Standard & Poor’s Ratings Services has revised its outlook on the Republic of Lithuania to positive from stable on good economic and EMU membership prospects.

At the same time, the ‘A-‘ long-term and ‘A-2’ short-term sovereign credit ratings on Lithuania were affirmed.

“The outlook revision reflects the prospects for sustained strong economic growth, which will swiftly raise the current, comparatively low, levels of wealth,” says Standard & Poor’s credit analyst Kai Stukenbrock. “The move also reflects Lithuania’s positive prospects of joining EMU by 2007, and no later than 2008, which will improve the country’s external risk position.”

Fiscal prudence remains an important cornerstone of macroeconomic policy in Lithuania. The 2004 general government deficit is estimated to have come in lower-than-budgeted, at about 2.4% of GDP. The new government that came to power following the general elections in October 2004 is expected to pursue a somewhat looser fiscal policy than the previous government. Nevertheless, Standard & Poor’s expects the government to stay safely within the fiscal criteria set by the Maastricht treaty, in order to qualify for EMU membership by 2007.

Growth prospects in Lithuania, together with its Baltic peers, remain the strongest among the new EU members. On the back of ongoing economic restructuring, Lithuanian growth rates will continue to exceed 5% in the medium term. This strong growth performance should raise Lithuania’s comparatively low levels of wealth, estimated at US$7,160 per capita in 2005.

Lithuania’s export performance and competitiveness have remained buoyant, but imports have recently begun to outperform exports, driven by the appreciating exchange rate and strong domestic demand. The current account deficit in 2004 exceeded 9% of GDP, and is expected to remain in that area in the medium term.

“We expect that the new government will not deviate very much from the previous course of responsible economic policies and fiscal prudence, thereby avoiding harm to Lithuania’s medium-term growth and EMU prospects,” says Stukenbrock. “EMU membership, which could come as early as 2007 and is expected no later than 2008, will minimise the potential negative effect of balance of payments pressures and the country’s external debt position on the gross financing gap, which is a constraining factor on the ratings.”