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Lithuania Business Forecast Report Q4 2014

  • July 2014
  • -
  • Business Monitor International
  • -
  • 32 pages

Core Views
Recent growing geopolitical tensions between Russia and the West over Ukraine will dampen investor sentiment in 2014, weighing on Lithuania's trade flows and domestic demand. We expect goods exports to expand by 4.5% in 2014, down from 7.0% in 2013, before accelerating to 6.3% in 2015. Although public support in Lithuania has shifted towards centreright opposition parties, we see no major threats to the centre-left coalition's term in power. The coalition has a comfortable majority in parliament, and is likely to smooth out potential sources of differences. Real GDP growth will slow in Lithuania in 2014 – to 2.9% from 3.3% in 2013 – due to the fallout from the Ukraine crisis. In addition, the weak inflation outlook will prolong the deleveraging process, further weighing on Lithuania's economic growth outlook.

Major Forecast Changes
We now expect Lithuania's current account surplus to narrow to 0.6% of GDP in 2014, from 1.5% previously as the fallout from the Ukraine crisis will weigh on the country's trade dynamics. We reiterate our view that the surplus will reverse into deficit by 2015.

Table Of Contents

Lithuania Business Forecast Report Q4 2014
Executive Summary.... 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook....5
Chapter 1: Political Outlook.. 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Domestic Politics 8
Coalition To Weather Drop In Popularity...8
Although public support in Lithuania has shifted towards centre-right opposition parties, we see no major threats to the centre-left
coalition's term in power. The coalition has a comfortable majority in parliament, and is likely to smooth out potential sources of
differences.
Table: Political Overview ...8
Long-Term Political Outlook.. 9
Convergence By No Means Assured9
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 2023 is by no means assured. In particular,
we highlight the aftermath of 2009's 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 2023.
Chapter 2: Economic Outlook.. 13
SWOT Analysis.. 13
BMI Economic Risk Ratings. 13
Economic Activity.. 14
Deflation Further Darkening Macro Outlook.14
Real GDP growth will slow in Lithuania in 2014 - to 2.9% from 3.3% in 2013 - due to the fallout from the Ukraine crisis. In addition, the
weak inflation outlook will prolong the deleveraging process, further weighing on Lithuania's economic growth outlook.
table: Economic Activity ...14
Fiscal Policy.. 15
Euro Adoption Prospects To Ensure Fiscal Probity....15
We forecast Lithuania's budget deficit to narrow to -1. 2% of GDP in 2014 from -1.5% in 2013. Despite the growing external public debts
in recent years, the government's debt dynamics remain on a stable footing due to its fiscal consolidation efforts and the upcoming euro
adoption which will bolster investor confidence and anchor borrowing costs.
Table: Fiscal Policy....15
Monetary Policy. 17
Inflation Bottoming Out....17
Higher energy prices due to geopolitical risk premium and higher softs prices will bolster core inflation in Lithuania by year-end. As
such, consumer price growth will accelerate moderately by end-2014, underpinned by stronger supply-side inflationary pressures, while
demand-pull pressures will remain subdued.
Table: Monetary Policy.17
Balance Of Payments.. 18
Current Account Surplus To Turn Into Deficit By 2015....18
With Lithuanian exports suffering from waning demand from Russia and the eurozone, we expect Lithuania's current account surplus to
narrow to 0.9% of GDP in 2014, from 1.5% in 2013, before reversing to deficit of -0.1% in 2015. Beyond this time horizon, we expect the
Lithuanian economy to post modest external deficits of 0.7% on average by 2023.
Table: Current Account18
Chapter 3: 10-Year Forecast 21
The Lithuanian Economy To 2023.. 21
Moderate But Sustainable Growth Ahead21
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. While growth is
unlikely to match the stellar outturns posted in the run-up to the recession, we forecast a more moderate, but sustainable 3.4% annual
average growth rate for 2017-2023.
Table: Long-Term Macroeconomic Forecasts..21
Chapter 4: Business Environment 23
SWOT Analysis.. 23
BMI Business Environment Risk Ratings 23
Business Environment Outlook 24
Institutions.... 24
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS...24
TABLE: BMI LEGAL FRAMEWORK RATING...25
Infrastructure 26
TABLE: LABOUR FORCE QUALITY.26
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS...27
Market Outlook.. 28
TABLE: TRADE AND INVESTMENT RATINGS....28
TABLE: TOP EXPORT DESTINATIONS ....29
Operational Risk 30
Chapter 5: BMI Global Assumptions. 31
Global Outlook... 31
Global Recovery Still On Track..31
Table: Global Assumptions....31
Table: Developed States, Real GDP GrowtH, %.32
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 32
Table: Emerging Markets, Real GDP Growth, %33

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