Fitch: Baltic countries overheating

Fitch Ratings said the economies of the Baltic countries are showing signs of overheating and that failure to take corrective policy action and re-establish credible euro-adoption timetables could lead to future negative rating actions.

The foreign-currency issuer default ratings of Estonia, Latvia and Lithuania are A, A- and A, respectively, all with stable outlooks.

After several years of high growth, the Baltic countries are facing rising inflation, tightening labor markets, rapid credit growth and double-digit current account deficits while also accumulating large external debt burdens. The agency believes Latvia to be the most and Lithuania the least vulnerable to an abrupt adjustment in capital and financial flows and slowdown in economic growth.

Fitch said several factors partially mitigate the negative pressure that growing external imbalances place on the ratings: all three Baltic countries have public debt levels below 20% of GDP, all are net public external creditors and almost all of the banking system assets in Estonia and Lithuania, and more than half in Latvia, are owned by strong foreign banks with good access to foreign currency.

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