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-/Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1/Stable) on 9 October 2023.

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- rating reflect several credit strengths, including its: 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.

The main challenges for the ratings are: 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 inflationary pressures and cost-of-living challenges; 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 Latvian economy is expected to grow by 0.8% in 2023, down from 3.4% last year. The deceleration in the economic momentum primarily reflects the persistence of elevated inflation and the tightening of financing conditions, which are weighing on private demand. Scope forecasts a rebound in real GDP growth over 2024 and 2025, at 2.8% and 3.2% respectively, in line with expectations of normalizing price dynamics, robust wage growth and a more favourable external environment.

The general government deficit is forecasted at 3.5% of GDP this year (down 0.9 percentage points from 2022), as the impact of energy-support measures, growing pension and social welfare expenditure and heighted defense spending is partly offset by the robust fiscal revenue growth and the withdrawal of pandemic-era policies. It should decline gradually over subsequent years, down to about 1-1.5% of GDP by 2028. The debt-to-GDP ratio is seen declining slightly to 40.2% this year, down 0.6 percentage points from 2022, and stabilizing around 39% in subsequent years, amid still-favourable nominal growth and declining primary deficits.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) geopolitical risks in the region declined; ii) solid economic growth and income convergence continued through reform implementation and investment; iii) the public debt-to-GDP ratio remained moderate, supported by balanced government finances in the medium run; and/or iv) external and/or financial sector vulnerabilities continued to moderate.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) fiscal fundamentals weakened, leading to a significant increase in the debt-to-GDP ratio over the medium run; ii) macroeconomic imbalances increased, weakening growth prospects; iii) external and/or financial sector vulnerabilities increased substantially; and/or iv) geopolitical risks rose further, undermining macroeconomic stability.
 
The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2023) 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 Brian Marly, Analyst

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