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Home > Reports By Country > Europe > Lithuania
Lithuania Business Forecast Report Q4 2009
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Recession To Last Through 2010
Lithuania remains in the midst of a severe macroeconomic and financial crisis. Following therelease of Q2 GDP data, which showed the economy contracting by a staggering 20.2% yearon-year (y-o-y), we have revised down our forecast for Lithuanian growth in 2009, and nowproject real GDP to fall by 15.9% - making the Baltic economy one of the worst performing in theworld this year. Indeed, with Vilnius attempting to correct the economy’s external asymmetriesthrough an ‘internal devaluation’, we caution that output, wages and prices are all set to contractprecipitously. This correction has already taken hold, as highlighted by the rapid unwinding inthe country’s current account deficit through the first half of the year. Although this will ultimatelybenefit economic stability over the long term, we caution that it nevertheless reflects a massivecollapse in internal demand.
Lithuania’s newly elected president, Dalia Grybauskaite, appears set to pursue a gradual improvementin bilateral relations with Russia throughout her term in office (which will run until 2014), bodingwell for the Baltic state’s underlying risk profile over the long term. Indeed, following a telephonemeeting between Grybauskaite and her Russian counterpart Dmitry Medvedev in late August, thetwo leaders agreed to deepen co-operation in trade, economic and cultural spheres. While wecaution that the scope for a significant improvement in relations will inevitably be constrained bydeep-rooted historical animosity and distrust between the two states, we are nevertheless encouragedby the apparent willingness of Grybauskaite and Mevedev to seek a change of course in thenear term.
Lithuania’s banking system remains in the midst of a large-scale structural adjustment, with underlyingstability set to remain compromised through 2011. Having embarked on an unsustainableexpansion path in the run up to the global financial crisis, with prudent lending policies having beensacrificed in the process, we caution that 2009 and 2010 will see asset growth and profitabilitycollapse concomitant with one of the Baltic state’s worst recessions on record. While the size ofthe industry compared to the broader economy remains smaller compared to that seen in someof Lithuania’s neighbours, with assets-to-GDP remaining under 100%, we nevertheless cautionthat the ongoing adjustment towards a new equilibrium for the banking sector will have significantrepercussions for aggregate demand going forward.
Ratings agency Standard and Poor’s (S&P) informed Lithuania that it risked a possible creditrating downgrade as rising economic and political risks in the country were depressing tax revenues.S&P put the Baltic state’s BBB long-term sovereign credit rating on negative credit watchin August, which is often seen as a precursor to a downgrade. Should Vilnius’ credit rating fall twonotches to below investment-grade status, we caution that the cost of borrowing throughout theeconomy would rise. This, in turn, would further weaken the economic recovery, as both the publicand private sectors would face increased difficulty tapping international credit markets.
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