S&P Global Ratings confirmed Latvia's 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on Friday, retaining a stable outlook.
The decision reflects a balance in S&P's view between Latvia's relative economic resilience and careful policymaking on one hand, and mounting risks on the other - notably an increase in public indebtedness and regional security concerns.
S&P projects that net government debt will climb to 45% of GDP by 2029, an increase of seven percentage points from the 2025 level. The rating agency also stated its expectation that the Russia-Ukraine war will not expand onto NATO territory, including Latvia.
On growth, S&P forecasts GDP expansion of 2.0% in 2026, supported by steady consumption and public-sector investment. The agency anticipates a modest pickup thereafter, with average growth of 2.4% across 2027-2029. Domestic demand is expected to remain the primary engine of growth as disposable incomes rise and investment benefits from EU fund inflows and increasing defense outlays.
Inflation pressures are projected to intensify in 2026, with S&P noting that the Middle East war will push inflation above 4.0% through higher energy prices. The agency said this could weigh on external demand for Latvian exports, even as domestic demand underpins activity.
Fiscal balances are set to deteriorate. S&P expects Latvia's general government deficit to widen to more than 4.0% of GDP by 2028, up from 2.5% in 2025. The primary driver of the deterioration is projected to be defense spending, which S&P estimates will exceed 5.0% of GDP.
To reflect the elevated defense outlays, the EU Council approved Latvia's request to activate the national escape clause under the Stability and Growth Pact.
The Latvian government recently resigned following drone incursions into Latvian territory, and a new coalition government led by Andris Kulbergs has been formed ahead of the October 2026 elections.
On external balances, S&P expects the current account deficit to widen to 6.0% of GDP in 2026 as terms-of-trade shocks from the Middle East conflict take effect, remaining above 5% during 2027-2028. The agency said that the bulk of these elevated deficits should be financed by EU fund inflows and foreign direct investment.
Separately, Latvia has been allocated 3.5 billion in loans from the EU's 150 billion Security Action for Europe program.
Implications for markets and sectors
S&P's assessment signals continued scrutiny of Latvia's fiscal trajectory, with potential effects on public borrowing costs and investor perceptions. Sectors tied to external demand, such as exports, may feel pressure if higher energy-driven inflation weakens foreign demand, while public-sector investment, EU-funded projects and defense-related procurement are likely to support domestic activity.