The international rating agency Fitch Ratings (Fitch) has confirmed Latvia's credit rating at the current level of "A-", maintaining a positive outlook on the credit rating, according to information published by the State Treasury. "As key factors supporting Latvia's credit rating at the current level, Fitch cites low levels of public debt and debt servicing costs compared to peer countries, compelling policies supported by membership in the European Union (EU) and the eurozone, and moderate levels of private sector debt At the same time, Latvia's small economy, lower level of gross domestic product. product (GDP) per capita, current account deficit and net external debt ratio higher than peers continue to constrain further credit rating growth. In making a positive outlook, Fitch notes that the assessment is based on the relative strength of a small and open economy. Latvia to recent external shocks, including the Covid-19 pandemic and Russia's war in Ukraine. The negative impact of risks of energy shortages and price hikes was lower than Fitch initially forecast. The agency notes that Latvia has eliminated its historical dependence on Russian energy imports and has significantly reduced trade ties with Russia. Fitch forecasts Latvia's government deficit to widen to 2.9% of GDP in 2024, despite higher tax revenues in the first five months of the year. The higher general government deficit is justified by increased spending on national defense and the social sector, which will not be offset by new budget revenues. The agency notes that the government plans to increase defense spending from 2.5% of GDP in 2023 to 3.5% of GDP by 2026 due to increased geopolitical risks. In the coming years, Fitch forecasts the government deficit to fall to 2.7% of GDP, while debt will rise to 46.4% of GDP in 2026, down from 43.6% of GDP in 2023, still below average for countries with similar credit ratings. The agency expects Latvia's GDP to grow by 1.5% this year, after a slight decline of 0.3% in 2023. According to Fitch, the main drivers of economic growth will be public and private consumption, driven by rising average wages and increased purchasing power. Public investment from European funds, especially financed by the Recovery and Resilience Facility, will remain strong, while private investment activity will remain limited, constrained by increased uncertainty in the region and weak credit growth. The agency expects Latvia's export performance to improve in 2024 as external demand from key trading partners increases. Fitch forecasts that Latvia's economy will grow by 2.8% in 2025 and 2026. Fitch's previous assessment of Latvia's credit rating was published on January 12, 2024, when the rating was confirmed at "A-" and the outlook was also positive.
