Fitch Ratings affirmed Latvia`s credit rating at A- with positive outlook
According to credit rating agency’s opinion, current Latvia's credit rating reflects lower government debt to GDP and debt servicing costs than rating peers, a credible economic policy framework supported by EU and eurozone membership and moderate private sector indebtedness. Still, the small size of Latvia's economy, GDP per capita lower than peers, a current account deficit and net external debt that is higher than peers, as well as adverse demographic trends remain credit rating weaknesses.
Fitch mentions that positive credit rating outlook reflects Latvia’s relative resilience to recent two consecutive severe external shocks (impact of Covid-19 pandemic and indirect impact of Russia`s invasion of Ukraine), despite being a small and open economy. The negative impact of the shock to energy supply and prices was less than initially anticipated by Fitch. Latvia has eliminated its historical reliance on Russian energy imports and significantly reduced its non-energy trade links, and Fitch projects inflation will remain low.
Fitch projects the general government deficit to narrow just below 3% of GDP in 2023, from 4.6% in 2022, mostly on the back of better-than-expected tax revenues and lower expenditure on support measures. Defence expenditure is projected to reach 3% of GDP in 2024-2025, reflecting the purchase of an air defence system, nevertheless, Fitch forecasts the general government deficit will remain just below 3% of GDP also in 2024-2025. Gross general government debt is forecasted to remain broadly stable at around 41% of GDP until 2027, which is well below the current peers’ average.
Credit rating agency expects Latvia’s GDP growth of 2% in 2024, following a shallow recession of 0.4% forecasted in 2023 due to weaker private consumption and export activity, while investment contributed positively to growth. According to Fitch, export activity should pick-up throughout 2024 as external demand from main trading partners resumes. Investment growth is expected to remain solid as Latvia continues to absorb EU funds, while sizeable projects related to railway and security will support public sector investments. Fitch projects GDP growth accelerates to 3.1% in 2025.
Fitch Ratings published the previous assessment of Latvia’s credit rating on July 28, 2023, when rating affirmed at "A-" level and outlook was revised from stable to positive.
The full publication is available on the Fitch Ratings website (https://www.fitchratings.com/).