Standard & Poor’s Ratings Services has raised its long-term foreign currency ratings on the Republic of Lithuania to ‘A-‘ from ‘BBB+’. At the same time, Standard & Poor’s affirmed its ‘A-‘ long-term local currency and ‘A-2’ short-term local and foreign currency ratings on Lithuania. The outlook is stable.
“The upgrade reflects Standard & Poor’s expectation that fiscal deficits and the debt burden will remain low and stable in the foreseeable future, as well as Lithuania’s solid medium-term economic prospects, with GDP growth rates forecast to be the highest among EU acceding countries,” says Standard & Poor’s credit analyst Kai Stukenbrock. “Weak external liquidity and a relatively low level of wealth remain key constraining factors for the ratings.”
The equalisation of the local and foreign currency ratings reflects Standard & Poor’s belief that Lithuania is firmly on track to join EMU. The country is expected to join the Eurozone by 2007 or 2008 at the latest, which will minimise the potential negative impact of balance-of-payments pressures and the country’s external debt position.
The general government deficit is expected to rise to 2.8% of GDP in 2004, from 1.5% in 2003. EU accession will bring budgetary pressures this year, as will the pension reform that came into effect earlier this year. However, the deficit should decline again thereafter, to about 2% of GDP by 2006 and 2007. General government debt will remain low, reaching 24% of GDP (excluding guarantees) in 2007, marginally up from 22% in 2003.
On the back of significant progress in structural reforms, robust and sustainable economic growth of 5%-6% is expected over the medium term, which will support fiscal discipline. Lithuania’s export performance and competitiveness have remained buoyant throughout the cyclical downturn in global demand. As a result, current account deficits will remain in the range of 5%-6% of GDP. A substantial proportion of this will remain covered by foreign direct investment.
Nevertheless, the gross external financial gap remains very high. As two thirds of reserves back the monetary base under Lithuania’s currency board arrangement, flexibility in addressing balance-of-payments pressures is limited.
Over the medium term, improvements to Lithuania’s creditworthiness will be driven by a continuation of the economic restructuring process, together with the maintenance of a prudent fiscal stance and sustained real economic convergence with higher-rated sovereigns. Significant policy slippage, however, could undermine Lithuania’s growth prospects and jeopardise early EMU entry, thereby exerting downward pressure on the ratings.
“The authorities are expected to continue steering a prudent fiscal course, aware that sound public finances are needed to maintain the country’s current account deficits at a sustainable level, avoid balance-of-payments pressures, and underpin the currency board’s credibility,” Stukenbrock concludes.