Analytics, Covid-19, Economics, Financial Services, Good for Business, Investments, Latvia

The ratings agency has appreciated the Latvian government's swift and effective measures taken to contain the spread of Covid-19 and support the economy.

Thanks to strict fiscal discipline before the Covid-19 outbreak and modest government debt, which is one of the smallest in the euro area, the government has ensured sufficient fiscal flexibility to support the economy in the current situation, the agency said.

Compared with the financial crisis of 2007-2009, the Latvian economy is now much more diverse and resilient to various shocks. S&P expects the Latvian economy to be back to its 2019 level by mid-2022 thanks to the support measures taken by the government and the recovery of Latvia's main trade partner countries. This will allow reducing Latvia's fiscal deficit and stabilize the government debt in following years. Despite the increase caused by the pandemic, Latvia's government debt will still remain among the smallest in the euro area, the agency said.

The stable outlook on Latvia's rating envisages that the Latvian economy will be able to recover in a few years' time after this year's brief recession, caused by the Covid-19 pandemic. S&P expects the Latvian economy to reduce by 7% this year.

Although risks to the economy will remain high, current indications suggest that in the first half of the year the situation has not been as bad as it was initially projected. The initial data on the second quarter of 2020, which will show the strongest impact from the pandemic, suggest that the Latvian economy contracted by 10% in annual terms. 

The ratings agency also projects Latvia's budget deficit to reach 5.1% of GDP and government debt to widen to 37% this year. 

At the same time, S&P notes that notwithstanding the fragmented nature of Latvia's political parties, policy making in Latvia is effective enough, which also helps keep Latvia's rating up. Furthermore, S&P has noticed Latvian political parties' unanimity when it comes to taking strategic decisions.

In its previous announcement, which S&P released on February 21, 2020, Latvia's rating was raised to A+ from A, with a stable outlook.