Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Latvia (Latvia)’s long-term issuer and senior unsecured debt-category ratings at A-, in both local- and in foreign-currency, with Stable Outlooks. Scope has also affirmed Latvia’s short-term issuer rating at S-1 in both local and foreign currency with a Stable Outlook.

The affirmation of Latvia’s credit ratings reflects a strong institutional framework which supports sound macroeconomic policymaking and a robust long-term growth potential. Medium-term growth prospects will benefit from sizable EU fund allocations and structural reforms agreed under the country’s Recovery and Resilience Plan (RRP).

The affirmation furthermore accounts for Latvia’s moderate public debt levels. These are expected to remain on a modest rising trajectory over the coming years, largely due to significant increases in defence spending, though robust nominal growth prospects and strong debt affordability should limit the rise in indebtedness and maintain debt ratios at comparatively low debt levels, despite prospects of sustained budget deficits.

The main credit challenges reflect: i) its exposure to external shocks, given the Latvian economy’s moderate income levels, small size and relatively elevated openness; and ii) the adverse demographic trends that are increasing labour shortages and fiscal pressures.

For the updated rating report, click here.

Key rating drivers

Sound institutions, robust growth prospects. Latvia’s A- ratings reflect effective policymaking anchored to the country’s EU and euro area memberships. These provide a sound and credible framework for fiscal policy and support the Latvian government’s ability to access capital markets even in periods of market stress. Together with ample access to, and efficient absorption of EU funding for public investment, these memberships have supported the country’s economic convergence over recent years. Latvia’s GDP per capita amounted to 50% of the euro area average in 2024, up from just 39% in 2015. Measured in purchasing power standards, Latvia’s GDP per capita is close to 68% of the euro area average.

The Latvian economy contracted by 0.4% in 2024 after a 2.9% expansion in 2023, amid pronounced delays in the roll out of public investment programs and sluggish household consumption. The economic momentum is showing signs of recovery (real GDP is up by 0.7% year-on-year in H1 2025), primarily driven by robust investment dynamics. Looking ahead, these should remain the key driver of the acceleration in growth as public investment increases and credit growth strengthens amid loosening financing conditions. Private consumption has remained subdued thus far but is expected to gradually recover, supported by healthy wage growth and the favourable impact of recent tax changes on disposable incomes. Scope expects real growth to pick up gradually, to 1.2% in 2025, 2.5% in 2026 and 2.8% in 2027.

Scope estimates Latvia’s medium-term growth potential at about 2.0-2.5% annually, underpinned by significant allocations of EU funds, totaling EUR 6.4bn (around 16% of 2024 GDP) over 2021-27 under the RRP and Cohesion funds). Reforms included under the RRP should also support an acceleration in productivity gains and support the long-term growth trajectory, including via measures aimed at improving the business environment and tackling labour and skill shortages. This comparatively robust growth outlook will support the convergence in income levels and productivity towards euro area averages, in turn yielding further improvements regarding the Latvian economy’s resilience to shocks.

Moderate public debt levels, sound fiscal trajectory. The affirmation of Latvia’s ratings also reflects the government’s moderate debt levels and robust debt affordability. Latvia’s public debt-to-GDP ratio remains moderate compared to peers, at 46.8% as of year-end 2024, despite increasing since the Covid-19 pandemic from 37.9% in 2019.

The fiscal deficit narrowed to 1.8% of GDP in 2024 (down 0.6pps from the previous year), outperforming previous forecasts due to stronger-than-anticipated revenue growth from labour and corporate income tax. Scope expects the fiscal balance to deteriorate over the coming years, primarily driven by a significant increase in defence expenditure (expected to rise to 5% of GDP by 2027, from 3.0% in 2024). Persistent inflation-related spending pressures affecting social transfers and public sector wages, a sustained public investment effort and the revenue-reducing effects of a reform of the personal income tax system (effective from 2025) will further weigh on the fiscal outlook.

At the same time, Scope expects several offsetting factors will help mitigate these pressures. Already implemented measures include hikes on excise duties alongside increased taxation on the financial sector. Latvian authorities are currently considering the implementation of spending cuts of approximately EUR 480m (equivalent to around 1.2% of GDP) over 2026-28 which, alongside an efficiency push within central administrations and a streamlining of state-owned enterprises, should curb growth in public expenditures. Revenue growth should remain healthy, underpinned by robust nominal economic growth and continued government efforts to strengthen revenue collection and curb the size of the shadow economy.

Scope forecasts the general government deficit will widen to 3.0% of GDP on average over 2025-27, before gradually receding in subsequent years, down to around 2.5% of GDP by 2030. The deficit is therefore expected to remain within the 3% of GDP Maastricht threshold, despite Latvia benefitting from defence-related spending flexibility within the EU fiscal framework. The debt-to-GDP ratio is forecast to remain on a gradual upward trend over coming years, to 47.8% by end-2025 and to around 50% by end-2030 – thus remaining moderate relative to euro area peers.

The public debt trajectory is anchored by robust debt affordability, which should limit the increase in debt-servicing burden resulting from durably higher interest rates. Interest payments are seen growing gradually over the forecast horizon, edging up to 1.5% of GDP by 2030 (in net terms), up from 0.9% in 2024. This moderately increasing trajectory accounts for the Latvian government’s favourable debt profile, including moderate foreign currency and interest risk exposure, a smooth refinancing profile and adequate average maturity of around 6 years.

Rating challenges: exposure to external shocks and longer-term demographic pressures

Latvia is a small and very open economy, with the export and import sectors accounting for around 66% of GDP each. This, coupled with comparatively moderate wealth levels (GDP per capita of EUR 21,600), exposes Latvia to external shocks. This vulnerability is exacerbated by the present environment of high geopolitical tensions in the wake of Russia’s invasion of Ukraine in February 2022. While Scope assesses direct military risks from Russia as low due to Latvia’s strong international alliances, the country’s geographical proximity to Russia and strategic location on the Baltic Sea make it one of the EU countries most exposed to spillovers from the conflict, including to broader security challenges such as cyber risks or disinformation campaigns. While Scope assesses the country’s preparedness to such hybrid forms of aggression positively compared to other Central and Eastern European peers, a protracted conflict adds significant uncertainty to the medium-term macroeconomic and fiscal outlooks.

Additionally, Latvia’s ratings are constrained by adverse demographic trends, which will weigh on the country’s macro-fiscal outlooks. The country’s working-age population is expected to decline by 1.6% a year on average over 2025-30 according to the European Commission’s latest ageing report.¹ While demographic challenges were partly alleviated in recent years by large inflows of Ukrainian refugees, an ageing population will exacerbate pressures in the labour market, where labour shortages already constitute a key bottleneck to output growth and risk fueling further wage increases, in turn potentially eroding the country’s external competitiveness. While adverse demographic trends present some risk to the fiscal trajectory in the long run, Scope notes that their impact should remain moderate relative to most EU peers. The IMF estimates the net present value of changes in healthcare and pension spending through 2050 at 19% of GDP, above Estonia (8%) but well below Lithuania (76%).²

Rating-change drivers

The Stable Outlook reflects Scope’s view that the risks Latvia faces over the next 12 to 18 months are balanced.

Upside scenarios for the ratings and Outlooks are if (individually or collectively):

1. Solid economic growth and income convergence continued through reform implementation and investment.
    
2. The public debt-to-GDP ratio remained moderate, supported by balanced government finances in the medium run.
    
3. External and/or financial sector vulnerabilities continued to moderate.

Downside scenarios for the ratings and Outlooks are if (individually or collectively):

1. Geopolitical risks increased, undermining macroeconomic stability.
    
2. Fiscal fundamentals weakened, leading to a significant increase in the debt-to-GDP ratio over the medium run.
    
3. Macroeconomic imbalances increased, weakening growth prospects.
    
4. External and/or financial sector vulnerabilities increased substantially.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘a-’ – approved by the Rating Committee – for Latvia. This ‘a-’ first indicative rating receives a one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This sees a final SQM indicative credit rating of ‘a’ for Latvia. On this basis, the final SQM quantitative rating of ‘a’ is reviewed by the Qualitative Scorecard (QS) and can be adjusted by up to three notches depending on Latvia’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following QS relative credit weaknesses of Latvia: i) resilience to short-term external shocks; ii) social factors; iii) governance factors. Conversely, Scope did not identify QS relative credit strengths for Latvia. On aggregate, the QS generates a one-notch negative adjustment affecting Latvia’s credit rating, resulting in the final A- long-term ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weight under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Latvia displays comparatively robust scores in the SQM, reflecting low levels of CO2 per unit of GDP, a low footprint of consumption compared to available biocapacity, and low exposure and vulnerability to natural disaster risks, alongside average levels of greenhouse gas emissions per capita. Latvia’s QS evaluation on ‘environmental factors’ is ‘neutral’ against a peer group of countries. Latvia boasts one of the highest shares of renewables in its energy mix, covering 43% of energy consumption in 2023 (above an EU average of 25%).

Regarding social factors, Latvia’s SQM score balances strong labour-force participation, alongside average marks on income inequality and weak marks for the old-age dependency ratio. The complementary QS assessment of ‘social factors’ is ‘weak’ compared to a peer group of countries, accounting for persistent challenges as regards poverty and exclusion risks, which remain markedly above EU averages, in part reflecting limited levels of income redistribution.

The complementary QS assessment of ‘governance factors’ is ‘weak’ compared to peers to account for Latvia’s comparatively heightened exposure to spillover from the Russia-Ukraine war. External security risks for Latvia have increased materially since the escalation of the Russia-Ukraine war, though NATO and EU memberships strongly limit the risk that the conflict will expand into the Baltic region. Under governance-related factors in the SQM, Latvia performs strongly relative to peers, in line with high scores under the World Bank’s Worldwide Governance Indicators. Policymaking has been effective and enjoyed broad continuity. EU and euro area memberships also enhance the quality of Latvia’s macroeconomic policies and macroprudential framework. Prime minister Evika Siliņa has led a broad three-party coalition since September 2023. The next parliamentary elections are expected to take place in October 2026 at the latest.

Rating committee
The main points discussed by the rating committee were: i) Latvia’s economic outlook and medium-term growth potential; ii) public finance risks, including fiscal framework and debt dynamics; iii) external economic risks, including effects of potential US tariffs; iv) financial stability and non-financial sector balance sheet developments; v) ESG considerations; and vi) peer developments.

Rating driver references
1. European Commission - 2024 Ageing Report. Economic and Budgetary Projections for the EU Member States (2022-2070)
2. International Monetary Fund, Fiscal Monitor, April 2025

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 January 2025), is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign Quantitative Model, version 4.1), available in Scope Ratings’ list of models, published under scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication/. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation       YES
With access to internal documents                                     NO
With access to management                                              NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Brian Marly, Senior Analyst
Person responsible for approval of the Credit Ratings: Eiko Sievert, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 20 September 2024.
 
Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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