Weaker public finances and the shock to economic growth, together with its potential impact on medium-term growth and fiscal dynamics appear the main channels through which the Covid-19 crisis can affect the sovereign credit ratings of the Baltic states, Fitch Ratings says in a new special report.
However, the report which was published on Sep.30, says they are in a much better position to weather the current shock than they were during the world financial crisis; a period of multi-notch downgrades. The economies of the three Baltic states (Estonia, Latvia and Lithuania) are being hit hard by the pandemic.
As small, open economies with relatively large transport sectors, they are vulnerable to the sharp fall in external demand, while domestic containment measures have hit household consumption, industrial production and what were until recently rapidly growing tourism sectors.
However, the relatively quick easing of containment measures and fiscal stimulus packages have supported economic activity meaning the contractions in GDP will be relatively small compared with most other EU sovereigns, the rating agency’s report claims. Fitch forecasts that Estonia’s GDP will shrink 5.7% in 2020, Latvia’s will fall 5.2% and Lithuania’s will contract 3.6%.
Weaker growth, fiscal support measures and automatic stabilisers are causing a significant deterioration in key public finance metrics. Fitch forecasts general government deficit/GDP to hit record highs in Lithuania (10.1 per cent) and Estonia (6.4 per cent), and be close to one in Latvia (7.1 per cent) Government debt/GDP will rise to all-time highs in the region reflecting wide budget deficits and a shrinking of the denominator.
“The pandemic is causing a significant growth and fiscal shock for Baltic sovereigns, but the trajectory of the recovery and the likely impact on their sovereign credit profiles will be very different to 2008-09 due to a much stronger starting point,” Paul Gamble, senior director, Fitch Ratings, and one of the authors of the report stated.
Public finances are the main channel through which the pandemic can affect the region's sovereign credit ratings. Each of the Baltic states has a negative rating sensitivity based on the evolution of government debt. Public finances are also the key positive rating sensitivity for Latvia and Lithuania (Estonia's public finances already stand out relative to peers).
Fitch changed on Friday (Oct. 9) Latviaʼs sovereign credit rating outlook to stable from negative and affirmed the debt grade at "A-". Standard & Poorʼs credit rating for the Baltic country stands at ʼA+ʼ with stable outlook while Moodyʼs credit rating was last set at ʼA3ʼ with stable outlook.