Analytics, Economics, Financial Services, Investments, Latvia, Rating

The issue ratings on Latvia's senior unsecured foreign and local currency bonds have also been affirmed at 'A-'.

The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1'.

Latvia's ratings are currently supported by the sovereign's stronger fiscal position relative to its 'A' range peers, its stable banking sector, as well as Fitch’s baseline assumption that economic growth will stay resilient against geopolitical risks. A low level of income per capita and a high net external debtor position relative to median levels constrain the rating within the 'A' range, Fitch informs.

Latvia is expected to continue its positive growth performance. For 2015 and 2016, Fitch is projecting Latvia's economy to grow 2.3% and 3.0%, respectively. Turbulence in Russia will hit the economy's external sector performance (Russia accounts for 11% of total exports) and related industries. However, Fitch expects this drag to be offset by growth in domestic demand, which has proven resilient in the current environment of growth in households' disposable incomes, improvement in labor employment and low inflation.

Fitch also points out that there is also evidence that Latvian exporters have redirected some exports originally bound for Russia to other important trade partners in EU, BRIC and CIS countries.

Fitch also goes on to say that Latvia's fiscal position is slightly better than its 'A' range peers. For 2015, Fitch estimates Latvia's fiscal deficit and general government debt ratio to be 1.5% and 36.4% of GDP respectively, compared with a 'A' median fiscal deficit of 2.1% and debt ratio of 46.8%.

The stable banking sector also supports Latvia's ratings. The average capital Tier 1 ratio is high (18.1%, 2014), and an increase in resident deposits has helped improve the sector's funding structure.

The stable outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger positive rating action are: – A longer track record of strong and stable growth that fosters higher income per capita, without re-emergence of macroeconomic imbalances. – A sustainable improvement in external finances in conjunction with a reduction in external debt ratios. The main factors that could, individually, or collectively, trigger negative rating action include: – Deterioration in Latvia's public debt dynamics, for example from sustained fiscal slippage and/or economic underperformance. – Deterioration in external finances for example associated with overheating of the domestic economy.