RIGA, Oct 13 (Reuters) - Rating agency Moody's said on Tuesday it would keep its current rating on Latvia, at the lowest investment grade, if the country kept to its loan deal with the International Monetary Fund and European Union.
Senior analyst Kenneth Orchard said a concern for the agency, which has a negative outlook on the BAA3 rating, was that the country's debt level was growing rapidly and about political commitment to the exchange rate peg.
However, in the short term, he saw little risk of a devaluation in the country, which is dependent on a 7.5 billion euro rescue led by the IMF and the EU.
"The current plan, if they stick to it, is sufficient in order to maintain the rating," he told Reuters Television, referring to budget deficit reductions promised to the EU and IMF, efforts to restructure the bank system and a continued commitment to the peg of the lat to the euro.
He said the short-term risk of a devaluation was minimal.
"The government is very liquid, the central bank has quite large foreign exchange reserves," he said.
He said the local forex market was illiquid, making it difficult to short the lat, "so they're probably not going to come under any serious pressure".
But there were longer-term worries, he added.
"...the longer the economy remains weak, the more political problems there are with the budget, and especially with an election coming up next year, that we could see the political commitment to the peg start to waver," he added.
Moody's would keep a close eye on the adoption of the 2010 budget, where the government has now agreed to cut the deficit in line with the requirements of lenders, and on how parties positioned themselves ahead of the October election.
"I would expect that we are going to resolve the outlook on the rating within the next 6 months time probably," he said. (Writing by Patrick Lannin; Editing by Victoria Main)