltic nation ended a 7.5 billion-euro ($9.9 billion) bailout in 2011 from a group led by the International Monetary Fund and European Union, after passing tax increases and spending cuts of almost 18 percent of GDP since end-2008.
The yield on Latvia’s dollar bond due 2021 fell 5 basis points to 5.17 percent after the announcement. The cost of insuring government debt against non-payment for five years using credit-default swaps fell to 249 basis points from 257, data compiled by Bloomberg show.
“Latvia is in a truly unique situation,” Finance Minister Andris Vilks said in an e-mailed statement. “At a time when economic activity in the European Union is decreasing and the ratings of the majority of member states are being reduced, the rating on our country is increased.”
The upgrade “is long overdue,” according to Martins Kazaks, chief economist at Swedbank AB’s Latvian unit in the capital, Riga.
“Unless something very bad happens in Europe, we should expect further improvements in ratings,” he said by phone.
The Finance Ministry predicts the economy will grow about 2 percent this year, while the budget gap will narrow to 2.5 percent of GDP, within the 3 percent limit needed to adopt the euro, which is planned in 2014.
S&P forecasts Latvia will succeed in trimming this year’s fiscal deficit to less than 3 percent. The Baltic nation’s credit grade may be further enhanced should private-sector foreign debt continue to fall and inflation remain consistent with adopting the euro, it said.
Countries seeking to adopt the euro must keep inflation at less than 1.5 percentage points above the average of the three lowest levels in the EU. Latvia’s 12-month consumer-price index was 4.1 percent in March, according to Eurostat. The threshold for the currency changeover was 3.1 percent.
“We do not assume that euro-zone entry would necessarily occur within the two-year outlook horizon,” S&P said. “Inflationary risks are significant.”
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