Fitch Ratings affirmed Latvia's credit rating at "A-" level with stable outlook
Latvia's credit rating reflects a credible policy framework supported by European Union and eurozone membership. Latvia is a small and open economy, but a resilient export sector, lower government debt levels and debt servicing costs than peer medians, and moderate private sector indebtedness should help mitigate negative spill-overs from the adverse global economic environment.
The war in Ukraine has highlighted geopolitical risk, but Fitch Ratings sees a further escalation with significant credit implications for Latvia as a remote tail risk. Latvia is a member of NATO, which has enhanced its efforts to protect the Baltic region. National security is among the key medium-term priorities of the new government of Latvia and it plans to increase its national defence budget to at least 3% of GDP by 2027.
The agency forecasts that inflation in Latvia will gradually decrease reaching an average of 9.5% in 2023, but notes that the current inflation forecast remains subject to heightened uncertainty and the development of global commodity prices. Fitch Ratings expects Latvia's economic growth to decelerate to -0.3% in 2023 and household consumption to decline due to high inflation and negative real wage growth. According to agency`s view, investment growth will slow, as high raw material prices and increased uncertainty will offset the expected pickup in EU-funded investments.
The agency notes that since the beginning of 2023 Latvia no longer imports natural gas from Russia, but although the country is well-positioned to navigate the current winter, it remains exposed to increased volatility of gas prices and possible reduced availability of alternatives.
Fitch Ratings mentions rising confidence in the government's ability to place general government debt-to-GDP ratio on a firm downward path over the medium term, as well as the effective implementation of structural reforms that is likely to increase economic growth in the medium term and mitigate the impact of long-term demographic challenges, as possible factors that could lead to positive rating action. Significant worsening of geopolitical risks with an adverse consequences for economic growth, a persistent upward trend in government debt-to-GDP ratio, as well as erosion in competitiveness due to high inflationary pressure, materially impacting medium-term growth, could lead to negative rating action.
Fitch Ratings published the previous assessment of Latvia’s credit rating on August 5, 2022, when rating affirmed at "A-" level with stable outlook.
The full publication is available on the Fitch Ratings website (https://www.fitchratings.com/)