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Lithuania Country Risk Reports Q2 2015

Lithuania Country Risk Reports Q2 2015

Core Views

While Lithuania will experience subdued economic growth in 2015 on the back of geopolitical headwinds, the outlook for 2016 is brighter. Improving external demand and Lithuania's first liquefied natural gas terminal will boost exports and fixed investment from 2016 onwards.

Public support for Lithuania's centre-left ruling coalition will remain high, as the government maintains the same policy course in 2015- 2016 that bolstered its public approval ratings in 2014 – its hardline stance towards Russia and ramped-up fiscal spending. This will solidify their term in power and will boost their chances of winning general elections in October 2016.

The Lithuanian government's goal of achieving a balanced budget by 2017 remains out of reach, as the fallout from the Ukraine crisis will suppress public revenue growth and keep expenditures elevated.

Nevertheless, the modest fiscal slippage we project will not hurt Lithuania's solid sovereign profile or dent investor confidence over our forecast horizon.

Major Forecast Changes

We estimate Lithuania's current account to have shifted back into deficit in 2014 and we expect it to remain in negative territory in the coming quarters due to the deteriorating outlook for exports. We do not see risks to the country's ability to meet its external financing needs due to the stable outlook for foreign direct investment inflows.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Ruling Coalition Tilting Towards Populism
Public support for Lithuania's centre-left ruling coalition will remain high, as the government maintains the same policy course in 2015-
2016 that bolstered its public approval ratings in 2014 – its hardline stance towards Russia and ramped-up fiscal spending. This will
solidify their term in power and will boost their chances of winning general elections in October 2016.
TABLE: Political Over vie w
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 nevertheless caution
that the country's convergence with Western political and economic institutions through 2024 is by no means assured. In particular, we
highlight the aftermath of the 2009 financial crisis as putting the country at a critical juncture. Indeed, dealing with an economy which
is set to post significantly lower trend growth over the long term (compared to 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 2024.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Slowdown Underway, But 2016 Brighter
While Lithuania will experience subdued economic growth in 2015 on the back of geopolitical headwinds, the outlook for 2016 is
brighter. Improving external demand and Lithuania's first liquefied natural gas terminal will boost exports and fixed investment from 2016
onwards.
TABLE: Eco nomic Acti vit y
Balance Of Payments
External Adjustment Running Out Of Steam
We estimate Lithuania's current account to have shifted back into deficit in 2014 and we expect it to remain in negative territory in the
coming quarters due to the deteriorating outlook for exports. We do not see risks to the country's ability to meet its external financing
needs due to the stable outlook for foreign direct investment inflows.
TABLE: Bala nce Of Payments
Fiscal Policy
Balanced Budget Goal Out Of Reach
The Lithuanian government's goal of achieving a balanced budget by 2017 remains out of reach, as the fallout from the Ukraine crisis
will suppress public revenue growth and keep expenditures elevated. Nevertheless, the modest fiscal slippage we project will not hurt
Lithuania's solid sovereign profile or dent investor confidence over our forecast horizon.
TABLE: Fiscal Polic y
Monetary Policy
Geopolitical Headwinds And Oil Price Declines Dragging Down Inflation
We have revised down our forecast for consumer price growth in Lithuania for 2015 on the back of the escalating trade war between the
EU and Russia, which has adversely impacted food price growth in the region, and on the back of global oil price declines.
TABLE: INFLATION
TABLE: Mo netar y Polic y
Regional Monetary Policy
Q&A On The European Central Bank's Quantitative Easing
TABLE: Europea n Central Bank – Capital Key for Euro zone Me mber s
Chapter 3: 10-Year Forecast
The Lithuanian Economy To 2024
Moderate But Sustainable Growth Ahead
Although the outlook for the Lithuanian economy over the coming decade is certainly less than inspiring compared to average real GDP
growth of 7.2% between 2004-2007, we nonetheless maintain a positive view for the economy over the long term. Indeed, while growth
is unlikely to match the stellar outturns posted in the run-up to the recession, we forecast a more moderate, but sustainable 3.5% annual
average growth rate for 2017-2024.
TABLE: Long-Ter m Macroeco nomic Foreca sts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
tABLE: Developed State s – Labour Mar ket Risk
Table : Developed State s – Logi stic s Risk
Table : Developed State s – Cri me And Security Risk
table : Developed State s – Trade And Investment Risk
Chapter 5: BMI Global Assumptions
Global Outlook
New Era For Oil
Table : Global Assumptio ns
Table : Developed State s, Real GDP Gro wtH, %
Table : BMI VERSUS BLOOMBERG CONS ENS US REAL GDP GROWTH FORECASTS, %
Table : Emergi ng Mar ket s, Real GDP Gro wth , %

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