"The rating upgrade to A3 is a signal for investors that investments in Latvia have even higher degree of safety and affirms strengthening of Latvia’s position in the ‘A’ rating category. It is a major achievement for Latvia because we have improved the country’s economic and fiscal position lately. In previous years the government acted decisively in response to the crisis situations and tightened fiscal discipline. Intensive work on improving tax collection also contributed to this success,” Latvian Finance Minister Janis Reirs said.
The rating agency has noted that in some aspects Latvia was even in a better position than other A3-rated countries, the Latvian Finance Ministry said.
Moody's said in the statement that the reasons for the rating upgrade were the durable strength of the Latvian government's balance sheet and reduced banking sector risk.
Moody’s expects Latvia’s fiscal deficit to remain below 1.5 percent of GDP and a reduction of general government debt-to-GDP to 36 percent of GDP by the end of 2015.
“Latvia's public finances are a notable source of strength for the sovereign relative to peers. Its debt-to-GDP ratio sits comfortably beside A3-rated peers, its debt-to-revenue ratio and financial balance are close to the lowest of all A3 countries and its debt affordability ratio (interest payments-to-revenue) is the lowest in the A3 rating category,” Moody’s said.
As to further reduction in banking sector risk, the rating agency said that the Latvian banking system was well capitalised, the share of non-resident deposits in the system had been stable and the regulators had imposed substantial capital add-ons and liquidity requirements for banks whose business is concentrated in this area.
“Banking sector risk is also mitigated by the supervisory oversight that is provided by the ECB's Single Supervisory Mechanism (SSM), which became operational in the last quarter of 2014 and which also includes Latvia's largest non-resident deposit taking bank,” Moody’s said.
“The stable outlook on Latvia's A3 rating reflects Moody's view that upside and downside risks are evenly balanced,” the rating agency said, pointing out that, regardless moderate geopolitical event risk and the adverse effects of the economic decline in Russia on the Latvian economy, Latvia as a small and open economy had adjusted and diversified its export markets.
“The crisis in Russia has dampened Latvian economic growth to below potential, with real GDP growth falling to an estimated 2.4 percent in 2014, and we are forecasting a 2.2 percent expansion in 2015,” Moody’s said.
“Moody's would consider upgrading Latvia's government bond rating in case of (1) a faster-than-expected debt reduction; (2) increased potential economic growth, most likely through further competitiveness-enhancing structural economic reforms; (3) decisive moves to increase the size of the country's tax base. Conversely, downward pressure on the rating could develop in the event of a substantial weakening of the government's balance sheet. A dramatic deterioration in the economic or security situation vis-à-vis Russia would also increase downward rating pressures,” the rating agency said.
In June 2014, Moody's upgraded Latvia's government bond rating to Baa1 from Baa2, and the outlook on the rating was stable.