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 2 April 2024.

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

For the updated report accompanying this review, click here.

Latvia’s A- rating reflects several credit strengths, including its: i) 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 NATO and EU memberships strongly mitigate 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 persistent headwinds stemming from the Russia-Ukraine war; and iii) 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 and exposure to external shocks, given the Latvian economy’s small size and openness; 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 capitalisation and profitability levels.

The Latvian economy experienced a shallow contraction of an estimated 0.3% of GDP last year, amid sluggish household demand and export activity, and despite resilient investment dynamics. Scope expects a gradual recovery of 1.9% in 2024 and 3.6% in 2025. Private demand is recovering, supported by prospects of gradually loosening financing conditions as well as by normalising price dynamics, which support a robust rebound in real incomes. At the same time, export-oriented sectors will benefit from improving external demand.

Strong revenue growth and lower spending on support measures helped to narrow the general government deficit markedly in 2023 to an estimated 2.3% of GDP (down 2.3 percentage points from the previous year). The fiscal deficit should increase to 3.8% of GDP this year, reflecting larger than previously expected public investment efforts – in large part on defense infrastructure – as well as pressures on public sector wages and social welfare expenditures following the inflation shock. Fiscal deficits are expected to moderate in subsequent years, supported by robust nominal growth and a still low interest rate burden. The debt-to-GDP ratio stood at an estimated 43.1% last year (up 2.1 percentages points from 2022) and should stay broadly stable over the medium term.

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) geopolitical risks increased, undermining macroeconomic stability; ii) fiscal fundamentals weakened, leading to a significant increase in the debt-to-GDP ratio over the medium run; iii) macroeconomic imbalances increased, weakening growth prospects; iv) external and/or financial sector vulnerabilities increased substantially.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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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