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The stable outlook reflects the balance between Latvia's rising debt and rebounding economic growth and mirrors agency`s expectation that Latvia will withstand external headwinds over the next two years, including from the Russia-Ukraine conflict. It also reflects agency`s expectations that Latvia's authorities will preserve the country's prudent fiscal policy, taking enough policy measures to ultimately keep budget deficits and government debt in check, despite the planned defense spending increases over 2026-2027. The stable outlook also reflects agency`s expectation that the Russia-Ukraine war will not spread to NATO member territory, including Latvia.

S&P expects Latvia's authorities will preserve the country's prudent fiscal policy, taking policy measures to ultimately keep budget deficits and government debt in check. The agency believes the Latvian authorities have broad agreement on key medium term policy objectives, maintaining the government's policy focus on enhancing security and defense, while also moving ahead with reforms that strengthen the economy's productive capacity.

The agency forecasts general government deficits to average 3.8% of GDP in tandem with expanding defense and security spending during 2026-2028 and then trend downward on account of moderating defence outlays. Latvia plans to progressively increase its spending on defense over the medium term, maintaining security spending at 5% of GDP over 2026-2028. While the temporarily elevated levels of defense spending will widen budgetary deficits over 2026-2028, S&P expects Latvia will maintain its prudent fiscal stance, limiting the increase in debt. The agency expects the Latvian government will work to offset part of its near-term security spending increases with measures on the revenue and expenditure sides, including the rationalization of existing budgetary allowances. S&P also expects Latvia will adhere to a policy of maintaining its level of gross general government debt at or below 55% of GDP as a binding medium-term policy objective.

While geopolitical risks have resulted in a substantial increase in Latvia's defense spending, S&P believes Latvia`s economy has shown resilience, with GDP per capita up almost 30% through 2025 compared with 2021. S&P estimates economic growth at 1.5% in real terms this year, accelerating further over 2026-2028, with real growth averaging 2.5% annually. According to the agency`s view, the pickup in economic activity is supported by structural tailwinds, such as from EU funds spending peaking in 2026, and recovery in broader domestic demand will be supported by substantial public-sector investments in infrastructure, security, and defense. In addition, the labor market is resilient and could further tighten, particularly within construction, driving wage growth and spurring household purchasing power.

S&P concludes that Latvia's economy has weathered the initial impact of the Russia-Ukraine war, but the protracted war in Ukraine complicates its medium-term prospects. S&P forecasts that it could take time before for security risks subside, even beyond a ceasefire or settlement of the war in Ukraine, given Latvia`s geographical position on NATO's eastern flank. The agency expects Latvia's near-term economic growth prospects and fiscal outcomes will depend on its ability to absorb and efficiently use the sizable funds made available through various EU financing envelopes.

S&P published previous assessment on May 30, 2025, when credit rating of Latvia remained at A Stable. Full announcement text is available on the S&P Global Ratings official web page (registration necessary).