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Saturday, April 13, 2024
CEOWORLD magazine - Insights - Lithuania

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Lithuania

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GDP: USD70.3bn (World ranking 81)
Population: 2.8mn (World ranking 136)
Form of state: Parliamentary Republic
Head of government: Ingrida Šimonytė (PM)
Next elections: 2024, Presidential and legislative

Strengths

  • Low systemic political risk • Good international relations (except with Russia), EU and NATO membership
  • Eurozone membership provides for low transfer and convertibility risk
  • Sound public finances and access to international capital markets
  • Strong business environment

Weaknesses

  • High external debt burden
  • The industry is dominated by one large refinery complex, Orlen Lietuva
  • Unfavorable export structure, with high export and import dependence on Russia (prior to the war in Ukraine) and a few EU countries

Economic overview

Growth to remain restrained while inflation normalizes

Lithuania’s economic prospects have sharply deteriorated as a result of the war in Ukraine. This is due to the country’s geographic proximity to Russia and its significant (pre-war) trade relations (accounting for 11% of Lithuania’s exports, 12% of its imports and 37% of its natural gas imports). Following a strong post-Covid-19 recovery, with +6% real GDP growth in 2021, economic activity in Lithuania slowed down markedly in 2022-2023 amid surging inflation, rising interest rates, weakening external demand and deteriorating business confidence. The economy grew by just +1.9% in 2022 and slipped into recession in early 2023 as real GDP in quarter-on-quarter terms contracted for two consecutive quarters (-0.5% in Q4 2022 and a hefty -3.0% in Q1 2023). We estimate a small full-year economic contraction in 2023 as the significant economic slowdown in Western Europe has additionally weighed on external demand in Lithuania last year. Looking ahead, we expect a gradual economic recovery on the back of government investment and fiscal stimulus, EU funding inflows, a rebound in consumer spending and a pick-up in global demand. We forecast real GDP to expand by around +2% in 2024 and +2.5% in 2025.

Inflationary pressures have abated for now but upside risks remain on the cards in 2024-2025. Consumer-price inflation rose markedly from mid-2021 and surged to a peak of 24.1% y/y in September 2022, driven by soaring energy and food prices as well as interrupted supply chains. It remained in double-digits until mid-2023 before base effects, monetary tightening by the ECB and slowing domestic demand triggered a rapid disinflation in the second half of 2023 to a low of just 1.2% y/y in December. Going forward, these effects are likely to wane and headline inflation is forecast to pick up to the range of 2% to 3.5% y/y in 2024-2025. Upside risks to this forecast include a renewed energy price shock, potential supply disruptions or tightening labor markets. Meanwhile, Eurozone membership provides for moderate transfer and convertibility risk in Lithuania.

Manageable public and external finances

Lithuania’s public finances should remain manageable. Four years of small annual fiscal surpluses in 2016-2019, which brought down total public debt to 36% of GDP, proved that the government is in principle pursuing budgetary prudence. As a result of substantial fiscal stimulus measures to mitigate the impact of the Covid-19 crisis on the economy, a large fiscal deficit of -6.5% of GDP was recorded in 2020. But the annual shortfall swiftly narrowed to -1.1% in 2021 and even further to -0.7% in 2022, despite the energy crisis, since expenditure on energy support measures and intermediate consumption was lower than expected. We estimate the fiscal deficit to have increased to about -2% of GDP in 2023 as the government implemented several projects that were partly planned for 2022. It also increased social spending and public investment and had to shoulder higher interest expenditure. In 2024-2025, the fiscal deficit to GDP ratio is forecast to widen further, driven by additional spending on social benefits and a substantial increase in pensions and public wages. Meanwhile, public debt in relation to GDP has fallen from a temporary peak of 46% of GDP in 2020 to 38% in 2022, in part helped by strong nominal GDP growth and is projected to remain around that level in the next few years. In any case, such a debt-to-GDP ratio is favorable as compared to fellow Eurozone member states.

After five years of annual surpluses, Lithuania’s current account posted a hefty -5.5% of GDP deficit in 2022, triggered by sharply increased import prices for energy and food. As the latter have eased markedly in 2023 and because nominal imports shrank more strongly than exports, the current account moved back to a surplus of around +1.8% of GDP. Looking ahead, we forecast continued, albeit smaller annual surpluses in 2024-2025 since imports are likely to recover. Meanwhile, gross external debt in relation to GDP has steadily declined from a temporary peak of 81% in 2020 and is projected at around 60% in 2024.

Strong business environment and low political risk

The Lithuanian business environment is very strong. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business friendly. Moreover, the perceived level of corruption has steadily declined since 2018 and is now relatively low. The Heritage Foundation’s Index of Economic Freedom 2023 survey assigns Lithuania rank 20 out of 176 economies. The country scores well regarding property rights, judicial effectiveness, tax burden, trade freedom and business freedom while there remains some room for improvement in terms of labor freedom. Meanwhile, our proprietary Environmental Sustainability Index ranks the country 14th out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress and general vulnerability to climate change, though there are still moderate weaknesses in renewable electricity output and the recycling rate.

Overall systemic political risk is low. Lithuania is a wellestablished democracy and has good international relations – except with Russia – reflected in its EU, OECD and NATO membership. Government instability and frequent early elections seem to be a story of the past. Since 2008, all elected governments survived their terms, at times as minority governments and were replaced only at the next orderly elections (which were held in October 2012, October 2016 and October 2020). Solid economic policies that began in the wake of the 2008/2009 global financial crisis enabled Lithuania to join the Eurozone in January 2015.

 

CEOWORLD magazine - Insights - Lithuania