Fitch Ratings affirms Latvia`s credit rating at A- with stable outlook
In accordance with agency`s view Latvia's rating level A- reflects a credible economic policy framework supported by EU and eurozone membership, lower, albeit rising, government debt levels and debt servicing costs than rating peers, and moderate private sector indebtedness. These Latvia’s credit rating strengths are balanced against economy's small size and openness, that leave it exposed to external shocks, lower GDP per capita and a higher current account deficit relative to 'A' peers.
Although Fitch considers geopolitical risks to be mitigated by NATO's mutual defence clause, increased uncertainty among European NATO members about future US military support contributes to expectations of a further rise in Latvian defence spending. Fitch assumes that Latvia will increase its defence spending up to 5% of GDP in the medium term and increase in spending will likely be compensated by additional fiscal measures or repurposing of the available EU funds. Fitch also mentions that Latvia requested the activation of the national escape clause of the Stability and Growth Pact, allowing it to deviate from set expenditure targets by up to 1.5% of GDP per year in additional defence spending.
Fiscal deficit was 1.8% of GDP in 2024, well below agency`s expectations from the November review, due to lower budget expenditure. Fitch expects the deficit to widen to 2.6% in 2025, in line with peer median, and to 3% in 2026 amid planned defence spending. Fitch forecasts public debt ratio will rise to 48.5% of GDP by 2026, from 46.8% in 2024, and will stabilize at about 52% from 2027, still below the projected 'A' median.
Fitch projects real GDP growth of 1.2% in 2025, following a shallow recession of 0.4% in 2024. Agency assumes that expected increase in EU funds inflows, defence-related projects and more favourable financing conditions will support investment growth. Fitch projects real GDP growth to accelerate to 2.4% in 2026 on higher private consumption and investment growth. According to agency`s view a further rise in trade protectionism poses a downside risk, mainly due to second-round effects as direct Latvia`s trade exposure to the US is low.
Fitch Ratings published previous assessment of Latvia’s credit rating on November 15, 2024, when rating was affirmed at "A-" and outlook was revised from positive to stable.
The full publication is available on the Fitch Ratings website (https://www.fitchratings.com/)