Lithuania: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Activity largely dependent on household consumption
There will be a significant increase in the rate of growth in 2016. Household consumption will remain the main driving force for this. The ease of the switch to the euro and stabilization of the situation in Ukraine have boosted household confidence. In addition, they have benefited from lower electricity prices, higher wages in the public sector and an increase in the minimum wage which may not be totally unconnected with the upcoming parliamentary elections in the autumn of 2016. Overall, the decline in the active population and the shortages of skilled labor are leading to higher wages. There should be moderate growth in exports. These are going to benefit from moderate growth in the European market, even if cereal, wood and fertilizer sales, alongside those of refined products from the Orlen Lietuva refinery owned by the Polish Orlen group, the country’s leading taxpayer, will continue to suffer from low prices. Because of counter-sanctions, devaluation of the ruble and Russian recession, the share of exports to that destination has dropped from 5% to 2% in 2015 and from 21% to 13% if the re-exporting of transshipped goods, such as capital goods, new and used cars, is included. Dairy and meat products, traditionally sold to Russia, are gradually finding substitute markets, but continue to suffer from low prices. Road transport, traditionally focused on transshipments towards Russia, is also shifting into other markets. Similarly, the reduction in the number of Russian, and Belarus, tourists (the two rubles are linked), has been offset by growing numbers of tourists from other countries. Whilst public investments may slow as a result of the transition between two European funding programs, that by companies should recover thanks to the high level of production capacity utilization. House building should continue to increase.
Satisfactory public and external accounts, despite a slight deterioration
There has been a significant improvement in the public accounts since 2009, when the deficit exceeded 9%. Even though the rise in pensions and civil service pay planned for 2016 will only be partially offset by the growth in receipts derived from buoyant consumption and revenues, the overall deficit should remain small. In this context, the size of the public debt, which experienced a technical increase in 2015 linked with an early refinancing operation, should resume its decline. This trend, as well as the room for maneuver, will be consolidated if the structural deficit (-1.4% in 2014), i. e. adjusted for the effect of the current economic situation, continues to shrink. A transfer in taxation from work to capital revenues and property will contribute to this.
There is likely to be a small increase in the balance of trade in goods deficit (around 4% of GDP in 2014) as a result of the vitality of domestic demand which local manufacturing output can only meet in part. The surplus in services will no longer be enough to plug the gap. Net outgoings of dividends (3% of GDP) will continue to be counterbalanced by remittances. Given this situation, the current account balance could slightly deteriorate. European structural funds, representing almost 3% of GDP annually, will continue to finance transport and energy infrastructures, research and innovation. Foreign direct investments will remain slight. The size of the external debt will continue to shrink (less than 60% of GDP) as a result of growth and the debt reduction by the banks with their parent companies. The share held by the public sector (45% of the total) should also start to reduce.
Energy dependence on Russia being reduced
Till the next parliamentary elections in October 2016, Algirdas Butkevicius is leading a coalition government consisting of his Social Democratic Party and the Labour Party, representative of the soft left, and the Order and Justice Party, from the right. This gives him 80 seats out of the 141 in Parliament. The party that represents the Polish minority (7% of the population) was thrown out of the coalition, with the support of the President, Dalia Grybauskaite, an independent, because of its criticism of the status of minorities and its support for Russia at the height of the Ukrainian crisis, whilst the authorities had adopted a firm stance. The country, which shares a border with the Russian enclave of Kaliningrad, home to a major naval base, has boosted its defense spending. It is also working to reduce its energy dependency on Russia. Start of production at a gas terminal in the port of Klaipeda at the end of 2014 and the commissioning of electricity cables with Sweden and Poland at the end of 2015, as well as the purchase by the State of gas facilities from Gazprom are part of this.