R&I notes that Latvia has a small and open economy, placed as an intermediate hub of trade between Russia and Europe. Although these properties make the economy susceptible to volatilities of the external environment, the country is expected to continue to enjoy solid economic growth, backed by strong domestic demand.
In R&I's view, the policy stance of adhering to fiscal rules will be maintained under a new government formed in January 2019.
The agency said that although ABLV Bank, the largest bank engaged in servicing non-residents in Latvia, went into liquidation, its collapse has had no impact on the domestic economy and the financial system remains stable.
Based on these factors, R&I has affirmed the Foreign Currency Issuer Rating at A-.
The agency also said that if the UK withdraws from the EU without a deal, Latvia's economy would come under downward pressure, affected by a downturn in the European economy.
"With non-resident deposits decreasing at a fast pace, the business model of banks providing services for non-residents needs to be reformed. Meanwhile, there is a possibility that those banks may increase their presence in the domestic market by, for example, expanding credits to residents," the agency said in its statement.
From the medium-term perspective, the impact of demographic shifts draws attention. Latvia's population keeps falling owing to continued outflow to other euro area countries, combined with a natural decline. The shrinking population could weigh on social security and healthcare spending and also hamper economic growth, the agency said.
As reported, Japanese credit ratings agency R&I announced last January it has raised Latvia’s credit rating to A- from BBB+.