Country Report Lithuania September 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 continues.
• The government keeps revising the budget in an attempt to cut spending and boost revenue, but revenue collection will suffer from the downturn in economic activity, and the fiscal deficit will widen sharply.
• 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, with lower commodity and oil prices, is forecast to bring down average annual inflation to 4.6% in 2009. We expect a further fall, to 1.5%, as continuing recession adds to disinflationary pressures.
• Falling import demand will lead to a marked narrowing of the trade deficit in 2009. We therefore forecast that the current account will record small surpluses in both years of the forecast period.

Monthly review

• Dalia Grybauskaite, the president, has been exerting her influence on domestic politics to a greater extent than did her predecessor, Valdas Adamkus, leading to a number of personnel changes in government.
• Ms Grybauskaite has also demonstrated her intent to pursue a more pragmatic policy with regard to Russia, intervening to settle a dispute over customs inspections in August.
• The National Resurrection Party (TPP) has split, placing doubt on its continued support for the ruling coalition.
• Parliament has approved a further revision to the 2009 budget, which reduces the revenue forecast by a further 9%. The rate of value-added tax (VAT) will increase from 19% to 21% on September 1st.
• The government plans to finance its budget deficit by borrowing on international capital markets. It raised a total of LTL7.62bn (US$3bn) on the debt markets in the first half of 2009.
• Real GDP fell by 22.4% in the second quarter of 2009, compared with a contraction of 13.3% in the first quarter. Monthly data for retail sales and industrial output suggest that the downturn may be bottoming out.

This report covers the following industry codes:
SIC Code: 37;47;15
NAICS Code: 336;48;23