VILNIUS - While Latvia and Estonia grapple with runaway inflation, Lithuania appears to be cruising toward an even worse macroeconomic trap as the country's leaders focus their attention on multi-billion dollar energy projects and the upcoming parliamentary election.
Though unscientific, anecdotal evidence suggests that the current government, while acknowledging high inflation and over-the-top domestic demand, has failed to implement necessary measures to ensure that the trends don't backfire and spark a hard landing.
One reason is that ministers have been burning the midnight oil on the nuclear power law amendments necessary to get the new plant project up and running. Another is that 2008 is an election year. As history has shown, political populism and economic stability are inherently antagonistic; in times of economic instability, the same populism can be massively unsettling.
Already one leading credit agency, Standard & Poor's has downgraded Lithuania's long-term foreign currency rating 's from 'A' to 'A'. While no major setback (all the Baltic states are being downgraded or getting hit with negative outlooks), the decision was serious enough to force ministers to rework a 400 million euro Eurobond offer.
Audrius Ziugzda, head of SEB Bankas, has lashed out at the government, saying it lacked a plan to adopt the euro, which is considered to be the best roadmap to economic stability.
"We cannot have it when we are making such ample promises and wasting money," he said.
"If the government fails to adopt a truly clear decision, which will prove that it controls the fiscal policy and the budget, the credit rating of the country might decline further," Ziugzda added.
Indeed, Standard & Poor's cited loose fiscal policy as one of the main factors behind its downgrade. The Lithuanian government announced recently that it finished 2007 with a 0.5 percent deficit. Considering that the economy has been expanding rapidly 's 10.3 percent in the third quarter of 2007 's this kind of excessive state spending is dangerous.
If Latvians and Estonians have cut back on spending, Lithuanian consumers continue to buy. New car registrations, for instance, soared 57 percent year-on-year in January. In Estonia, new car registrations declined 1 percent year-on-year, and in Latvia by 15 percent, according the automobile market researcher DataCenter.
If Latvia's experience is any gauge, Lithuania is truly in trouble. In 2006 when ministers there should have been addressing the country's red-hot economy, they were instead on the campaign trail. Worse, after the coalition won the election, they took the mandate as a sign to leave the economy untouched. Latvia is now paying the price.
"The Lithuanian government is stuck between a rock and a hard place as there will be general elections in Lithuania this year, and the Lithuanian minority government will have a hard time getting any austerity measures passed in Parliament," Danske Bank noted in a bulletin.
The International Monetary Fund announced that it has sent its delegation to Vilnius, where for two weeks it will study the economic situation.
