July 9, 2013 / 5:06 PM / 6 years ago

Fitch Upgrades Latvia to 'BBB+'; Outlook Stable

Link to Fitch Ratings' Report: Latvia - Rating Action ReportLONDON, July 09 (Fitch) Fitch Ratings has upgraded Latvia's Long-term foreign currency Issuer Default Rating (IDR) to 'BBB+' from 'BBB', Short-term foreign currency IDR to 'F2' from 'F3' and Country Ceiling to 'AAA' from 'A'. The Outlooks are Stable. At the same time, the agency has affirmed the Long-term local currency IDR at 'BBB+'. KEY RATING DRIVERS The upgrade follows the announcement of ECOFIN's decision today to invite Latvia to join the eurozone on 1 January 2014 and reflects the following key rating drivers and their relative weights: Medium - Euro adoption will enhance economic policy coherence and credibility compared with the current exchange rate peg to the euro. The Latvian economy is closely integrated with the EU through trade, investment and substantial ownership of its financial sector by Nordic parent banks. It has also demonstrated the flexibility required to adjust to shocks within the confines of a currency union. - Euro accession will reduce credit risks associated with foreign currency exposures in the banking system as well as the country's high level of net external debt. - Euro accession will improve fiscal and external financing flexibility through the euro's reserve currency status. It also gives Latvian banks access to European Central Bank (ECB) liquidity facilities. Nonetheless, membership of EMU will bring additional financial liabilities related to the funding of the European Stability Mechanism. Although the size of such costs is unclear, participation in the ESM would enhance fiscal financing flexibility through access to new sources of emergency external funding, if needed. Low - The country's strong recovery from its deep economic crisis has continued. Growth surprised on the upside in 2012, while eurozone downside risks have eased. - Fiscal consolidation has remained on track. Against a deficit target of 1.9%, Latvia recorded a budget deficit of 1.2% in 2012; down from 3.6% in 2011. It exited the EU excessive deficit procedure in June 2013. The upgrade of the Country Ceiling reflects the application of the 'AAA' Country Ceiling that Fitch applies to all eurozone members other than Cyprus and Greece. Fitch considers the risk that a resident entity would be unable to transfer funds to a non-resident creditor due to an inability to convert euros into foreign currency - transfer and convertibility risk - to be minimal. Latvia's 'BBB+' foreign currency IDR also reflects the following key rating factors: - Latvia's ratings are supported by underlying political and institutional strengths, underpinned in turn by EU membership, and a per capita income level higher than most rating peers. - The significant presence of non-resident bank deposits (around half of total) renders banks vulnerable to a liquidity shock in the event of a sudden deposit outflow. - Fast private sector deleveraging has put external indebtedness on a declining path, although net external debt remains relatively high at an estimated 39% of GDP in Q113. - The small size and openness of the Latvian economy underpins its volatile recent macroeconomic performance as the country went through a severe boom and bust cycle. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors individually, or collectively, could lead to positive rating action: - Establishing a track-record of strong, stable growth while preventing the re-occurrence of macroeconomic imbalances, within the strictures of the eurozone. - A further material reduction in external indebtedness. The following risk factors individually, or collectively, could lead to negative rating action: - A significant shock in the Latvian banking sector. - A material deterioration in economic or fiscal performance. - A severe re-intensification of the eurozone crisis, with adverse implications for economic growth, contingent liabilities or ease of financing. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. Fitch assumes that Latvia will continue to build on its recent track record of prudent macroeconomic policy-making and experience a smooth transition to membership of the eurozone. 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. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Spyros Michas, CFA Director +44 20 3530 1121 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Matteo Napolitano Director +44 20 3530 1189 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Methodology' and 'Country Ceilings' dated 13 August 2012, and 'Distressed Debt Exchange' dated 8 August 2012 are available at www.fitchratings.com. Applicable Criteria andALL 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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