Lithuania keeps head above water despite doubts on quick recovery

VILNIUS - Lithuania is falling further behind Estonia in the race to adopt the euro, though this may not be such a bad thing. The government has proposed budget cuts for 2010 worth 5 percent of GDP that target social benefits, such as maternity and jobless pay and pensions, reports Bloomberg.
“Those are very ambitious measures, very painful measures, and of course there are some limits to what you can implement,” said Prime Minister Andrius Kubilius speaking in London on Nov. 26. The goal is to “not kill the whole economy and the stability in your society when you are cutting expenditures, wages and pensions.”

Even with these cuts, the government is expected to have a budget deficit of 9.2 percent of GDP in 2010, rising to 9.7 percent in 2011. Joining the eurozone requires governments to keep the budget deficit to within 3 percent of GDP, a gap Lithuania isn’t expected to meet until at least 2013.
Maintaining the position that Lithuania keep to its own path in working through the economic crisis, without turning to the IMF for support, Kubilius asserted that the country won’t adhere to a “painful euro adoption schedule that would quell demand and hurt the economy.”

Lithuania’s economy, at 32.2 billion euros in 2008, contracted 14.3 percent in this year’s third quarter as the government pushed through budget cuts equal to 8 percent of GDP. Its currency, the litas, is pegged to the euro, though Kubilius says that they need to switch to the euro “as soon as possible.”

Estonia is in the best shape, financially, among the three Baltic nations, and may qualify to join the eurozone by January 2011, as it built up budget surpluses and strong public finances during the economic boom years. Latvia’s government, led by Andris Skele’s People’s Party, wasn’t so prescient, as it ran budget deficits during the economic surge through reckless policies and spending. Latvia doesn’t expect to join the eurozone until 2014, or later.
Lithuania raised 1.0 billion euros on Oct. 7 in its biggest-ever debt issue, with the notes priced to yield 462.5 basis points (4.62 percent) more than U.S. Treasuries. The government is expected to return to international markets to sell more bonds by next spring.

Kubilius argues however that, unlike Latvia, Lithuania won’t go to the IMF for financial assistance, as it’s able to fund itself through capital markets. “The policies required by the IMF or the EU we can implement ourselves, therefore we have possibilities to borrow in international markets,” Kubilius said. “Those possibilities are becoming better and better as the price for borrowing is decreasing. We hope that during next year the price will go down even more.”
The prime minister continues that “We would be very happy if… Estonia is able to have the euro much earlier. It will show us very clearly what different policies Estonia and Lithuania were implementing during the last four, five years. Estonia had very strict fiscal control and surpluses in their budget, and we had deficits. Now, during the recession and financial crisis, that makes quite a big difference. Estonia is fighting to keep the deficit below 3 percent and we are fighting to keep it below 9 percent.”

n a sign that the economy could be bouncing off the bottom, Lithuania’s third quarter output rose a seasonally adjusted 6.1 percent against second quarter figures. Exports are slowly rising and the drop in industrial output is slowing.
“The bigger picture is that the process of internal devaluation still has further to run and I’d be very skeptical about the chances of a quick recovery,” said Capital Economics economist Neil Shearing.
Retail sales fell an annual 28.7 percent in October, though month to month this number was up 5.2 percent. The consumer confidence indicator fell to minus 51 in November, down from minus 47 in October. The confidence index is a gauge of current and future economic expectations.

Agricultural output, which typically makes up about 7 percent of GDP in the third quarter as the harvest comes in, was the only component that grew on an annual basis, reported the statistics office. Foreign sales of dairy products grew 23 percent from the second quarter. Exports, which account for about 60 percent of GDP, rose 7.9 percent in the third quarter from the previous quarter, led by a 21 percent increase in fuel sales.
The three Baltic states’ governments say they won’t devalue their currencies and will continue to use wage cuts and deflation to boost competitiveness to keep budgets in line with European Union rules. Lithuania’s economy should shrink 15.2 percent this year, and 1.5 percent in 2010 before turning back to growth.