Standard & Poor’s Ratings Services has published a full report on the
- Republic of Lithuania ‘s credit standing.
“The ratings on Lithuania reflect successful fiscal consolidation since 1999, evidenced by a general government deficit of 1.2% in 2002 and the persistence of a low debt-to-GDP ratio,” says Standard & Poor’s credit analyst Moritz Kraemer. “They are also supported by robust and sustainable economic growth, which is the reward for substantial progress in structural reforms, underpinned by EU accession requirements.”
The general government deficit has been falling every year since 1999, on the back of rigorous expenditure discipline. As a result, the share of general government expenditure in GDP is expected to fall to 31.4% in 2003, affording Lithuania substantial fiscal flexibility ahead of the spending pressures associated with EU accession in May 2004.
Looking ahead, the authorities are expected to continue to steer a prudent fiscal course, aware that sound public finances are a precondition of success for Lithuania ‘s euro-based currency board. Moderate general government deficits, at or below 2% of GDP, have kept the general government gross debt ratio at a low 23% of GDP (excluding guarantees). Fiscal reforms in particular, to the health and tax systems should safeguard the sustainability of public finances in the longer term despite a rapidly aging society.
Output growth will remain in the vicinity of 5% per year for the foreseeable future. While a credit-driven increase in domestic demand has played an important role in this growth, Lithuania ‘s export performance and competitiveness have remained buoyant throughout the cyclical downturn in global demand. As a result, external imbalances have remained under control and current account deficits will remain in the range of 5-6% of GDP, a substantial proportion of which will remain covered by foreign direct investment. Large and continuous productivity gains in the tradable sector can be expected to persist, sustaining the economic expansion without causing significant imbalances.
Nevertheless, Lithuania ‘s wealth levels remain comparatively low. GDP per capita is forecast at US$5,200 in 2003 and amounted to only 36% of the EU average at purchasing power parity in 2002.
Moreover, external financial liquidity remains low, although it is improving. The gross external financial gap remains high, at an estimated 122% of reserves in both 2003 and 2004, from 155% in 2001. Lithuania ‘s currency board limits flexibility in addressing balance-of-payments pressures, as the majority of reserves back up the monetary base, so that their use would transmit immediately into tight credit and demand conditions.
As a result, over the medium term, improvements to Lithuania ‘s creditworthiness would require further progress in restructuring the economy while maintaining a prudent fiscal stance. In particular, low fiscal deficits are needed to maintain the country’s current account deficits at a sustainable level, avoid balance-of-payments pressures, and sustain the currency board’s credibility.
“A successful continuation of the stability-oriented macroeconomic policies implemented since the 1999 recession, combined with sustained real economic convergence with higher-rated sovereigns, would support an improvement in the country’s credit standing during the next two years,” concluded Kraemer. “Conversely, an unexpected worsening of the economic environment, potentially jeopardizing EMU membership, would exert pressure on the ratings.”
The report, entitled “ Lithuania (Republic of)”, is available to subscribers of RatingsDirect, Standard & Poor’s web-based credit analysis system, at www.ratingsdirect.com. This report can also be found on Standard & Poor’s website at www.standardandpoors.com. Click on “Fixed Income”, then, in the left navigation bar under “Browse by Sector”, select “Sovereigns”, scroll down to “Credit Reports” to locate the article. Alternatively, call one of Standard & Poor’s Ratings Desks: London (44) 20-7847-7400; Paris (33) 1-4420-6705; Frankfurt (49) 69-33-999-223; or Stockholm (46) 8-440-5916.