Strong domestic demand will push growth levels to above 3% annually on average over the next four years, with fiscal deficits remaining contained, in the view of S&P.
"As we expected, the liquidation of ABLV Bank and the reduction of nonresident deposits in the banking sector has markedly lowered Latvia's short-term external debt without undermining the country's economy, fiscal position, or financial system... We are therefore raising our ratings on Latvia to 'A/A-1' from 'A-/A-2'" the agency said.
"The upgrade reflects Latvia's sustained strong economic and fiscal performance, while a significant decrease in nonresident deposits (NRDs) has reduced external vulnerabilities. A robust construction sector, alongside strong inflows of EU funds, continue to lift Latvia's economy, with this year's growth projected to again exceed 4%. Growth continues to support budgetary performance, despite procyclical fiscal policy.
The rating could be raised again if fiscal improvements are seen in the areas of increased tax compliance, government willingness to more effectively contain expenditures, or faster-than-anticipated economic growth.
"Negative future rating action could be taken if risks related to the NRD banking sector's legacy, such as additional anti-money laundering breaches, or resulting from the fast unwinding of NRD positions, started to materialize," S&P said.