Vilnius - Doom mongers are leading the country into a recession. That is the verdict of SEB, the biggest bank in the region.
The leading financial insitutution in the Baltic states, SEB believes that it is not the macroeconomics of Lithuania that is causing the problem but a lack of confidence of the country's residents.
According to an SEB report, the negative mood is having a negative impact on the economy and will continue to do so in the near future.
"People are more sensitive than objective economic indicators, and indeed have more sway when the economic situation changes. Consumers often react very emotionally to inflation growth and reports about a general slow-down. Their behavior changes and expectations fluctuate. One needs to take into account that there is a certain tension in the credit segment in Lithuania. Market pressure affects many credit overloaded consumers who struggle to keep up with monthly payments when interest rates go up,"said Gitanas Nauseda of SEB Bank.
Lithuania has recently experienced near record inflation as have the other countries in the region. The property market which was buoyant has begun to sag as people discover that the credit boom is over.
According to SEB figures people are spending less and saving more as result. This is having a knock on effect on consumer sales which in turn affects jobs.
SEB forecasts a higher savings rate in Lithuania rather than allocation of funds to current spending and long-term investment as in the past. In 2007, the bank deposit base in Lithuania grew by more than 20 percent. Nauseda is certain that residential housing segment would get a healthy boost if sellers reduce prices by about 15 percent this year. Buyers, however, should not be overly optimistic when expecting prices to fall further.
SEB's credit portfolio growth in Lithuania was 46,8 percent in 2007, while the 2008 forecast is 30 percent , and 2009 projection is set at only 20 percent
According to Nauseda, The EU Central Bank is expected to reduce interest rates by 0.5 percent later this year. This decrease nevertheless would not reverse the downward curve of credit portfolio growth in Lithuania. Average year-on-year inflation in Lithuania, according to SEB analysts, will reach 8.5 percent in 2008 and is likely to be about seven percent in 2009.