Lithuanian economy in 2012:
From swift recovery
to lower growth

Rokas Bancevičius, Senior analyst, DNB Bank.

This year we celebrate the independence day of Lithuania surrounded by the uncertain economic environment. Lithuania was one of the top growing economies in the EU in 2011 but we are not expecting more of the same in 2012. The key challenges for Lithuania this year will be escalations of debt crisis in the eurozone and the general elections in Lithuania this autumn.

Lithuania’s GDP expanded by an impressive 5.8% last year up from 1.4% in 2010. This result is second best in the EU as Lithuania is surpassed by Estonia only. Lithuanian exports expanded by 16% yoy in real terms in the first nine months of the year. However, the end of 2011 witnessed an economic slowdown as contracting EU economy and uncertainty over sovereign debt crisis started weighting on Lithuanian business. This effect was especially pronounced for exporters.

While 2011 was a successful year for Lithuania, future holds several major challenges. The most prominent is the Europe’s sovereign debt crisis that has already started weighting on the real sectors with EU’s economy contracting in the last quarter of 2011 by 0.3 per cent. This will affect Lithuania’s exports more than half of which goes to EU members. On the positive side, Lithuania mostly exports to countries with relatively good growth prospects - Germany, Poland, Latvia, Estonia and non-EU Russia. According to the survey of Lithuanian Manufacturers, undertaken by Lithuanian Manufacturers Confederation, 53 per cent of industry managers expect stable (neither higher nor lower) amount of export orders in 2012.

Another major concern when looking into 2012 is Lithuania’s refinancing risk. Government has to refinance c. LTL5.7bn (EUR1.65bn) of debt and to borrow additionally c. LTL3bn (EUR0.86bn) to cover budget deficit. Government has already raised c. LTL4bn (EUR1.15bn) by issuing a 10-year USD denominated bond at the yield of 6.75%. This sum is sufficient to meet all obligations in the coming months and to redeem EUR1bn bond maturing this May. Nevertheless, government will still have to tap international markets again later this year. Should market funding become too expensive, government might be forced to turn to IMF for an emergency loan. This could result in additional austerity measures and more output contraction. However, this risk was diminished by recent developments in Greece where politicians passed additional austerity measures.

Lithuania’s internal problems are as prominent as external ones. Labor market remains weak. While number of unemployed people fell by a fifth last year to 222 thsd. level of unemployment remained high at 13.9% at the end of 2011. This weighs on consumer confidence and limits growth of domestic demand. The problem is structural unemployment as companies report the lack of skilled labor force while majority of unemployed are not qualified or have liberal art degrees.  This as well as emigration will have severe negative consequences on economic growth and state finances in the long-run. Nevertheless, the short-run economic developments will depend on the solutions of the Eurozone crisis and on the outcome of elections in Lithuania this autumn.

The risk of overspending by politicians in the pre-election cycle did not materialize in Lithuania as Government continued its budget consolidation in 2012. However, the uncertainty of the outcome of the new ruling coalition and the uncertainty whether the new Government continues with the current fiscal conservativism and strategic projects (LNG terminal and Visaginas power plant) makes it very difficult to forecast for 2013.

Overall, 2012 will be the year of slower growth and further stabilization in the economy. We expect Lithuania’s GDP to grow in the region between 2.5 – 3 per cent compared to 5.8 per cent in 2011. If Greece crisis is contained and Europe returns to growth at the second half of 2012 Lithuanian economy will end up growing at the higher rate of this range.

Rokas Bancevičius, Senior analyst

Rokas Bancevičius is an acting head of the DNB Economic Research Unit. He holds MSc in Economic and Social History from Oxford University and BSc in Economics from University of Birmingham.