Gold bars to be exempt from tariffs, White House clarifies
Investing.com -- On Friday, May 9, 2025, Fitch Ratings reaffirmed Latvia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’A-’ and indicated a stable outlook.
The rating draws on Latvia’s reliable economic policy framework, which is bolstered by its EU and eurozone membership, manageable government debt and debt servicing costs, and moderate private sector indebtedness. However, the small and open nature of Latvia’s economy, which leaves it vulnerable to external shocks, its lower GDP per capita, and a higher current account deficit (CAD) compared to ’A’ peers, balance these strengths.
Latvia’s geopolitical position, bordering Russia and Belarus, exposes it to potential escalation of geopolitical tensions. Fitch believes that NATO’s mutual defense clause mitigates these risks, but notes the growing uncertainty among European NATO members about future U.S. military support. This uncertainty contributes to expectations of increased Latvian defense spending. Fitch predicts that Latvia will raise its defense spending to 5% of GDP over the medium term from 3.3% in 2024. This increase is faster than the government’s current plan, which is under review.
To offset the anticipated increase in defense spending, the government has implemented a fiscally neutral tax reform for 2025-2028. This reform includes changes to personal income taxation and an increase in excise duties. The authorities estimate the solidarity tax for banks will yield 0.2% of GDP a year in 2025-2027.
Fitch projects that the fiscal deficit, which was 1.8% of GDP in 2024, will widen to 2.6% in 2025 and further to 3% in 2026. This is due to increased defense spending and the planned deliveries of air defense systems.
Public debt is forecasted to rise to 48.5% by 2026, from 46.8% in 2024, and stabilize at about 52% from 2027. This is still below the projected ’A’ median of 57.2% in 2026.
Fitch projects real GDP growth of 1.2% in 2025, following a shallow recession of 0.4% in 2024. This growth is expected to accelerate to 2.4% in 2026.
Inflation, which reached 3.5% in March 2025, is expected to moderate in the remainder of the year and average 2.9% in 2025 and 2.3% in 2026.
The CAD is forecasted to widen to 3.5% in 2025 and 3.8% in 2026 due to planned deliveries of military equipment and the expected increase in EU-funded projects.
The Latvian banking sector remains stable, with high liquidity and capitalisation, and stable asset quality. The implemented temporary solidarity tax will affect the sector’s profitability, but the Bank of Latvia does not expect the tax to pose significant challenges to the sector.
Latvia has an ESG Relevance Score (RS) of ’5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption.
For a downgrade, Fitch points to potential factors such as a significant worsening of geopolitical risks or a more rapid increase in general government debt/GDP. On the other hand, factors such as fiscal consolidation, reduction of geopolitical tensions, or sustained higher medium-term growth could lead to an upgrade.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.