Fitch affirms Lithuania’s A- rating with positive outlook

Fitch affirmed Lithuania’s A- credit rating with a positive outlook, amid the country’s strong institutional framework and sound public finances, the rating agency said in a press release. Fitch expects that Lithuania’s policy framework will continue to support the macroeconomic stability of the country, mitigate the risks associated with external shocks while public debt will remain on its downward path amid the realization of fiscal surpluses.

Fitch expects that the tax reform introduced last year and effective as of January will result in revenue underperformance, however, the general government budget will not fall into a deficit in 2019 and 2020. Regarding GG debt, Fitch expects its level to increase to 37.4% of GDP at end-2019 from 34.1% at end-2018 on the back of pre-financing for 2020, however, debt will then start falling again. Net external debt has declined to 16.1% of GDP as of end-2018 and the composition of gross external debt has improved in recent years and although the CA is expected to turn to a deficit in 2019 and 2020 (0.6% and 1.1% of GDP, respectively), the inflow of FDI and non-debt related capital inflows from the EU will keep external debt on a downward trend.

GDP growth is projected to ease to 2.7% in 2019 and 2.3% in 2020 on the back of weakening external environment while the pass-through to headline inflation from strong wage growth has been weak and Fitch expects average consumer price growth in 2019 and 2020 to stand at 2.5%. The strong wage growth has not impacted competitiveness of Lithuanian exports as similar processes have been observed in other countries in the region while companies have responded to this process through increased investment in productivity enhancing measures. The banking sector remains well capitalized, however, the high exposure to Nordic banks remains a tail risk.

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