Latvia, with a stable A3, benefits from improved economic growth on the back of structural reforms, as well as reduced banking sector risk, says Moody’s Investors Service in a report published Saturday.
The Latvian economy’s small size and history of volatile growth are balanced against the country’s relatively high wealth levels and economic dynamism.
“Latvia’s implementation of structural reforms is helping to alleviate macroeconomic imbalances between domestic and external demand. Together with increased flexibility in the export sector, this supports growth in excess of the eurozone average,” says Evan Wohlmann, an analyst at Moody’s.
“In 2015, we expect that the Latvian economy will continue to show moderate growth of 2.3%, despite the challenging situation in Russia which has impacted exports as well as business investment. A revival in economic sentiment and faster growth in the eurozone will likely support higher growth of 3.2% in 2016.”
Moody’s expects a government budget deficit of around 1.5% of GDP in 2015-16 as fiscal consolidation remains in focus. This represents a substantial reduction in the deficit since the financial crisis (2009: 9.0% of GDP). The rating agency expects that Latvia’s general government debt-to-GDP ratio will remain around 40% in 2016, following the pre-financing of forthcoming bond repayments.
Risks related to the banking sector have decreased, as banks registered improvements in profitability and asset quality. Overall, banking sector capitalization stood at 20.6% in the third quarter of 2014, while the domestic loan to deposit ratio (excluding government) fell to 133% at the end of 2014.
Moody’s views non-resident deposits as the main, albeit modest, risk in the banking system. However, it notes that the share of NRDs has stabilized at around a half of total banking sector deposits, and banks that focus on non-resident business are subject to stricter capital and liquidity requirements from the regulator.
