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S&P's hits Lithuania with negative outlook

  • 2007-05-30
  • By TBT staff
VILNIUS - The rating agency Standard & Poor's last week revised Lithuania's ratings outlook to negative due to macroeconomic imbalances. The move followed a rating downgrade for Latvia, whose economic boom has shown increasing signs of being unsustainable, and signals further uneasiness ahead for the Baltic economies.

Standard & Poor's said the negative outlook was based on an increase in domestic demand in the first part of 2007, which was facilitating the likelihood of a "hard landing" for the country's economy.
The surge in disposable income, as well as rapid credit expansion, continue to stimulate strong domestic demand in 2007, despite some signs of a cooling in demand in the second half of 2006. As a consequence, macroeconomic imbalances were again building up in the economy, Eileen Zhang, Standard & Poor's credit analyst, said in a statement.
Given the very limited scope of monetary policy under a currency board regime, the agency stressed that fiscal policy was the main macroeconomic instrument in demand management. Although conservative budgets have allowed Lithuania to achieve low deficit and debt levels in recent years, they are insufficient to constrain demand.

If the government fails to tighten its fiscal stance and implement additional measures to tame domestic demand, the external imbalances will escalate further and Lithuania's ratings could be lowered, Zhang said.
Conversely, the government could choose to tighten fiscal policy in the short term and the private sector (i.e., banks) could tighten its lending policy to reduce credit growth. This would allow macroeconomic imbalances to unwind gradually, and set the stage for a revision of the negative outlook.
Still, the agency affirmed its long-term and short-term sovereign ratings for Lithuania at A and A-1, respectively.
In Latvia's case, Standard & Poor's waited three months after giving the country a negative outlook before it finally reduced the rating.

A leading analyst from Danske Bank confirmed the troubled waters for Lithuania, saying the economy should slow down to 5 percent per year, which is considered a sustainable rate of development. In recent years the Baltic state's economy has grown by an average 7.5 percent.
"Otherwise the national economy might face a threat of overheating, the probability of which is being raised by Latvia and Estonia's strained economies," Lars Christensen, Danske Bank's senior analyst for Eastern Europe, told a press conference in Vilnius last week.

Danske Bank analysts have projected that Lithuania would be unable to take up the euro by 2010-2011 due to inflation, and they urged the country to guard against the overheating contagion spreading from neighboring Baltic states.
"If the situation in Latvia, which is dangerous, turns critical, the danger might also spread to Lithuania," Christensen noted.