"Latvia's ratings are supported by moderate budget deficits and government debt levels well below peers, institutional strengths underpinned by EU membership and the benefits of eurozone reserve currency flexibility. These factors are balanced by a lower income level, and higher GDP volatility and net external debt than peers," Fitch said.
"Despite modest revenue underperformance in the first seven months of 2019, we have maintained our deficit forecast of 0.7% of GDP for the full year, given expenditure restraint and lower interest costs... Fitch expects the budget deficit to remain broadly stable in 2020-2021 (well below the 'A' median forecast of 1.1%), absent a more pronounced economic slowdown or more expansionary expenditure measures," it added.
Financial soundness indicators are strong, with banks maintaining high liquidity, sound capital ratios (23.7% in June) and increased profitability despite the ongoing slump in credit growth... Banks serving the non-resident sector are in the process of changing their business models, which could lead to consolidation or closures. However, the impact on economic activity is expected to be minimal," it added while noting that "Latvia risks facing important reputational damage if it is placed "under-review" by the FATF, which could have some adverse near-term political or medium-term economic consequences."
However, on the whole the assessment was positive with real GDP growth expected to ease to an average of 2.6% in 2019-2021 (slightly below the 'A' median average of 2.8%) as investment and export growth moderate due to weaker external demand and a slowdown in EU fund absorption.
Medium-term potential growth is estimated at 2.5%-3.0% while headline inflation is set to average 3.0% in 2019, from 2.6% in 2018, according to Fitch's models.
"Wage pressures should start to moderate from next year, which combined with lower headline GDP, will bring inflation down to 2.3% by 2021," the agency predicted.