Fitch Ratings revises Latvia`s Outlook to Positive
As one of the reasons for changing the outlook, Fitch points out that Latvia has shown relative resilience to recent severe external shocks, despite being a small and open economy; and real GDP has exceeded its pre-pandemic level. The pandemic shock resulted in much smaller contraction in GDP compared to the EU average, while the adverse impact of the shock to energy supply and prices was less than initially anticipated, despite Latvia’s historical high reliance on Russian energy imports.
Fitch expects inflation to fall sharply and GDP growth to resume to around 3% in 2024-2025 supported by acceleration in investment as EU funds absorption advances, and private consumption recovers.
Fitch have revised Latvia’s GDP growth forecast up to 1.4% in 2023, from -0.3% expected at the previous review in February. The upward revision reflects better-than-expected performance of the economy over last two quarters and our expectation for further easing of inflation pressures, which should result in positive real wage growth.
Fitch expects the general government budget deficit to narrow to 3.8% of GDP in 2023, from 4.4% in 2022, reflecting strong cash-based fiscal outturns in the first half of 2023.
The decision of international credit rating agency Fitch Ratings to revise outlook from stable to positive, affirming the credit rating level in A- level and to increase Latvia`s GDP forecast to 1.4% from -0.3% confirms the stability of the Latvian economy against external shocks and the sustainability of the government's decisions, says Minister of Finance Arvils Ašeradens.
Latvia has eliminated its historical reliance on Russian energy imports and reduced its non-energy trade links, although they remain a potential source of vulnerability.
Fitch states that Latvia`s rating strength is lower government debt level and debt servicing costs than rating peers, a credible economic policy framework supported by EU and eurozone membership and moderate private sector indebtedness.
At the same time Agency notes that the rating weaknesses include the small size of Latvia’s economy, GDP per capita below 'A' category peers, a current account deficit and net external debt that is somewhat higher than peers and adverse demographic trends.
The previous credit rating agency’s Fitch announcement was published on 14 February, 2022, when agency affirmed Latvia’s credit rating in ‘A-’ with a stable outlook.
Full press release in Fitch homepage.