Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Latvia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A-/Positive; short-term local- and foreign-currency issuer ratings: S-1/Stable) on 28 November 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Latvia’s A- ratings reflect the following credit strengths: i) a sound institutional set-up and effective policymaking underpinned by its status as a member of the euro area, ensuring a robust framework for fiscal and economic policy, while its membership in NATO strongly mitigates external security risks in the context of heightened geopolitical tensions; ii) solid medium-run economic growth prospects supported by large allocations of EU funds, underpinning the country’s continued convergence with the euro area despite near-term headwinds stemming from the Russia-Ukraine war; and iii) a moderate public debt level, supporting the country’s fiscal resilience and room to withstand shocks.

However, Latvia’s rating remains constrained by credit challenges relating to: i) moderate income levels, which, coupled with the economy’s exposure to external shocks, given its small-size and openness, increase the country’s vulnerability to the current high inflationary pressures and cost-of-living shock; ii) unfavourable demographic trends, increasing labour shortages and long-term fiscal pressures; and iii) financial spill-over risks stemming from the banking sector interconnectedness with Nordic banks, though mitigated by sound capitalization and profitability levels.

The Positive Outlook represents Scope’s view that Latvia will weather the economic fallout from the Russia-Ukraine war without its credit fundamentals deteriorating; and that a continuation of sound policies, paired with swift absorption of EU funds, will support further economic and fiscal improvements.

The ratings could be upgraded if, individually or collectively: i) solid economic growth continued through structural reform implementation and investment; ii) the public debt-to-GDP ratio remained anchored to moderate levels, supported by broadly balanced government finances in the medium run; and/or iii) external and/or financial sector resilience continued to improve.

Conversely, the Outlook could be revised to Stable if, individually or collectively: i) fiscal fundamentals weakened, leading to a significant increase in debt-to-GDP over the medium run; ii) macroeconomic imbalances increased, weakening growth prospects; iii) external and/or financial sector vulnerabilities increased substantially; and/or iv) heightened geopolitical risks undermined macroeconomic stability.

For the updated rating report accompanying this review, click here

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.

Lead analyst: Giulia Branz, Senior Analyst

© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.