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Moody's affirmed Latvia's credit rating at A3 with stable outlook

Created : 29.01.2024.
On Friday, January 26, 2024, the international credit rating agency Moody's affirmed Latvia's credit rating at A3 level, maintaining a stable outlook.

The affirmation of Latvia's A3 ratings is supported by strong public finances reflecting a long track-record of prudent fiscal management, which Moody’s expects to continue and contribute to a broadly stable general government debt burden just above 40% of GDP, and robust debt affordability. Despite spending pressures stemming primarily from defence and security, Moody’s expects Latvia’s public finances to remain strong over the next three years. Moody’s expects the general government budget deficit to reach 2.9% of GDP in 2024, and narrow further to 2.6% of GDP in 2025 and 1.7% of GDP in 2026. This trajectory balances stronger economic activity, which will support public revenues, and new spending commitments, which will increase expenditures.

The affirmation also considers Latvia’s solid economic strength despite its relatively small size, with high income levels and a flexible economy. Latvia’s economic resiliency reflects a small and flexible economy with solid institutions, as reflected in the country’s forward-looking energy strategy. In 2023, the acceleration in inflation driven by rising energy prices dented consumers purchasing power, likely leading to a real GDP contraction of 0.4%. Moody’s expects Latvia’s real GDP to grow by 1.3% in 2024, before accelerating to 2.4% in 2025 and 2.9% in 2026. Latvia’s public investment projects will largely rely on the EU Next Generation programme 2021-2026. In addition to defence and security, key investment priorities include strengthening of digital infrastructure, upgrading electricity transmission and distribution grids. Furthermore, the Rail-Baltica project, a European initiative connecting the Baltic region to the rest of Western Europe, has the potential to support economic activity by raising investment and promoting clean transportation.

The ratings affirmation also reflects Latvia’s long-term economic pressures related to a rapidly ageing population, which will increasingly constrain labour supply and also takes into account geopolitical risks, which has increased since Russia’s invasion of Ukraine in 2022, although the country is shielded from related energy shocks by secure and diversified energy suppliers. According to Moody`s view geopolitical risks are notably mitigated by the fact that Latvia, as a NATO member since 2004, benefits from full NATO security guarantees. Latvian government’s pledge to raise defence spending to 3% of GDP by 2027 well above NATO’s 2% of GDP target shows its strong commitment to ensure a high level of preparedness and bolster its deterrence capacity to conventional threats, cyberattacks and hybrid warfare.

The stable outlook reflects balanced risks at the A3 rating level. According to the agency`s view, Latvia`s economic and fiscal metrics could improve at a faster pace than currently expected by Moody's, if reforms to tackle structural challenges on the labour market led to materially higher growth potential.

Moody’s previously reviewed Latvia’s credit rating on 29 April 2022, affirming Latvia’s credit rating at A3 level with a stable outlook.

The full report is available on the Moody`s Investors Service website  (registration necessary).