Lithuania Country Risk Report Q4 2017

Executive Summary

Core Views

Key Risks

Chapter 1: Economic Outlook

SWOT Analysis

BMI Economic Risk Index

Economic Growth Outlook

Rampant Consumer Will Drive Acceleration In Growth

The Lithuanian economy will post robust growth over our short-term outlook to 2019, buoyed by a strong consumer sector and

improving investment climate. Rising inflation will add some headwinds after the economy posted strong Q117 headline growth, but will

not suppress a notable acceleration in real GDP growth over the coming two years.

GDP By Expenditure Outlook

TABLE: GDP GROWTH FORECASTS

TABLE: PRIVATE CONSUMPTION FORECASTS

TABLE: GOVERNMENT CONSUMPTION FORECASTS

TABLE: FIXED INVESTMENT FORECASTS

TABLE: NET EXPORTS FORECASTS

Outlook On External Position

TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE

TABLE: TOP 5 GOODS IMPORTS IN 2015

TABLE: TOP 5 GOODS EXPORTS IN 2015

TABLE: CURRENT ACCOUNT BALANCE FORECASTS

Monetary Policy

Improving Growth To Bring ECB Closer To A Gradual Exit

Economic and financial conditions in the eurozone have normalised over the past two-and-a-half years since the ECB announced the

launch of its expanded asset purchase programme in January 2015, and now it is clear that monetary policy has hit an inflexion point.

The withdrawal of monetary accommodation is set to be gradual and cautious, however.

Structural Fiscal Position

TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES

TABLE: FISCAL AND PUBLIC DEBT FORECASTS

Currency Forecast

EUR: Real Rate Differentials Do Not Support A Bull Market

The euro is rapidly approaching key resistance at USD1.15/EUR and despite the growing upside momentum we remain neutral from

a short-term perspective as the recent rally is not justified by the still-wide real yield spread between the US and Germany. From a

longer-term perspective, while the euro is slightly undervalued, the real yield differential is likely to remain strongly in favour of the dollar,

suggesting the euro will continue to edge weaker.

TABLE: BMI EUROZONE CURRENCY FORECAST

Chapter 2: 10-Year Forecast

The Lithuanian Economy To 2026

Structurally Lower Growth But Outlook Remains Stable

Unfavourable demographics, a low savings rate and declining global trade volumes will see real GDP growth trend lower in Lithuania

over the coming decade. However, low debt levels and an attractive operating environment will help sustain investment growth,

maintaining low but stable economic activity throughout our long-term forecast period.

TABLE: LONG-TERM MACROECONOMIC FORECASTS

Contents

Chapter 3: Political Outlook

SWOT Analysis

BMI Political Risk Index

Domestic Politics

Foreign Policy Status Quo Going Nowhere

Tensions with neighbouring Russia will continue to pose the largest threat to investor interests in Lithuania over the coming months.

While we do not expect an outright conflict between the two states, the threat of Russian military intervention will keep defence spending

a key priority of Lithuania's fiscal policy and encourage closer relations with the rest of the EU.

TABLE: POLITICAL OVERVIEW

Long-Term Political Outlook

Policy Will Struggle To Navigate Key Challenges

Most of Lithuania's main political parties enjoy a degree of consensus on the country's main issues, but future governments will struggle

to navigate policy around an increasingly nationalist electorate, an uncertain future for the EU and tense relations with neighbouring

Russia.

Chapter 4: Operational Risk

Operational Risk

TABLE: DEVELOPED STATES – LABOUR MARKET RISK INDEX

TABLE: DEVELOPED STATES – LOGISTICS RISK INDEX

TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK INDEX

TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK INDEX

Chapter 5: BMI Global Macro Outlook

Global Growth Solidifying, But 'Reflation' To Moderate

TABLE: GLOBAL MACROECONOMIC FORECASTS

TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y

TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y

TABLE: LITHUANIA – MACROECONOMIC DATA AND FORECASTS

Lithuania Country Risk Report Q4 2017

Core Views

The Lithuanian economy will post robust growth over our short-termoutlook to 2019, buoyed by a strong consumer sector and improvinginvestment climate. Rising inflation will add some headwinds afterthe economy posted strong Q117 headline growth, but won't suppressa notable acceleration in real GDP growth over the comingtwo years.

Tensions neighbouring Russia will continue to pose the largest threatto investor interests in Lithuania over the coming months. While wedo not expect an outright conflict between the two states, the threatof Russian military intervention will keep defence spending a keypriority of Lithuania's fiscal policy and encourage closer relationswith the rest of the EU.

Major Forecast Changes

We have revised up our forecasts for real GDP growth in 2017, from2.8% to 3.5% on the back of stronger-than-expected Q1 data.