Lithuania Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	53
ISBN Number	1750-2152
Product Code	BMI02148

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Summary

Following the release of dire Q109 real GDP growth figures for Lithuania, we have revised down our real GDP forecast for 2009 and now project a 12.6% contraction (compared with our previous -10.6% forecast). We expect the recession to be driven by net capital outflows, which will weigh on domestic consumption. We caution that as the unemployment rate rises and real incomes are eroded, the potential for political unrest will be elevated. With the government planning to make further cuts in social spending this year, this will increase the likelihood of further strikes and social unrest going forward, which is reflected in our short-term political risk rating score of 62.9 (out of a maximum of 100).

Independent candidate Dalia Grybauskaite won a landslide victory in the presidential election held on May 17. While the office of the Lithuanian president has some influence over economic policies, including the right to veto the budget, executive power is limited to implementing foreign and defence policies together with the government. Grybauskaite has already indicated that she will play a more active de facto role in policymaking and implementation than her predecessor.

However, she has signalled that this will be in the same vein as the policies of Valdas Adamkus, Lithuania's former president, rather than in a different direction. We believe this bodes well for policy continuity in Lithuania going forward.

Beyond 2009, we expect to see some signs of a recovery in the Lithuanian economy, particularly in the latter months of 2010, and forecast zero growth in real GDP for that year. In 2011, we expect external demand, particularly in key trading partner the eurozone, to resume to an extent which will have positive feed-through effects for Lithuania. Nevertheless, we caution that we expect trend growth to be lower over the longer term and project real GDP growth to average 3.9% in 2011-2013 (compared to 8.2% between 2005-2007). Indeed, consumer spending is not expected to return to levels seen in recent years, and capital inflows in the form of loans and foreign direct investment will also be at lower levels, preventing a proliferation in consumer and investment purchases.

Lithuanian Energy Minister Arvidas Sekmokas stated on June 1 that the country will have to import as much as 35% of the electricity it consumes once the Ignalina nuclear power station closes at the end of this year. Estonia and Finland have agreed to provide electricity to help Lithuania meet its energy needs, however Sekokas acknowledged that the country would have to resort to sourcing some of its electricity from Russia. In addition, Belarus and Russia signed contracts in May which will allow the Baltic countries to promptly purchase electricity from Russia at fixed prices in the case of an emergency on the electricity power grid. Nevertheless, we believe that the closure of the Ignalina plant will leave Lithuanians more exposed in the event of a disruption in supply in the medium term.

Content

Executive Summary
Difficult Choices Ahead for The Government
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- New President Will Play A More Active Role
- While Voter Turnout Was Low at The European Parliamentary Election Held in Lithuania on June 7, The Higher Turnout at The Presidential Election A Few Weeks Earlier Indicates That Political Engagement Remains Robust.
- Tab Le: Politica L Overview
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Trend Growth Will Be Lower through to 2013
- as A Result of The Sharp Fall in Economic Output in Lithuania during in The First Quarter of 2009, Supported by The Bleak Outlook for A Number of Key Leading Indicators, We Have Revised Our Real Gdp Growth Forecast to -12.6% in
- 2009 (from A Previous -10.6% Projection).
- Balance of Payments
- Watch The Financial Account
- We Expect Lithuania's Current Account Deficit to Narrow Sharply to 1.1.% of Gdp This Year (from 12.4% in 2008) as Demand for Imports Falls at A Sharper Rate than That of Exports.
- Fiscal Policy
- Fiscal Deficit Will Increase to 6.4% of Gdp in 2009
- While The Lithuanian Government Plans to Introduce A Further Ltl2.0bn in Budget Expenditure Cuts This Year, We Believe That The Fiscal Deficit Will Widen This Year to 6.4% of Gdp (from 3.2% of Gdp in 2008).
- Regional Outlook: Banking Sector
- Real Sector Deterioration Is The Key Risk Now
- The Immediate Crisis Risks Facing The Central and Eastern European Banking Sector in Q408 Have Subsided Markedly through H109, with The Stabilisation of Global Credit Markets Mitigating The Risks of Capital Flight in The Short Term.
- Regional Outlook: Economic Activity
- after The Crisis: Slow Recovery, Lower Trend Growth
- with First Quarter Real Gdp Growth Figures in Key Emerging Europe Economies Confirming That The Region Has Entered into Its Deepest Recession since The Post-Soviet Transition, We Reaffirm Our below-Consensus 2009 Regional Growth Forecast of -5.6%.
Chapter 3: 10-Year Forecast
- The Lithuanian Economy to 2018
- Solid Growth, but Less Fear of Overheating over Long Term
- Although The Outlook for The Lithuanian Economy over The Course of 2009-2010 Is Certainly Less than Inspiring, with Risks of A Hard Landing Elevated, We Nonetheless Maintain A Positive View for The Economy over The Long Term.
Chapter 4: Special Report
- The Outlook for Global Banking
- Table: Loan-to-Deposit Ratios, Select Ed Stat Es
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Outlook
Chapter 6: BMI Global Assumptions
- Global Assumptions
- Global Outlook
List of Tables
- Table : Economic Activity
- Table : Balance of Payments (Euro )
- Table : Fiscal Policy
- Table : Emerging Eu Rope Growth Forecasts
- Table : Lithuania Long-Term Macroeconomic Forecasts
- Table : Loan Growth (% Chg Y-O-Y), Selected States
- Table : Commercial Banking Business Environment Ratings, Selected Stat Es
- Table : Bmi Business and Operational Risk Ratings
- Table : Bmi Le Gal Framework Ratings
- Table : Labour Force Quality
- Table : Eu Rope - Fdi Inflows
- Table : Bmi Trade Ratings
- Table : Top Export Destinations
- Table : Global Assumptions
- Table : Global & Regional Real Gdp Growth
- Table : Commodities