Fitch Ratings affirms Latvia`s credit rating at A- with stable outlook
Fitch approves that Latvia's current ratings reflect a credible economic policy framework supported by EU and eurozone membership, still lower government debt levels and debt servicing costs than rating peers, and moderate private sector indebtedness. The revision of the outlook reflects agency`s expectation of Latvia's fiscal deficit to widen with a gradual increase in the government debt to GDP ratio in the medium term, as nominal growth is now likely weaker than Fitch initially anticipated due to a larger impact from the war in Ukraine.
Fitch forecasts fiscal deficits of 3% in 2025 and 2.9% in 2026, in line with Latvia's latest medium-term fiscal plan. Although these forecasts are broadly in line with the current peer medians for 2024-2026, these are above Fitch`s projections from July 2023, when the agency revised the outlook to positive. Fitch forecasts debt to GDP ratio to be on a modest upward path, increasing from 45.0% in 2023 to 48.7% by 2026. Latvia's government debt level will stay below that of peers, despite the expected increase, but will rise well above the pre-pandemic level.
Fitch expects real GDP growth in 2024 and 2025 to fall below the agency`s expectations from the latest review in July 2023 due to more gradual recovery of private consumption and external demand than previously expected. However, Fitch expects real GDP growth to accelerate to 2.4% in 2026 on higher private consumption and investment growth.
Fitch concludes that under the new EU fiscal framework, Latvia is not obliged to meaningfully correct its fiscal position over the adjustment period of 2025-2028 as its fiscal deficit is expected to stay below 3% of GDP and public debt below 60% by 2038. However, in the agency`s view, lack of fiscal space to accommodate weaker economic growth or additional spending needs, increases a risk of fiscal slippage.
Fitch Ratings published the previous assessment of Latvia’s credit rating on July 12, 2024, when rating affirmed at "A-" level with positive outlook.
The full publication is available on the Fitch Ratings website (https://www.fitchratings.com/).