Latvian Rating Raised by Fitch on Positive Debt Dynamics

Latvia got its third credit upgrade in three weeks as Fitch Ratings bolstered its assessment, citing prospects for a decline in public debt relative to gross domestic product.

Fitch increased the score by one level to A-, the fourth-lowest investment rating, from BBB+, putting it on par with Malaysia and Poland. It assigned a stable outlook.

“Positive debt dynamics support Latvia’s rating,” Fitch analysts Kit Ling Yeung and Paul Rawkins said today in an e-mailed statement from London. “Latvia’s growth prospects are positive notwithstanding heightened geopolitical risk, which has had little spill-over effects to date.”

The move returns Latvia’s rating to where it was in the first half of 2007, before a recession wiped out more than a fifth of output and prompted the government to seek a bailout. The country’s debt was raised one step by Moody’s Investors Service on June 13 and by Standard & Poor’s on May 30, both citing economic growth, lower debt ratios and this year’s euro adoption.

The yield on Latvia’s 2020 dollar bond rose 0.04 percentage point to 2.97 percent as of 10:18 a.m. today in Riga, the capital, data compiled by Bloomberg show.

‘High Assessment’

The rating increase demonstrates a “high assessment of our country and our efforts to catch up,” Latvian Finance Minister Andris Vilks said today in an e-mailed statement. “The decision by Fitch is based on Latvia’s positive economic growth, the country’s good financial indicators and the success in improving public finances.”

Latvia’s public debt-to-gross domestic product ratio will fall to 33.5 percent by 2015 from 38.1 percent in 2013, Fitch predicts. That compares with a 51.7 percent median for borrowers rated A, the credit assessor said in the statement. The budget deficit will probably remain low, averaging 0.9 percent of GDP in 2014-2016, Fitch said.

The economy will expand 3.6 percent this year before accelerating to 3.8 percent in 2015, driven by domestic demand and a recovery in investment, according to Fitch. GDP grew 2.8 percent from a year earlier in the first quarter, its slowest pace in three years.

Latvia’s large share of non-resident deposits is “a source of potential capital flow volatility,” Fitch said. Even so, non-resident deposits remain stable despite recent geopolitical risks, it said.

Global bond yields showed investors ignored 56 percent of Moody’s and 50 percent of S&P’s rating and outlook changes in 2012, more often disagreeing when the companies said governments were becoming safer or more risky, data compiled by Bloomberg show.

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