Country Report Lithuania June 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 13% 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% in 2009. We expect a slight increase, to 5.3%, 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 1.7-1.8% of GDP (from 11.9% of GDP in 2008).

Monthly review

• Dalia Grybauskaite, long the front-runner to win the presidential election, secured a convincing victory in the ballot held on May 17th. Her election is likely to lead to changes within the cabinet.
• Two of the four parties in the ruling coalition have wavered in their support for the government. The two parties have formed a united bloc, hinting at the possibility of an alternative coalition.
• In early May the Seimas approved further government spending cuts in an attempt to curtail the budget deficit. The Ministry of Finance has acknowledged that the cuts are unlikely to be the final revision to the budget.
• Energy policy has re-emerged as a contentious issue. Plans to construct a new nuclear-power plant, jointly owned with Estonia, Latvia and Poland, remain slow-moving.
• The new president has criticised the lack of competition in the power sector, and the government has been discussing the possibility of breaking up the Lithuanian Electricity Organisation (Leo) holding company.
• Real GDP fell by 12.6% year on year in the first quarter of 2009, with all economic sectors contracting. Trade turnover fell sharply as both export and import demand declined.

This report covers the following industry codes:
SIC Code: 49;59
NAICS Code: 22;44