Fitch affirmed Latvia’s A- rating with a stable outlook, according to an official press release, published on Friday, April 12. The move was supported by solid public finances, institutional strength and a credible policy framework. On the other hand, the rating remains constrained by a lower income level, higher GDP volatility and also higher net external debt compared to peers.
The rating agency expects the general government deficit at 0.7% of GDP, higher than the government’s projection for 0.5% of GDP. Meanwhile, public debt levels are expected to remain stable this and next year. Fitch noted that although robust GDP growth is forecast, Latvia plans to finance large Eurobond redemptions in 2020 and 2021, hence this will prevent a reduction in the general government debt-to-GDP ratio.
Fitch forecasts growth at 3.1% on average in 2019-2020, driven by private consumption and reduced risks in the financial sector. The agency also noted that although the labor market continues to tighten, the impact on inflation and competitiveness remains contained. In the meantime, the current account deficit is projected to widen, due to slower growth of exports of both goods and services.
A further positive rating action could be driven by a sustained improvement in external debt ratios or strong growth that leads to higher income per capita. On the other hand, a downgrade could follow by a deterioration in public debt dynamics such as fiscal slippage or a deterioration in external finances.