…. so why not report those, especially in these times when most news are very dire indeed?
On 12 March I had my (so far) last official meeting involving other people in the same room as myself. The Fiscal Discipline Council met with the ratings agency, Fitch. Or “met” since the Fitch representatives participated via a link from London.
As always, these ratings agency people talk to a wide selection of institutions: Central Bank Ministry of Finance, commercial banks and what have you and their verdict in the form of a short report was published just a few days ago. Latvia keeps its rating at A- with the outlook changed from stable to negative, which, given the circumstances, should be seen as major endorsement by Fitch.
But, as I also argued recently, Latvia has prepared itself quite well in fiscal terms. Since the financial crisis, government debt has been stabilized and put on a downward trajectory as can be seen from Figure 1. OK, not downwards enough for my more hawkish taste, but not bad and at about 36% government debt as a share of GDP, Latvia has the 7th lowest such ratio in the EU.
Figure 1: Government debt as a share of GDP, %, Latvia, 2005 – 2019
Source: IMF database
The debt ratio will increase substantially in 2020 as the numerator worsens (a big budget deficit from much more spending and much lower tax revenue) and the denominator (GDP) shrinks but, if we trust Fitch, it will still end up at only 49% of GDP, which is easily manageable. The ratio was, before this crisis, already higher in e.g. Germany, a country we certainly do not associate with debt repayment problems.
The trust in the fiscal capabilities of the Latvian economy was also demonstrated by financial markets last week. Latvia managed to borrow a whopping one billion euro at an interest rate of just 0.2%. One billion is about 3% of GDP (that’s a lot in one loan!) and is there to pay for government measures taken to mitigate the crisis. Various lenders were obviously happy to lend at super-low interest rates, reflecting a trust in the Latvian economy that certainly wasn’t there in 2008.
Add to this the benefits of being in the Eurozone, i.e. being part of a very large currency market. One billion euro is a lot of money in Latvia but a pittance in the euro market. Latvia can thus borrow in its own currency and suffers no potential currency risk. My country of passport, Denmark, AAA-listed by all ratings agencies and thus seen as one of the safest countries to lend to can not in these times raise enough money in the small Danish kroner market and must borrow in foreign currency, thereby running a potential (OK, in reality VERY small) risk of currency mismatch should something happen to the exchange rate.
In short, some very good fiscal news in otherwise turbulent times.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and Vice-Chairman of the Fiscal Discipline Council of Latvia.
Points of view expressed here are not necessarily those of the Fiscal Discipline Council.