Latvia: EU Funds Help Growth, but Implementation and Fiscal Risks Are Looming

Expenditure of European Union (EU) funds helped the economy of Latvia rated A, Stable Trend, to remain resilient in 2023. This spending supported the contribution to real GDP growth from investment, but this dynamic lost steam in 2024. EU-funded investments suffered delays and weak investment growth weighed on the economy. This development highlights implementation risks for earmarked projects in the coming years as execution could lag projected budget expenditure. While absorption levels will need to improve, the risks are manageable as the government introduced measures to expedite flows such as re-allocating funds. Latvia's economic growth is projected to rebound thanks to larger EU funds' expenditure over 2025-26. Recovery and Resilience Facility (RRF) funded projects need to be executed by 2026, with remaining cohesion policy funds expected to ensure that public investment levels remain solid thereafter. Also, the Rail Baltica project will result in important economic and strategic benefits, but while Latvia's debt-to-GDP level is low, uncertainties on additional funding requirements for the project could pose fiscal risks.

Key highlights
-- Increasing expenditure of EU funds will support economic growth rebound in Latvia.
-- Delays in EU-funded projects including Rail Baltica highlight implementation risks, but generally strong track record of EU fund absorption.
-- Large cost overrun of Rail Baltica project could result in additional funding needs to be covered by Latvia.

"EU-funded investments suffered delays in 2024 highlighting implementation risks for projected budget expenditure. The pace of investment needs to increase, or Latvia's economic growth rebound could be less strong than forecast," said Max Dietz, Assistant Vice President in the Global Sovereign Ratings Group.