2013-02-20 05:25:10 - Fast Market Research recommends "Lithuania Business Forecast Report Q2 2013" from Business Monitor International, now available

Core Views

The parliamentary motion to lift the immunity of several key members of Lithuania's governing coalition in December was an important step to consolidating the new centre-left government's political credibility. However, major challenges remain, such as a still struggling economy and overly ambitious budget projections, which will crimp the government's ability to materially improve the country's living standards.

We are reaffirmed in our belief that the Lithuanian economy will enjoy only a gradual, drawn-out recovery at best over the coming years. Although there have been some encouraging signs that construction activity may be on the road to improvement, still weak demand and a struggling eurozone economy do not bode well for a sharp pick-up in Lithuanian growth for the foreseeable future.


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Lithuania's fiscal dynamics point to a continued shrinking of the fiscal deficit over the coming years. However, while we acknowledge that the rate of fiscal deficit reduction in the near term may occur fast than we currently anticipate, we believe that looser fiscal policy over the course of 2013 and 2014 cannot be ruled out entirely, with the new centre-left coalition government under pressure to improve living standards in the country.

Major Forecast Changes

We have moderately revised our current account deficit forecast for 2013 to 2.0% of GDP from 2.1% of GDP previously.

Risks To Outlook

In the near term, we believe that the main risk stems from overestimating gross fixed capital formation growth, which disappointed in Q312, while exports of goods and services may outpace import growth by some margin. Any indication of stronger export growth would have a sizeable impact on our real GDP growth projection, placing Lithuania's economic activity more closely in line with the government's expectations of 3.0% growth in 2013.

We acknowledge that a stronger revenue performance at the end of 2012 may see the full-year fiscal deficit come in below 4.0% of GDP for that year, contrary to our current estimate of 4.4%. However, we note that the key risk to our longer-term outlook is the prospect that a new centre-left administration, which is already under fire for ongoing criminal investigations into alleged party funding fraud by key Labour Party officials, may opt to shift its policy emphasis towards the domestic support base at the expense of further fiscal consolidation. We will be watching carefully for any clues over the coming months, to suggest that a shift in fiscal policy is becoming increasingly likely. For now, we believe that the lure of euro adoption and improved access to international capital markets will prevent such a shift from occurring.

Partial Table of Contents:

Executive Summary
Core Views
Major Forecast Changes
Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Government Off To A Bumpy But Promising Start
- The parliamentary motion to lift the immunity of several key members of Lithuania's governing coalition in December was an important step to consolidating the new centre-left government's political credibility. However, major challenges remain, such as a still struggling economy and overly ambitious budget projections, which will crimp the government's ability to materially improve the country's living standards.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Convergence By No Means Assured
- While Lithuania's long-term political outlook remains among the most stable in the emerging Europe region, we caution that the country's convergence with Western political and economic institutions to through 2022 is by no means assured. In particular, we highlight the aftermath of 2009's financial crisis as putting the country at a critical juncture. Dealing with an economy that is set to post significantly lower trend growth over the long term (compared with pre-crisis levels), while balancing the need to pursue a more pragmatic foreign policy with Russia and the demands of an increasingly nationalist electorate will pose significant challenges for Lithuanian governments to 2022.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Very Gradual Recovery To Remain On Track
- We are reaffirmed in our belief that the Lithuanian economy will enjoy only a gradual, drawn-out recovery at best over the coming years. Although there have been some encouraging signs that construction activity may be on the road to improvement, still weak demand and a struggling eurozone economy do not bode well for a sharp pick-up in Lithuanian growth for the foreseeable future.
TABLE: ECONOMIC ACTIVITY
Fiscal Policy
Key Test For New Government's Fiscal Credentials
- Lithuania's fiscal dynamics point to a continued shrinking of the fiscal deficit over the coming years. However, while we acknowledge that the rate of fiscal deficit reduction in the near term may occur faster than we currently anticipate, we believe that looser fiscal policy over the course of 2013 and 2014 cannot be ruled out entirely, with the new centre-left coalition government under pressure to improve living standards in the country.
TABLE: FISCAL POLICY
Balance Of Payments
Steady Deficit Narrowing To Continue
- We continue to see signs that point to a steady narrowing of Lithuania's current account deficit over the coming years. Weak domestic demand conditions suggest that a major widening of the shortfall is unlikely. Meanwhile, a weak growth outlook across much of Europe will prevent a return to a current account surplus over the coming years.
TABLE: CURRENT ACCOUNT
Regional Outlook
Maintaining CEE's Competitive Edge Necessitates Reforms
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