Reuters logo
Fitch Affirms Latvia at 'A-'; Outlook Stable
April 28, 2017 / 8:05 PM / 6 months ago

Fitch Affirms Latvia at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, April 28 (Fitch) Fitch Ratings has affirmed Latvia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A-' with Stable Outlooks. The issue ratings on Latvia's senior unsecured foreign and local currency bonds have also been affirmed at 'A-'. The Country Ceiling has been affirmed at 'AAA'. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'F1'. KEY RATING DRIVERS Latvia's ratings are supported by the sovereign's institutional strengths and a credible policy framework aided by eurozone membership, as well as a more favourable fiscal position relative to 'A' rated peers. However, the country's lower per capita income, weaker external finances, smaller and more open economy, and weaker demographics compared with its 'A' peers constrain the ratings. Latvia's economy grew 2.0% in 2016, below the 'A' median of 2.7% but slightly above the eurozone average (1.8%), after growing 2.7% in 2015. For 2017, Fitch forecasts growth to rise to 2.6% due to a rebound in investment stemming from a recovery in use of EU funds after a double-digit slump in 2016, caused by the EU funding cycle. The high import intensity of capital goods means a negative contribution from net exports is projected to weigh on 2017 GDP. Private consumption will support growth, but at a lower rate than last year due to higher inflation, which Fitch forecasts to average 2.7% in 2017 from 0.1% in 2016. Risks to Fitch's GDP forecast are tilted to the downside, dependent on the absorption of EU funds and economic developments in Latvia's largest trading partners. After a fiscal deficit of 1.3% of GDP in 2015, Latvia achieved a balanced fiscal position in 2016 - a significant improvement from the government and Fitch's forecast for a deficit 1.0% of GDP at the time of our November 2016 review. Savings were made through a 30% contraction in public capital spending, which offset increases in defence, social welfare and salary spending. Tax receipts exceeded budget plans, despite weaker than budgeted growth, suggesting some progress in increasing tax compliance. Fitch forecasts a fiscal deficit of 0.5% of GDP in 2017, reflecting already planned government revenue-raising measures of 0.4% of GDP against expenditures of 0.54% of GDP, higher absorption of EU funds and the fading out of one-off revenue effects. Fitch's deficit forecast does not take into account any accounting impact arising from the winding-down of bad bank Reverta by end-2017. Higher economic growth and an improvement in tax collection efficiency are upside fiscal risks. Government debt and debt service metrics are better than the peer medians. The debt/GDP ratio increased to 40.1% in 2016 (A median 51.7%) from 36.5% in 2015, accounting largely for pre-financing February 2017's USD1 billion Eurobond redemption. Fitch forecasts government debt/GDP to fall to 39.7% by 2018. Latvia's banking sector benefits from being part of the ECB's Single Supervisory Mechanism. The sector is well-capitalised (Tier 1 capital adequacy ratio at 17.1% in 2016), and deleveraging has improved banks' balance sheets. The high level of foreign ownership in the banking sector reduces the risk of financial sector liabilities migrating onto the sovereign balance sheet. Non-resident deposits (NRDs) are large, but had fallen to 44% of total deposits at end-2016, compared with 55% a year earlier. Recession in Russia and the clampdown by Latvia's Financial and Capital Market Commission on money laundering among NRD serving banks are key drivers of the declining stock of NRDs. Fitch expects this trend to continue in 2017, but at a slower pace and primarily led by withdrawals by individuals and corporates (24% of NRDs are funding from Nordic parent banks to Latvian subsidiaries, which are considered more stable). Fitch does not expect falling NRDs to impact credit supply or the real economy. Latvia's ratings remain constrained by the sovereign's weaker external finances compared with 'A' peers. Since peaking in 2009 (at 58.4% of GDP), net external debt has stayed on a downward trend (33.4% of GDP estimated for 2016). However, this compares unfavourably with the median net external creditor position of its rated peers (12.4%). On-going deleveraging by the financial and non-financial private sector will keep net external debt on a downward trajectory, but at a more modest pace than previous years. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Latvia a score equivalent to a rating of 'A-' on the Long-Term Foreign-Currency IDR scale. In accordance with its rating criteria, Fitch's sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because the SRM output has migrated from 'A' to 'A-', but in our view this is potentially a temporary deterioration. Assuming an SRM output of 'A', Fitch's sovereign rating committee adjusted the output to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows: -External Finances: -1 notch, to reflect that although Latvia benefits from the euro's "reserve currency flexibility", Fitch believes that this status would likely offer Latvia only limited protection in case of a global or domestic financial crisis. In addition, Latvia's small and open economy exposes it to external vulnerabilities, and net external debt is high relative to peers. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that could, individually or collectively, trigger positive rating action include: - Persistent strong and stable economic growth that fosters higher income per capita, without the re-emergence of macroeconomic imbalances. - A sustainable improvement in external debt ratios. The main risk factors that could, individually or collectively, trigger negative rating action are: - Deterioration in Latvia's public debt dynamics, for example, from sustained fiscal slippage or economic underperformance. - Deterioration in external finances, for example, associated with overheating of the domestic economy. KEY ASSUMPTIONS The global economy performs in line with Fitch's Global Economic Outlook. Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnaud Louis Director +33 144 299 142 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below