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Thursday, 28.03.2024, 15:00
S&P upgrades Latvia's rating outlook to positive from stable
S&P Global indicated that Latvia’s
strong economic growth has been the main reason for the outlook upgrade. The
ratings agency noted, however, that Latvia’s per capita GDP is still smaller
than the average per capital GDP in similar eurozone countries. Latvia’s economic
growth is also expected to ensure improvements to Latvia’s labor market. EU
funding has ensured a moderate current account deficit.
S&P Global said ratings on Latvia are supported by track record of effective
policy making, prudent fiscal policy, and moderate and declining net government
debt. Latvia’s rating could be upgraded if economic expansion ensues without
overheating, external risks abate over medium term, and debt continues to
decline.
S&P Global expect fiscal prudence to be maintained despite tax reform and
upcoming elections next year.
S&P Global says in its statement that the ratings agency has revised upward its
growth forecast for Latvia to over 4% in 2017-2018. Private consumption is
rising as wages and real incomes are increasing and investments are picking up
with rising EU fund inflows, all the while we project sound external demand to
support export growth. An overheating of the labor market, however, could
forebode a growth slowdown in the years ahead.
S&P Global expects this cyclical expansion to wane and growth rates to moderate
to around 3% in 2019-2020. This underlines some of the challenges that Latvia
is facing on its path of income convergence toward the EU average. These relate
chiefly to the country's labor market, which is facing a tightening supply as
Latvia's population is declining, largely due to emigration, which is going to
threaten the competitiveness of Latvia’s businesses.
The ratings agency notes that the Latvian government
could use the favorable growth environment to address structural issues to
ensure that that wage increases are aligned with productivity growth. The
government recently passed a comprehensive tax reform and S&P Global expects policymakers to proceed with structural reforms in the labor
market, the education, and the health care system.
In ratings agency believes the tax reform with its new
corporate income tax model, increasing capacity utilization, and external
demand will contribute to private investment growth and could also spur
productivity growth. Furthermore, S&P Global expects bank
lending to recover with rising consumer confidence and real incomes.
As the October 2018 elections approach and the tax
reform becomes effective, S&P Global expects the general government deficit to
slightly widen next year. However, overall deficits will average only 1% of GDP
in 2017-2020 and government debt will continue to decline. External risks
mainly relate to non-resident deposit funding of part of the financial sector,
the macroeconomic environment and geopolitical developments.
“We do not expect major fiscal slippage over our
forecast horizon 2017-2020, despite upcoming elections and the implementation
of tax reform. We expect the general government deficit to slightly widen to
1.3% of GDP in the election year 2018. In that year, effects of the tax reform
could hit revenues but the government has introduced counterbalancing measures
such as an excise tax hike,” S&P Global said in the statement.
"This year, Latvia has been showing its fastest economic growth rate in five years, and the outlook upgrade assigned to Latvia by S& Global ratings agency is a significant affirmation that we are heading in the right direction. Latvia has managed to demonstrate adherence to a consistent policy, including by planning its next year’s budget responsibly. This achievement is also a result of intensive work on improvements to the tax system, which will bring sweeping change in the next five years," said Finance Minister Dana Reizniece-Ozola (Greens/Farmers).
At the end of March 2017, S&P Global assigned Latvia’s rating at ‘A-‘.