Country Report Lithuania May 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 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 10% in 2009 and by a further 2.5% in 2010.
• A fall in domestic demand, together with lower commodity and oil prices, is forecast to bring down average annual inflation to 4.5% in 2009. We expect a slight increase, to 5.2%, 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. A recovery in exports in 2010 will narrow the deficit further, to 1.4% of GDP.

Monthly review

• Dalia Grybauskaite remains the front-runner in the presidential election campaign, and could win outright in the first round, scheduled for May 17th.
• Budget revenue collection performed poorly in the first quarter of 2009, falling short of the target by 15%. Value-added tax (VAT) revenue came in around one-quarter below target.
• The government has approved a new round of spending cuts to offset revenue shortfalls, and plans to propose further cuts in June, in an attempt to bring the full-year budget deficit to around 2% of GDP, as in its original target.
• The government has agreed the sale of its remaining 10% stake in Mazeikiu Nafta (Mazeikiai Oil) to PKN Orlen (Poland) for US$285m.
• Inflation has resumed a downward trend after a brief surge in January, following increases in VAT. However, it remains almost 7 percentage points above the Maastricht inflation criterion for euro adoption.
• Eurostat data show the unemployment rate in Lithuania, at 13.7%, to be the third-highest in the EU, compared with the lowest in the EU a year earlier.
• Foreign trade has slowed markedly, with exports falling by 22% year on year and imports falling by 41% in the first two months of 2009. The current account recorded a surplus in February.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48
NAICS Code: 517