May 15, 2015 / 8:07 PM / 3 years ago

Fitch Affirms Latvia at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) Fitch Ratings has affirmed Latvia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-'. The Outlooks are Stable. 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' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS Latvia's ratings are currently supported by the sovereign's stronger fiscal position relative to its 'A' range peers, its stable banking sector, as well as Fitch's baseline assumption that economic growth will stay resilient against geopolitical risks. A low level of income per capita and a high net external debtor position relative to median levels constrain the rating within the 'A' range. Latvia is expected to continue its positive growth performance. For 2015 and 2016, Fitch is projecting Latvia's economy to grow 2.3% and 3.0%, respectively. Turbulence in Russia will hit the economy's external sector performance (Russia accounts for 11% of total exports) and related industries. However, we expect this drag to be offset by growth in domestic demand, which has proven resilient in the current environment of growth in households' disposable incomes, improvement in labour employment and low inflation. There is also evidence that Latvian exporters have redirected some exports originally bound for Russia to other important trade partners in EU, BRIC and CIS countries Latvia's fiscal position is slightly better than its 'A' range peers. For 2015, we estimate Latvia's fiscal deficit and general government debt ratio to be 1.5% and 36.4% of GDP respectively, compared with a 'A' median fiscal deficit of 2.1% and debt ratio of 46.8%. Pre-financing plans for a USD1bn Eurobond repayment maturing in 2017 will lead to a moderate increase in Latvia's public debt ratio to around 39.5% of GDP in 2016 in Fitch's estimate. The stable banking sector also supports Latvia's ratings. The average capital Tier 1 ratio is high (18.1%, 2014), and an increase in resident deposits has helped improve the sector's funding structure. The average loan-to-deposit ratio has now fallen to 68% from a peak of 169% in 2008. A source of vulnerability remains the large non-resident deposits in the banking system (41% of GDP), but there are high levels of liquid assets. Fitch views positively the large presence of Scandinavian banks in Latvia, given their financial strength and high home supervision standards. A high level of foreign ownership in the sector reduces the risk of financial sector liabilities migrating onto the sovereign balance sheet. Partially constraining Latvia's ratings is the country's net external debtor position (27.6% of GDP in 2014), which stands out as a weakness against the median net creditor position (25% of GDP in 2014) of its 'A' range peers. On-going deleveraging in the banking sector, future reduction in sovereign debt, and modest equity FDI inflows should help gradually bring down Latvia's external liabilities in the long term. Latvia's ratings are also weighed down by its lower GDP per capita relative to higher rated peers. Addressing moderate structural rigidities in the economy (i.e. high unemployment, low domestic savings) will support gradual convergence to income levels consistent with rating peers. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger positive rating action are: - A longer track record of strong and stable growth that fosters higher income per capita, without re-emergence of macroeconomic imbalances. - A sustainable improvement in external finances in conjunction with a reduction in external debt ratios. The main factors that could, individually, or collectively, trigger negative rating action include: - Deterioration in Latvia's public debt dynamics, for example from sustained fiscal slippage and/or economic underperformance. - Deterioration in external finances for example associated with overheating of the domestic economy. KEY ASSUMPTIONS Fitch assumes that under severe financial stress, support for Latvian subsidiary banks would come first and foremost from their foreign parent banks. Fitch assumes that there will be no material escalation in developments between Russia and Ukraine that would lead to a significant external shock to Latvia's economy. The European Central Bank's asset purchase programme should help underpin inflation expectations, and supports our base case that, in the context of a modest economic recovery, the eurozone will avoid prolonged deflation. Fitch also assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Fitch's base case is that Greece (CCC) will remain a member of the eurozone, though it recognises that 'Grexit' is a material risk. Although a Greek exit would represent a significant shock to the eurozone that could spark a bout of financial market volatility and dent confidence, Fitch does not believe it would precipitate a systemic crisis like that seen in 2012, or another country's rapid exit (see 'Grexit Still Possible; Systemic Crisis Unlikely' dated 6 March 2015 at Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status 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 WEBSITE '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. 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.

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