VILNIUS — Lithuania’s foreign and local currency ratings were downgraded to “Baa1” from “A3” with the outlook remaining negative by Moody’s Investors Service, the rating company said, but local economists think the rating won’t have such a serious impact on the country.
This is the second time Lithuania’s currency ratings have been downgraded by Moody’s this year.
“It’s not good news, but I don’t think it will have any dramatic implications for the image of Lithuania,” Gitanas Nausėda, senior SEB Bank economist told Baltic Reports. “Probably investors will analyze broader indicators and new trends and events. This downgrading is not unexpected — rather the opposite,” he said adding that other rating agencies had already downgraded the country earlier.
Kenneth Orchard, senior analyst in Moody’s Sovereign Risk Group said the crisis “continues to place severe pressure on the government’s fiscal metrics.”
“The deterioration in growth prospects for Lithuania and its major European trade partners suggests that a reversal of this trend is unlikely to occur within the medium-term rating horizon,” Orchard said in a company statement. “The Baltic economy is suffering the European Union’s deepest recession. Spending cuts and tax increases contributed to a 20.2 percent economic slump last quarter and the government expects a 4.3 percent contraction next year as it maintains tough austerity measures needed to comply with euro adoption terms.”
The value of Lithuania's currency, the litas, has remained steady throughout the crisis because it is pegged to the euro. Photo by Nathan Greenhalgh.
To attain the euro, Lithuania needs to keep its budget deficit below 3 percent of gross domestic product, but both Moody’s and SEB think the figure will be much higher.
“We expect the budget deficit for 2009 to be 10 percent, and 4 percent next year. That’s if this government is still in place and manages to make some cuts in expenditure,” Nausėda said.
Nausėda expects the euro in Lithuania no earlier than 2014.
Moody’s expects the deficit to be in the “high single digits,” because of weak revenue generation and weak demand for exports.
“Lithuania is unlikely to grow out of its budget problems post-crisis as other countries have done in the past given the absence of external stimulus,” Orchard said. “But a delay reducing the budget deficit would also push back the earliest date of euro adoption to 2014-15.”
Moody’s warned of further downgrades in future, especially if the economy contracts again next year.
Nausėda said that he expects further contraction, but is also expecting surprises.
“Next year there might be surprises with macroeconomic indicators — the rebound could be faster and more pronounced than expected. We see effort on micro level to reduces costs and find new niches and some have been successful. It is hard to put this into macroeconomic model, so the picture is late to catch and react to what is happening,” Nausėda told Baltic Reports. “We were slow to predict before in 2008 when we expected a soft landing, but it didn’t happen and now perhaps we are too late again, but to forecast recovery, but for now we are sticking to what we think.”
SEB Bank forecasts a 15.5 percent overall contraction of GDP this year, a 3.5 percent contraction in 2010 and a return to growth for the country in 2011.
