Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic 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 rating’s 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 and/or on its subscription platform ScopeOne.

Scope completed the monitoring review on 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 3 March 2025.

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 scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Latvia’s A- credit ratings reflect several credit strengths, including: i) its 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 constitute strong mitigants to external security risks in the context of heightened geopolitical tensions; ii) sound 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 enduring repercussions of Russia’s war against the Ukraine; and iii) its moderate public debt level, supporting the country’s fiscal resilience and room to withstand shocks.

The main challenges for the credit ratings are: i) exposure to external shocks given the Latvian economy’s small size, elevated openness and moderate income levels; and ii) unfavourable demographic trends, persistent labour shortages and long-term fiscal pressures.

After experiencing strong output growth in 2023 (of 2.9%, representing a significant positive revision from an initial estimate of a 0.3% contraction), the Latvian economy shrunk by 0.4% in 2024. Investments weakened as high interest rates weighed on business investment and public investment projects experienced delays. Household consumption remained sluggish despite easing inflationary pressures. Scope expects growth to recover to 2.0% this year and 2.7% in 2026, supported by recovering household purchasing power, declining borrowing costs and a pick-up in EU-funds absorption.

The fiscal deficit narrowed to 2.1% of GDP in 2024, outperforming previous forecasts thanks to stronger-than-anticipated revenue growth. Scope expects the general government deficit as a share of GDP to reach 3.0% in 2025 and 2.8% in 2026. This widening will be driven by a ramp-up in military expenditure alongside a gradual increase in the interest payment burden following a prolonged period of higher borrowing costs. At the same, Scope notes that increased defence policy commitments will be partly financed via an exceptional tax on banking sector profits, while the deficit-increasing impact of a recent reform aimed at streamlining the personal income tax framework will be offset by a transfer from the second-tier funded pension system. The debt-to-GDP ratio is seen rising to 50% by 2026, from 47.7% at the end of last year.

Latvia’s macroeconomic and fiscal outlooks remain significantly affected by the current environment of heightened geopolitical tensions, particularly in view of the recent uncertainty around EU-US relations. Scope presently assesses direct military risks from Russia as low due to Latvia’s strong international alliances and the recent build-up of European-led security cooperation efforts in the Baltic region. Additionally, Scope views the country’s preparedness to potential hybrid forms of aggression positively compared to other European peers. Still, the country’s geographical location makes it one of the EU countries most exposed to spillovers from the conflict.

The Stable Outlook for Latvia represents the present view that risks for the ratings are balanced.

Downside scenarios for the long-term ratings are (individually or collectively):

1. geopolitical risks increase, undermining macroeconomic stability;
    
2. fiscal fundamentals weaken, leading to a significant increase in the debt-to-GDP ratio over the medium run;
    
3. imacroeconomic imbalances increase, weakening growth prospects; and/or
    
4. external and/or financial sector vulnerabilities increase substantially.

Upside scenarios for the long-term ratings are (individually or collectively):

1. solid economic growth and income convergence continue through reform implementation and investment;
    
2. the public debt-to-GDP ratio remains moderate, supported by balanced government finances in the medium run; and/or
    
3. external and/or financial sector vulnerabilities continue to moderate.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on 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, Senior Analyst

© 2025 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab 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. Public Rating are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.