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Rating Action:

Moody's affirms Lithuania's A3 rating, outlook remains stable

08 Sep 2017

London, 08 September 2017 -- Moody's Investors Service, ("Moody's") has today affirmed Government of Lithuania's A3 long-term issuer and senior unsecured ratings as well as the (P)A3 senior unsecured MTN program rating. Moody's has also affirmed Lithuania's (P)P-2 domestic currency short-term rating. The outlook remains stable.

The decision to affirm the ratings and maintain the stable outlook balances the following key rating factors:

(1) Lithuania's flexible economy, underpinned by a strong policy track record;

(2) Robust public finances, supported by prudent fiscal policy;

(3) Exposure to external shocks, particularly developments in the geopolitical environment.

Lithuania's long-term local and foreign-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign currency bond and deposit ceilings remain unchanged at P-1.

RATINGS RATIONALE

FIRST DRIVER: LITHUANIA'S FLEXIBLE ECONOMY, UNDERPINNED BY STRONG POLICY TRACK RECORD

Lithuania's flexible economy and the implementation of sound policies allowed a strong post-crisis adjustment and supported the country's ability to withstand the trade shock emanating from Russia. Export performance remained relatively resilient, benefiting from the ability of Lithuanian exporters to diversify into new markets, including Middle Eastern countries. The resilience of Lithuania's economy has been also supported by the country's proactive stance in reducing its energy dependence from Russia, which in turn has helped to increase the energy security in the Baltic region. Lithuania has made significant progress in reforming its energy market and securing the supply of alternative sources while obtaining more competitive prices. The projects have extended across both the electricity and gas markets, most notably with the launch of the liquefied natural gas (LNG) terminal in the port city of Klaipeda in December 2014, and with the start of operations in December 2015 of the Nordbalt and LitPol Link interconnection links with Sweden and Poland, respectively.

Growth is gaining momentum and the medium-term economic outlook is favorable. Moody's expects real GDP to grow by 3.5% and 3.4% in 2017 and 2018 respectively, from 2.3% in 2016 on the back of continued robust private consumption. The economy will also benefit from a pick-up in investment driven by an acceleration in the allocation of EU funds under the 2014-20 programming period, for which Lithuania enjoyed one of the highest absorption rates under the previous programme. Exports are recovering, supported by improving external conditions, albeit the contribution to growth from net exports is expected to remain negative due to the increase in investment-related imports.

At the same time, the country's economic strength remains constrained by a number of factors. Specifically, Moody's expects structural challenges, including adverse demographic dynamics due to aging population and emigration as well as skill mismatch that limits domestic labour supply, to continue to weigh on competitiveness and on economic prospects in the medium and long term. The new Labour Code, aiming to increase the flexibility of labour relations, provides a step towards easing some of these pressures.

SECOND DRIVER: ROBUST PUBLIC FINANCES SUPPORTED BY PRUDENT FISCAL POLICY

The second driver of Moody's decision to affirm Lithuania's ratings is the strength of its public finances, which reflects the fiscal consolidation efforts and the expectation that the commitment to prudent budgeting supported by a credible fiscal framework will continue.

After recording the first surplus in its history in 2016, Lithuania's fiscal balance is expected to return to a small deficit in 2017, mainly reflecting the cost of structural reforms related to the labour market and pension system. The general government debt-to-GDP ratio stood at 40.2% of GDP at end-2016, in line with the median of its A-rated peers (40.7% of GDP in 2016, excluding Lithuania). Moody's projects the debt ratio will temporarily increase to 42.5% of GDP in 2017, mainly due to the pre-financing of 2018 Eurobond redemption, before declining to less than 39% of GDP in 2018.

At the same time, Lithuania's unexploited tax potential will continue to pose a challenge to fiscal flexibility. Lithuania's tax intake, at 29.1% of GDP in 2015, remains well below the EU average of around 40%. However, Moody's notes that, with aim to increase the tax intake to 32% of GDP in the medium term, the government has introduced a number of measures to improve tax administration and enhance tax collection.

Over the long term, costs associated with rapidly ageing population, one of the fastest in EU, will pose fiscal challenges. Adverse demographics will weigh on the sustainability of public finances. According to a study published by the European Commission (EC) in 2015, age-related spending is expected to add 3.7% of GDP to public spending by 2040. The EC also acknowledged that the pension measures that are part of the recent structural reforms package are likely to mitigate fiscal sustainability risks.

THIRD DRIVER: EXPOSURE TO EXTERNAL SHOCKS, PARTICULARLY DEVELOPMENTS IN THE GEOPOLITICAL ENVIRONMENT

The third driver of today's affirmation is Lithuania's vulnerability to external shocks, including the risks posed by the geopolitical environment.

Despite the demonstrated flexibility and resilience, as a small and open economy, Lithuania remains vulnerable to external shocks, including developments in the regional geopolitical landscape shaped by the relations with Russia. Moody's A3 rating takes into consideration the risk that Lithuania's credit profile could be affected in the event of a significant deterioration in the economic and/or security situation vis-à-vis Russia resulting in a persistent weakening of business confidence and trade disruption.

RATIONALE FOR STABLE OUTLOOK

The stable outlook balances Moody's view that the country's economic resilience will continue to be supported by sound economic policies and that the substantial fiscal consolidation over the recent years will be preserved, against the presence of structural challenges and geopolitical risk in the region.

WHAT COULD CHANGE THE RATING - UP

Much lower debt levels along with further progress in improving the government's fiscal flexibility, achieved for example through tax base-broadening measures, would exert upward pressure on the rating. Further progress on structural reforms which help to mitigate the effects of high youth emigration and the impact of a rapidly ageing population on the sustainability of public finances as well as structural reforms to boost competitiveness would also provide upward pressure. An easing of geopolitical risk in the region would also be credit positive.

WHAT COULD CHANGE THE RATING - DOWN

Conversely, a material deterioration in the public finances reversing the stabilization of the debt to GDP ratio, could exert downward pressure on the rating. Also, a severe escalation of geopolitical risk that would materially undermine Lithuania's economic and fiscal performance could trigger a rating downgrade.

GDP per capita (PPP basis, US$): 29,622 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.3% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: 0.3% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.9% (2016 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 06 September 2017, a rating committee was called to discuss the rating of the Lithuania, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has improved. The issuer is more susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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