Population 3.202 million
GDP 41.216 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
1.4 |
5.9 |
3.4 |
3.2 |
|
Inflation (yearly average) (%)
|
1.3 |
4.1 |
3.2 |
3 |
|
Budget balance (% GDP)
|
-7.1 |
-5.6 |
-3.3 |
-4.1 |
|
Current account balance (% GDP)
|
1.5 |
-1.5 |
-2.6 |
-2.9 |
|
Public debt (% GDP)
|
38 |
38.5 |
40 |
40.5 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Strong per-capita income growth in recent years
- Rapid modernisation of the economy
- Skilled labour force and favourable geographic position
WEAKNESSES
- Heavy dependence on foreign capital
- High external debt, particularly bank debt
- Borrowers’ exposure to exchange rate risk
- Export sectors, which drive growth, do not provide sufficient employment to allow rapid reduction of high unemployment rate (15.5%)
Risk assessment
Private consumption will be the main driver of growth
Having experienced one of the world’s biggest contractions in activity in 2009, Lithuania began an impressive recovery in 2011 thanks to a rebound in exports. However, growth sagged in 2012 due to weakening external demand and the rising cost of financing the external debt in the wake of the sovereign debt crisis in the eurozone. Private consumption, although supporting growth, was hit hard by the 2009 crisis and still has not returned to its pre-crisis level. Real civil service salaries have been falling since 2009, which impacts negatively on consumer behaviour. In October 2012, the electors approved Prime Minister Kubilius’ government’s pursuit, over the last two years, of an austerity policy aimed at reassuring investors, though it seems the new government’s room for manoeuvre will be narrow due to ideological differences within the coalition. Several decisions to boost consumption have been taken such as raising the minimum wage and introducing of progressive income tax. Consumption will support growth in 2013, but will be restrained by the banking sector’s reluctance to grant credit to the private sector as still hold a lot of non-performing loans in their portfolio (16%) and their loan levels are above those of deposits (120%). Meanwhile, investment will also suffer from credit restrictions in 2013. Unemployment will therefore remain high. It averaged 9% before 2008 and reached 18% in 2010. Our prediction for 2013 is 12.5%. Exports, particularly of capital goods, transport equipment food products and chemicals will suffer from the slowdown in activity of the main European trading partners, i.e. Poland, Germany and the neighbouring Baltic countries. Inflation is expected to settle at 3% following the stabilisation of oil prices in 2013.
The government is expected to ease its fiscal policy
The previous government made the fiscal deficit its priority. Therefore, in 2012, it was able to cut the deficit to 3% of GDP. Nevertheless, the new government was elected on a promise to ease the austerity measures introduced and to reduce the nascent threat to living standards. Lithuania is committed to joining the eurozone soon and in 2012 requirements were met. It seems therefore rather unlikely that the country will deviate suddenly from this course. However, the previously announced measures to support consumption will slightly increase the deficit. The public debt level of 40% of GDP is, however, well below the European average and this stimulus policy will not have a significant negative impact on public debt. Meanwhile, Lithuania is the most energy-dependent country in Europe (84% of the energy consumed is imported). In order to reduce its dependence on Russia (40% of energy imports concern gas from Russia), Lithuania has authorised the sinking of oil wells on its territory by the American group Chevron. Moreover, it launched an offer for the construction of a regasification unit for the import of liquefied natural gas from Norway or Qatar. These actions will put pressure on the Russian gas giant Gazprom accused of obstructing competition and manipulating prices by most countries in Central Europe. The current account balance will be in deficit while transfers from European structural funds will not cover the deficits in the trade balance and the revenue balance (cross-border workers wages). These deficits will, however, be covered by foreign direct investments. In this context the country’s foreign exchange reserves will rise. The economy’s resilience in 2012 had positive consequences on the banking system. Capitalisation and liquidity ratios are above the minimum required by Basel III. The recapitalisation of the Snoras Bank in November 2011 led to strengthen of the banks’ balance sheets.
Moderate political risk
Parliamentary elections were held in 2012. Since independence in 1990, the country has had a change of government at each election. The austerity measures taken to cut the fiscal deficit have led to another change of majority. The left (the Social Democratic Party) came to power alongside two populist parties of the left and the right (respectively the Labour Party and the Order and Justice Party). The future government coalition will, however, have little room for manoeuvre considering Vilnius’s ambition to adopt the euro in 2015 and to successfully conduct Lithuania’s presidency of the EU from the summer of 2013. External economic policy is therefore expected to remain unchanged.
The Lithuanian President, Dalia Grybauskait, independent of any party refused to form a government with the Labour Party because of strong suspicions of corruption against the party’s leader, Victor Uspaskich. Born in Russia, member of the European Parliament, businessman who made his fortune by importing Russian gas and former Minister of the Economy, Victor Uspaskich is a controversial charactere in Lithuania. In 2006, under judicial proceedings for tax fraud, he fled to Russia and only returned a year later. The President appealed to the Constitutional Court, which invalidated the election of three labour MPs (for irregularities in the drawing up of the list of candidates) and of one social democratic MP (for dishonesty in counting the votes). However, a government was successfully formed with Algirdas Butkevicius, leader of the LSDP (Lithuanian Social Democratic Party) at its head.
