“Persistent geopolitical uncertainty and elevated regional security risks could continue to impact Latvia’s credit profile over the medium term, although we do not expect the Russia-Ukraine war to escalate into NATO territory, including Latvia,” said S&P.
“While geopolitical risks have resulted in a substantial increase in Latvia’s defense spending, we believe its economy has shown resilience, with GDP per capita up almost 30% through 2025 compared with 2021, before the start of the war,” the rating agency added.
“The stable outlook reflects the balance between Latvia’s rising debt and rebounding economic growth and mirrors our expectation that the country will withstand external headwinds over the next two years, including from the Russia-Ukraine conflict. It also reflects our expectations that Latvia’s authorities will preserve the country’s prudent fiscal policy, taking enough policy measures to ultimately keep budget deficits and government debt in check, despite the planned defense spending increases over 2026-2027.
“We further base the stable outlook on our expectation that the war will not spread to NATO territory, including Latvia,” it said.
S&P forecasts modest economic growth of 1.5% in real terms in 2025, rising to 2.25% next year driven by investments and an influx of EU financing, alongside a gradual recovery of private consumption.
Prime Minister Evika Siliņa welcomed the “no change” decision from S&P saying:
“Latvia has a very good credit rating, and S&P’s decision to maintain it at A level with a stable outlook is excellent news for our economy. It shows that investors can trust us, and confirms that international partners see Latvia’s ability to manage risks, observe fiscal discipline and continue development in difficult circumstances.”
The agency forecasts that the general government budget deficit will average 3.8% of GDP in 2026-2028, taking into account the increase in defence spending to 5% of GDP in 2026-2028. Although the increase in defense spending will increase the state budget deficit, S&P believes that Latvia will continue to implement a tight fiscal policy, limiting the growth of public debt – though this will inevitably be a focus of debate ahead of next year’s Saeima elections.
The rating agency stressed the importance of Latvia absorbing all the EU funds to which it is entitled, saying: “We expect Latvia’s near-term economic growth prospects and fiscal outcomes will depend on its ability to absorb and efficiently use the sizable funds made available through various EU financing envelopes. Latvia is benefitting from access to ample non-debt-creating external funding, including EU transfers. Total funds available through the EU’s Multiannual Financial Framework, the RRF, and the Rail Baltica project amount to over €11 billion, or about 27% of the country’s 2024 GDP. Specifically, as the deadline for drawing down its RRF approaches, and the 2021-2027 Cohesion policy funding cycle revs up, we expect Latvia to absorb more EU funding in 2025-2026 than in 2024, supporting public investment activity.”
“While the Rail Baltica project continues to face execution challenges, we do not expect any residual funding shortfall to fall onto the government’s budget,” it added.
The decisions of the various international rating agencies remain important benchmarks for investors, despite their notorious failure to notice the dramatic sub-prime loan crisis of 2008 until it was already happening. After taking a serious reputational knock when the subsequent global economic strife unfolded, rating agencies have spent the years since slowly regaining their powerful positions as gatekeepers of the global economic system. Â
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