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Fitch Upgrades Latvia to 'A-'; Outlook Stable
June 20, 2014 / 4:16 AM / in 3 years

Fitch Upgrades Latvia to 'A-'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Latvia - Rating Action Report here LONDON, June 20 (Fitch) Fitch Ratings has upgraded Latvia's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'A-' from 'BBB+'. The Outlooks are Stable. The issue ratings on Latvia's senior unsecured foreign and local currency bonds have also been upgraded to 'A-'from 'BBB+' The Country Ceiling has been raised to 'AAA' from 'AA+' and the Short-term foreign currency IDR upgraded to 'F1' from 'F2'. KEY RATING DRIVERS The upgrade of Latvia's IDRs reflects the following key rating drivers and their relative weights: Medium Latvia's public finances are stronger than the 'A' median. Positive efforts in fiscal consolidation over recent years have brought Latvia's fiscal deficit (1.0% of GDP in 2013) down to one of the lowest in the eurozone. We expect Latvia's fiscal deficit to remain low, averaging 0.9% of GDP in 2014-2016. Positive debt dynamics support Latvia's rating. The general government debt-to-GDP ratio is projected to remain on a downward trend over the medium term. We expect public debt-to-GDP to fall to 33.5% by 2015 from 38.1% in 2013. Latvia's public debt is lower than the 'A' median ratio of 51.7% of GDP. Latvia's growth prospects are positive notwithstanding heightened geopolitical risk which has had little spill-over effects to date. We expect Latvia to operate close to potential. For 2014 and 2015, we forecast real GDP growth of 3.6%, and 3.8%, respectively. Real GDP will be largely driven by domestic demand, supported by resilient private consumption growth and recovery in investment activity. Latvia's ratings also reflect the following key rating drivers: The banking sector is stable. Tier 1 capital at 17.3% stands well above regulatory requirements. The average domestic loan-to-deposit ratio at 147%, although high, is declining. There is a large share of non-resident deposits (NRDs) in Latvia's banking system, which is a source of potential capital flow volatility. However, despite recent geopolitical risks, NRDs have been stable. Direct exposure to Russia is relatively small (10% of NRDs), but the risk of indirect contagion to Russia may potentially be high given the close financial ties between EU economies with Russia. Latvia's external debt is a rating weakness. Against the median net creditor position of 'A' rated peers (17.4% of GDP), Latvia is a net external debtor of 35.4% of GDP. However, this ratio is declining and largely reflects debt to parent banks. Longer term growth challenges remain for Latvia to gain faster income convergence towards the EU average level. These are unlikely to be addressed until after domestic parliamentary elections (October 2014) and Latvia's EU presidency term (2015). Latvia's ratings are underpinned by the country's on-going commitment towards stronger economic policy and credibility. Eurozone membership enhances the sovereign's creditworthiness with the reduction of foreign exchange rate risks, greater fiscal financing flexibility via the euro's reserve currency status, and allows Latvian banks access to European Central Bank liquidity facilities. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.The main factors that individually, or collectively, could trigger a positive rating action include: - A longer track record of strong and stable growth, fostering income convergence towards the 'A' rating median, without the re-emergence of macroeconomic imbalances. - A further material reduction in external and public indebtedness. The main factors that individually, or collectively, could trigger a negative rating action include: - A severe negative shock that undermines the stability of the Latvian banking sector, economic growth and fiscal stability. -Underperformance of economic growth and/or material fiscal slippage, which would result in a deterioration of Latvia's public debt dynamics. 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's fiscal projections are based on the assumption that medium-term budget deficit outcomes are broadly in line with Ministry of Finance targets. 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 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. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Paul Rawkins Director +44 20 3530 1046 Committee Chairperson Shelly Shetty Senior Director +1 212 908 0324 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. 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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