Latvia's Sovereign Rating Raised by S&P on Lower Deficit, Return to Growth

Latvia’s credit rating was raised one step by Standard & Poor’s, which cited public debt remaining at “moderate levels” and the economy “rebalancing quickly.”

S&P raised the rating to BB+, one level below investment grade, analyst Frank Gill said in a statement from London today. The grade has a stable outlook, meaning the credit evaluator is more likely to keep it unchanged than to cut or raise it. The rating is on a par with Azerbaijan, Romania and Greece.

Latvian gross domestic product grew an annual 2.7 percent in the three months through September, the first expansion in 10 quarters. The country has passed austerity measures equal to about 14 percent of GDP since the crisis began in 2008 and plans more in the 2011 budget to comply with its 7.5 billion-euro ($10 billion) international bailout from a group led by the European Commission and the International Monetary Fund.

“Continued commitment to fiscal discipline and further strengthening in economic activity could lift the country to investment grade in 2011 or in early 2012,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co., in an e-mailed comment.

The yield on Latvia’s Eurobond due 2018 fell 13 basis points today to 5.36 percent, which compares with a yield of almost 12 percent in March last year.

‘Marked Improvement’

Asking rates for three-month loans at the Riga interbank offered rate, or Rigibor, was little changed at 0.83 percent today, about 20 basis points below the euro-area rate, known as Euribor. The difference, or spread, between the rates reached 2,868 basis points in June 2009 when speculation mounted that the lats, which has a fixed rate to euro, would be devalued.

The ratings changes “reflect a marked improvement in Latvia’s current account,” S&P said. “Confronted with sharply tighter credit conditions, past imbalances have rapidly unwound. The process has helped to restore competitiveness.”

Five-year credit-default swaps on Latvian debt, which investors use to protect against default or speculate on a borrower’s credit worthiness, fell about 6 basis points today to 277.4, according to data provider CMA. Latvian CDS prices had reached almost 1,200 basis points in March 2009.

Economic Recovery

The economy is recovering after shrinking about 25 percent through nine quarters of declines, the International Monetary Fund estimates. S&P estimates that Latvia’s deficit will fall to below 3 percent of gross domestic product in 2012, a key requirement to adopt the euro in 2014.

Latvian net general government debt levels are projected to peak at 35 percent of gross domestic product in 2013, S&P said in the statement.

“The rating news shows that the measures are clearly paying off,” said Lars Christensen, chief emerging-market analyst at Danske Bank A/S, by phone. “It’s helpful for the efforts to return to the markets. It’s a sign of approval from the rating agencies and from the markets further down the road of what Prime Minister Valdis Dombrovskis has been doing.”

Moody’s Investors Service rates the country Baa3, its lowest investment grade, with a stable outlook. Fitch Ratings has a BB+ rating for Latvia, one level below investment grade, with a stable outlook. Fitch places Estonia at A, its fifth- highest investment grade, while Moody’s has the country at A1.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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