Fitch Ratings affirmed Latvia`s credit rating at A- with positive outlook
On Friday, July 12, 2024, Fitch Ratings (Fitch) affirmed Latvia's credit rating at the "A-" level with positive outlook.
According to credit rating agency 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. 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 remain as 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.
Fitch projects the general government deficit to widen till -2.9% of GDP in 2024, despite a solid cash performance in the first five month. Wider fiscal deficits predominantly reflect higher defence and social spending, which is not offset with new revenue measures. The government plans to increase defence spending to 3.5% of GDP by 2026, from 2.5% in 2023, amid heightened geopolitical risks. In following years Fitch forecasts the deficit to narrow till -2.7% of GDP while gross general government debt will very slightly increase from 43.6% in 2023 to 46.4% in 2026 and remail well below the peer’s average.
Credit rating agency expects Latvia’s GDP growth of 1.5% in 2024, following a shallow contraction of 0.3% in 2023. According to Fitch, Public and private consumption will drive growth this year, with the latter supported by an acceleration of real wage growth and improving purchasing power. Public sector EU funded investments, particularly those financed by the Recovery and Resilience Facility grants will remain solid, while private investment activity lags due to elevated uncertainty and weak credit growth. Export activity should pick-up throughout 2024 as external demand from main trading partners resumes and thus the credit rating agency projects GDP growth increases to 2.8% in 2025-2026
Fitch Ratings published the previous assessment of Latvia’s credit rating on January 12, 2024, when rating and outlook was affirmed A- positive.
The full publication is available on the Fitch Ratings website (https://www.fitchratings.com/).