DBRS Assigns A (low) Rating to Republic of Lithuania, Stable Trend

DBRS Ratings Limited (DBRS) has assigned Long-Term Foreign and Local Currency – Issuer Ratings of A (low) and Short-Term Foreign and Local Currency – Issuer Ratings of R-1 (low) to the Republic of Lithuania. All trends are Stable.

The A (low) ratings are underpinned by Lithuania’s sound fiscal position and its low public debt ratio amid a developing reform agenda. Euro system membership since January 2015 is another credit strength. Credit challenges relate to the country’s weak productivity growth and the low investment rate. The declining and aging population as well as economic informality present fundamental challenges to economic and fiscal management. Lithuania’s small and open economy is sensitive to external shocks, although these are mitigated by the fact that the current macro-economic imbalances are small.

Lithuania is a small, open economy with exports accounting for around 75% of gross domestic product (GDP) and GDP volatility that is mostly related to external shocks. Euro system membership is a credit strength, especially given the support it could provide in the event of such a shock. European Union (EU) economic governance frameworks foster credible macroeconomic policies and euro system membership provides access to financial facilities from European institutions, including liquidity from the ECB and potential financial support from the ESM. Lithuania is a net beneficiary of EU funds, amounting to 4.2% of GDP.

Having grown consistently above 3.0% in the years following the 2008/2009 economic crisis, Lithuania's GDP growth has averaged around 2.0% over the past two years. While private consumption has been robust, the slow EU investment cycle has caused a temporary decline in EU-funded projects. The European Commission (EC) expects the economy to grow by 2.9% this year and by 3.1% in 2018, as exports and investment recover; however, Lithuania’s investment-GDP ratio is below the euro-area average and labour productivity growth has slowed. The structural reform program is developing, but Lithuania is a weaker performer in state owned-enterprise governance, insolvency laws, business access to finance and the quality of the education system.

Supported by a sound fiscal framework and moderate economic growth, Lithuania’s fiscal results have improved in recent years. The general government deficit peaked at 9.3% of GDP in 2009. The ratio has declined each year since 2011 and reached a 0.3% surplus in 2016. Interest payments as a share of revenue declined to 3.9% in 2016 from 6.0% in 2014. Expenditure cuts constituted two-thirds of the consolidation. Lithuania has one of the lowest debt ratios among EU countries at 40.2% in 2016 compared with the EU average of 83.5%. The government works with a conservative debt management strategy and the weighted-average term to maturity of central government debt is 6.0 years.

Lithuania faces deteriorating demographics – a declining and aging population. The population has been declining since the early 1990s at an accelerating pace to 2.8 million in 2016 from 3.7 million in 1990. The main drivers of the country's population decline are high net emigration and a low fertility rate. Moreover, Lithuania has one of the fastest-aging populations in the EU. Age-related costs are expected to peak at around 2% of GDP in 2040, according to EC data. In response, a major systemic pension reform was introduced in 2015.

The size of the informal economy and, therefore, the high propensity for tax evasion is another challenge. Measured at 16.5% of GDP, Lithuania’s informal economy is one of the largest in the EU. Informality obstructs efficient resource allocation, exacerbates social inequities, and narrows the tax base. The authorities have introduced measures to fight tax evasion with some positive effects.

RATING DRIVERS

The Stable trend reflects DBRS’s view that risks to the ratings are broadly balanced. Upward rating action could ensue if investment strengthens economic diversification and if the productivity gap narrows. Potential negative rating drivers include signs of a less-responsible fiscal stance leading to a material deterioration in the debt ratio. Weak trend growth, particularly if exacerbated by continued emigration, could contribute to a deterioration in medium-term fiscal sustainability. Alternatively, a return of significant macroeconomic imbalances could also have negative implications for Lithuania’s ratings.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Ministry of Finance, International Monetary Fund, OECD, European Commission, United Nations Development Program (UNDP), Haver Analytics, Eurostat, World Bank, Bank of Lithuania, Stockholm School of Economics in Riga, Lithuania Department of Statistics, European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is the first DBRS rating on the Republic of Lithuania.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Nichola James, Senior Vice President, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President
Initial Rating Date: July 21, 2017
Last Rating Date: Not applicable as no last rating date.

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