Fitch assessed the new government's security-oriented policy as positive.
"The war in Ukraine has highlighted geopolitical risk, but we see a further escalation with significant credit implications for Latvia as a remote tail risk. Latvia is a member of NATO, which has enhanced its efforts to protect the Baltic region. National security is among the key medium-term priorities of the new government and Latvia plans to increase its national defence budget to at least 3% of GDP by 2027 from about 2.2% of GDP in 2021," Fitch said.
The inflation is projected to gradually decrease in 2023 reaching an average of 9.5% but its "inflation forecasts remain subject to heightened uncertainty and depend on the development of global commodity prices and persistency of the second-round effects."
Latvian economy is forecast to drop by 0.3% in 2023 but household expenses are predicted to grow due to inflation and insufficient wages.
As possible factors influencing the positive future development of the credit rating, Fitch Ratings has mentioned the government's ability to achieve a medium-term reduction in the level of government debt, as well as the introduction of effective structural reforms that would raise economic growth rates in the medium term and mitigate the effects of long-term demographic challenges.
The future development of Latvia's credit rating may be negatively affected by a significant escalation of geopolitical risks with adverse effects on economic growth, a steady increase in the level of government debt-to-GDP level, and a decline in economic competitiveness as a result of high inflation, noted Fitch.