Ratings agency Fitch Ratings has affirmed Latvia's Long-Term Issuer Default Ratings (IDRs) at 'A-' with a Stable Outlook, it said in an October 16th release from Frankfurt.
"The ratings reflect a credible policy framework, supported by EU and eurozone membership, and lower, albeit rising, government debt and debt-servicing costs than rating peers. These strengths are balanced by Latvia's heightened exposure to geopolitical risks, small economy, lower GDP per capita, and weaker external finances than 'A' peers," reasoned the agency.
"The Stable Outlook reflects Fitch's assumption that Russia-related security risks will remain broadly unchanged and an expectation that stronger nominal GDP growth and expected fiscal adjustment will stabilise public debt/GDP below the peer median over the medium term, despite a commitment to maintaining high defence spending," it added.
Fitch said "heightened geopolitical risks" will remain a key factor "given the country borders Russia and Belarus" and that Russian migration pressure, disinformation, sabotage and airspace violations must also be taken into account.
"Latvia's NATO membership mitigates near-term security risks, despite increased uncertainty over the US commitment to NATO. NATO temporarily reinforced Latvia's air defences during parliamentary elections. The government raised its core defence spending target to 5% of GDP in 2026, under NATO cash methodology," Fitch noted.
Fitch expects the general government deficit to widening to about 5% of GDP by 2028, and to decline thereafter. Higher defence spending will be the main driver, expected to peak at above 6% of GDP in 2028 and remain above 5% in 2029-2030.
"Fitch assumes that the next government remains committed to EU fiscal rules and will implement fiscal adjustment after 2028, when the national escape clause expires. Fiscal risks stem from Rail Baltica cost overruns, potential support for airBaltic, rising social support needs, and additional defence spending linked to security risks," said Fitch.
The result of the recent parliamentary elections should lead to "broad continuity" on fiscal policy and other key policy matters, the ratings agency anticipated.
planned defence spending, EU and NATO alignment, and relations with Russia and Ukraine.
Fitch forecasts general government debt will increase to 52.2% of GDP in 2028, from 46.2% at end of 2025, but forecasts growth of 2.7% in 2026, revised up from 2.3% in April, and an average 2.4% in 2027-2028.
Fitch forecasts headline inflation to average 3.4% in 2026 and rise to 3.6% in 2027, before declining in 2028 if energy and domestic cost pressures ease.
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