Furthermore, Fitch believes Estonia could adopt the euro soonest. The agency is forecasting a budget deficit of 4% of GDP in 2009 and 2.9% of GDP in 2010 which makes 2012 the most likely date for Estonia to adopt the euro. However, if the EU judges that the 3% of GDP reference value has only been exceeded "exceptionally and temporarily" and that Estonia's medium-term budget plans to reduce the deficit to under 3% are credible; or if the Estonian government succeeds in delivering a budget deficit below the reference value in 2009, then Estonia could join the eurozone in 2011. Indications that Estonia will meet the Maastricht criteria for euro adoption would likely lead to positive rating action.
Fitch notes, nevertheless, that there is some uncertainty regarding how the Maastricht inflation criterion might be interpreted in assessing Estonia's application for euro zone membership, namely whether a sustainable price performance is consistent with deflation that is caused by a severe recession, shortly after it was in double digits. Fitch believes 2015 is the most likely date for Latvia and Lithuania to adopt the euro.
Fitch notes some signs that the precipitous decline of the Baltic economies might be bottoming out. The pace of economic contraction (on a seasonally adjusted quarter-on-quarter basis) slowed in Q209 from Q109 for all three Baltic states while Lithuania saw quarter-on-quarter growth in Q309, for the first time since Q108. However, it is too early to judge a sustainable rebound has started. Although large current account deficits, which were a rating weakness for the Baltic countries, have reversed rapidly, and inflation rates and real wages are also coming down, more adjustment is needed. Fitch forecasts that gross external debt and external financing needs will still be large compared with regional and rated peers at end-2009.
