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Friday, November 7, 2008

Latvia's Economy Contracts By 4.2% in Q3 As Moody's Downgrades The Credit Rating

Latvia's economy shrank an annual 4.2 percent in the third quarter, the fastest drop since at least 1994, according to today's flash estimate from the Riga-based statistics office (Friday). This follows a 0.1% year on year expansion in the second quarter.

We do not have quarter on quarter statistics at this point, but if we apply the minus 4.2% calculation over last years Q3 2007 constant price number, then what we get is 2.147 billion Lati, and a GDP graph which looks like this:

Which may have little analytic value (since the data is not seasonally corrected), but does enable us to form a pretty rough and ready visual impression of what is going on, where the annual contraction data remains rather abstract. The economy definitely peaked and started to enter contraction mode after the summer of 2007, and now we need to keep watching and waiting to see just how far it is we go.

The statistics office will release constant price and seasonally adjusted data for the third quarter on Dec. 9. The last time Latvia's economy contracted on a year on year basis (by 2.2 percent) was in 1994, according to data from the Latvian central bank.

Coincidentally Moody's Investors Service today downgraded Latvia's credit rating to A3 from A2, the third-lowest investment grade level, citing a worsening global liquidity crunch and economic slowdown.Moody's warned today that tighter global liquidity could affect some of Latvia's 26 banks, many of whom rely on syndicated loans to finance operations.

``The global liquidity crisis will probably cause a shock to the Latvian banking system, which will reverberate throughout the rest of the economy,'' Kenneth Orchard, a senior analyst at Moody's, said before the report. ``Unless there are major improvements in the European syndicated loan market by early 2009, the government and central bank will be forced to take remedial action.''

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