Latvia’s economic outlook has taken another blow after ratings service Standard & Poor’s dropped the country’s creditworthiness to “junk” status.
The Feb. 24 decision to lower Latvia’s credit rating to “BB+/B” means foreign investors may become more skittish about putting their money into the Baltic economy.
Latvia becomes the second new European Union member state after Romania to be dropped to “junk” status.
“The downgrade of Latvia reflects what we consider is a worsening external outlook and the associated implementation risks on the government’s ambitious economic program,” Standard & Poor’s London-based credit analyst Eileen Zhang said in a press release. The ratings service foresees Latvia’s economy continuing to struggle for several years.
In Rīga, a Ministry of Finance spokesperson acknowledged the downgrade by Standard & Poor’s, but said the lower rating will not affect Latvia’s economic stabilization program or the EUR 7.5 billion in loans the country has arranged with the World Bank, the International Monetary Fund, the EU, the European Bank for Reconstruction and Development, and several European nations.
The spokesperson, in a Feb. 24 press release, noted that Fitch Ratings, Moody’s Investors Service and Japan’s R&I were not following Standard & Poor’s in downgrading Latvia’s ability to repay debt. Fitch and Moody’s, however, had already joined Standard & Poor’s in November in lowering Latvia’s rating to just above “junk.”
In Copenhagen, analysts for Danske Bank—which in November had warned that Latvia’s creditworthiness could drop further—said the move by Standard & Poor’s was not surprising.
“The downgrade is obviously bad news, but not unexpected given the freefall in growth and political instability in the country,” they said in a Feb. 24 press release.
Once one of Europe’s fastest growing economies, Latvia has seen a major bank taken over by the government, rising unemployment, continued public unhappiness with the Saeima and—just last week—the collapse of its center-right coalition government led by Prime Minister Ivars Godmanis.
“The rating agencies are deeply concerned about the current status of the Latvian economy,” the Danske Bank analysts said. “They cannot rule out the possibility of more downgrades in the future if the new government delays responding to the problems. On the other hand, if confidence in the Latvian financial system and the whole economy is restored, then the ratings could stabilize at the current level.”
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