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UPDATE 1-Crisis bites Latvia, GDP slides in third quarter

Fri, Nov 7 2008, 11:47 GMT
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RIGA, Nov 7 (Reuters) - Latvia plunged further into crisis on Friday as figures showed its economy contracted by a massive 4.2 percent in the third quarter and ratings agency Moody's cut its credit rating on the small Baltic state's debts.

Latvia and its Baltic neighbours Estonia and Lithuania are in the grip of a strong slowdown brought about by the global credit crunch and financial crisis. Domestic consumption has slumped and worries have arisen over local banks.

The median forecast in a Reuters survey was for GDP to shrink by 3.3 percent.

"In the third quarter of 2008 the economic slide continued in the manufacturing and services sectors. The volume of income from product taxes has also fallen noticeably," the statistics office said in a statement on Friday.

Moody's said earlier that it had cut its rating on Latvia due to fears its economic crisis would deepen and that it eventually might have to fellow Hungary in appealing for outside help, though this was not its main scenario.

"If the situation were to worsen, Latvia could be forced to seek balance-of-payments support from the European Union and/or the International Monetary Fund," it said.

Moody's downgraded the foreign and local currency ratings of the government of Latvia to A3 from A2.

The foreign currency deposit ceiling was also downgraded to A3 from A2. The outlook on these ratings remains negative. Although the foreign currency bond ceiling remains at Aa1, its outlook was also moved to negative.

Moody's also cut the outlooks on the ratings of Estonia and Lithuania to negative from stable.

Parex Asset Management analyst Zigurds Vaikulis said Latvian GDP would probably fall even more in the fourth quarter.

"In that case the drop in GDP this year could be about 1.5 percent. If there is some kind of stabilisation in the second half of 2009 then the GDP drop next year could be about 2.5 percent," he said in a note, though there was a chance this would have to revised lower.

(Reporting by Patrick Lannin, editing by Mike Peacock) Keywords: LATVIA GDP/

(Riga newsroom, patrick.lannin@reuters.com, patrick.lannin.reuters.com@reuters.net, +371 29 269 191)

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