Country Report Lithuania July 2009

Outlook for 2009-10

• The governing coalition, led by the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), is likely to face fractures over the forecast period, despite having a large majority in the Seimas (parliament).
• Public discontent with the government's austerity programme will intensify as the economic downturn gathers pace.
• The government aims to cut spending and boost revenue in order to narrow the budget deficit, but revenue collection will suffer from the downturn in economic activity, and budget targets will continue to be overshot.
• Tight lending conditions and declining consumer confidence will lead to a deep slump in private consumption and investment in 2009. We forecast that real GDP will fall by 15% in 2009 and by a further 4.5% in 2010.
• A fall in domestic demand, together with lower commodity and oil prices, is forecast to bring down average annual inflation to 5.5% in 2009. We expect a slight increase, to 6%, in 2010 as commodity prices and power prices rise.
• Falling import demand will lead to a marked narrowing of the current-account deficit as a share of GDP in 2009-10, to 1.7-2% of GDP (from 11.9% of GDP in 2008).

Monthly review

• The TS-LKD performed fairly well in the election to the European Parliament in June, but support for two of its coalition partners, particularly the National Resurrection Party (TPP), fell markedly.
• In the first five months of 2009 state budget revenue was slightly above target, following a downward revision of revenue expectations by the Ministry of Finance in May.
• The government agreed to increase the rate of value-added tax from 19% to 21% from August 1st. However, the coalition was divided on the issue, and the government may struggle to win parliamentary approval for the increase.
• The government successfully placed a ???500m (US$680m) Eurobond on June? 15th, with a yield of 9.4%.
• Real GDP in the first quarter of 2009 contracted by 13.6%, mainly owing to a 15% drop in private consumption and a 37% fall in fixed investment.
• Unemployment increased by 116,400 year on year in the first quarter, rising to 11.9% of the workforce.
• Real wages fell by 5.2% year on year in January-March, recording their first decline in real terms since 2001.

Source: Country Report