Business News
Moody's lowers credit rating on Latvia, Estonia
By DPA
Sep 12, 2007, 13:55 GMT

Tallinn - Moody's, the international credit rating agency, changed the rating outlook for Latvia and Estonia from positive to stable on Wednesday.

Both countries have experienced rapid economic growth along with high inflation since the two small Baltic nations joined the European Union in 2004.

'Latvia's economy is currently expanding at a very rapid rate, while economic growth in Estonia has recently slowed but remains high,' explains Kenneth Orchard, Moody's Vice-President and Senior Analyst for the Baltic region in a press release.

'Very fast growth has brought many benefits, but the risk is that a slowdown could be somewhat sharper than previously thought.'

The news comes just two days after the office of statistics reported that Latvian inflation hit record levels two months in a row.

The higher-than-expected economic indicator reached a staggering 10.1 per cent in Latvia.

The economic indicator in Lativa and Estonia is far above the level required for adoption of the common European currency.

'Large-scale foreign borrowing by the private sector has fuelled household consumption and investment in property, which have been the primary drivers of economic growth over the past few years,' the rating agency said in its press release.

Latvia's GDP has increased by 11 per cent in the second quarter, according to figures released by the Office of Statistics last week.

Estonia's GDP growth slowed to 7.6 per cent in the second quarter. The Office of Statistics said last week Estonia's annual inflation reached 5.5 per cent in August, with a cooling off on the real estate market.

'The rating agency believes that property markets are exhibiting bubble-like characteristics, although prices have started to decline. Current account deficits, as a percentage of GDP, are now amongst the highest in the world.'

As both countries pegged their currencies to euro, it restricts the ability of national banks to conduct a monetary policy, leaving fiscal policy as a leverage.

The Latvian government has vowed to adopt a balanced budget for this year and a budget with a surplus for next year. The Estonian government has been generating large budget surpluses.

'In the current macroeconomic context, Moody's believes that both these governments may face greater fiscal challenges than they anticipate,' the credit agency said in its press release.