Analytics, Economics, Financial Services, GDP, Investments, Latvia

The credit profile of Latvia (A3 stable) is supported by the country's flexible and relatively diversified economy, moderate government debt relative to GDP and a record of effective policymaking, Moody’s said in an annual report released today.

The coronavirus crisis will lead to a sharp economic contraction of 7.3% of GDP this year, which will also have significant negative knock-on effects on the public finances. The fiscal deficit is expected to reach 9.8% of GDP this year and the government debt burden will increase by 12.4 percentage points of GDP, while remaining moderate and in line with A-rated peers.

"Despite the easing of restrictions and the significant government support provided to help businesses and workers weather the crisis, coronavirus will lead to a sharp contraction in the Latvian economy, with GDP falling by 7.3% this year," said Petter Bryman, a Moody’s AVP-Analyst and the report's author. "We expect that the Latvian economy will begin recovering gradually in the second half of this year, returning to full-year growth of 4.7% of GDP in 2021."

Although money laundering and corruption scandals in 2018 raised questions about the quality and integrity of financial supervision, the government has since made significant progress in tackling these areas, Moody’s points out.

An easing of negative medium- to long-term pressures on the economy's potential growth rate, most likely through structural economic reforms, would be credit positive. Faster-than-expected debt reduction after the pandemic, a broadening of the country's tax base and reduced regional geopolitical risk would all be positive, according to the report.

A substantial weakening of the government's fiscal position relative to peers, a structural deterioration in economic performance or a weakening of efforts to curb money-laundering-related risks associated with the financial system would be credit negative. An escalation of tensions with Russia that affects Latvia's growth and fiscal performance would also be negative, Moody’s goes on to say.