VILNIUS - Despite recording a 22.4 percent collapse in second quarter GDP last week, Lithuania is having little trouble attracting investors in the international debt markets, as its debt remains "very attractive and is a compelling investment story" for investors looking for higher yield in today's investment environment, says Berlin-based fund manager at Landesbank Berlin, Lutz Roehmeyer, reports news agencies Bloomberg.
The country is borrowing on the international capital markets as it tries to steer clear of having to turn to the IMF and other lenders. Though borrowing from these institutions would come at a lower interest rate, they tend to impose tighter budgetary restrictions and conditions on the borrower, as has been seen in neighboring Latvia.
Investors are attracted to bond yields reaching close to 10 percent.
Lithuania sold 500 million euros in five-year bonds yielding 9.375 percent on June 15, with investor demand exceeding supply by 50 percent, reports news agency ELTA. The auction was a success even as next door Latvia was denying rumors it would be forced to devalue the lat and abandon its pre-euro exchange rate mechanism, a move most believe would destabilize the region.
Roehmeyer said he's "not very concerned" about Lithuania's economic slump, as long as the country sticks to its euro adoption strategy, which will "offer a very safe exit for the imbalances," he says.
Lithuania's BBB credit rating was removed from CreditWatch, by Standard & Poor's Ratings Service, saying there's a reduced threat of a downgrade, as the government takes steps to contain the deficit. "The removal of the CreditWatch placement reflects Lithuanian authorities' actions in the commitment to take sufficient measures to rein in the deterioration in the public finances, including measures to stem the widening deficit of the Social Funds Budget," says S&P credit analyst Frank Gill. The country's outlook remains negative.
Roehmeyer's view is that "Lithuania is one of the top yielders in eastern Europe and at the same time has a very low debt to GDP ratio; it's suffering because there's a Baltic problem."
Government debt this year will be 22.6 percent of GDP, compared with 72.6 percent for the EU average, according to the European Commission. Lithuania's budget deficit will widen to 5.4 percent of GDP this year and 8 percent in 2010.
Lithuania will need "about 3.5 billion litas (1.01 billion euros) of additional funding this year," said DnB Nord economist Jekaterina Rojaka. "The Finance Ministry is unlikely to pay more than 10 percent later this year on the bonds," she believes.
"The reaction in the market would be extremely positive right now," says fund manager at Genoa-based Carige Asset Management Maurizio Gialdini. "There is still great demand for high yielding paper. Gialdini, who holds about 3 million euros in Lithuanian investments, says "This could be a great moment to issue," and that he "would definitely consider buying more."
The Baltic nation is joining emerging-market governments from Brazil to South Africa that have sold debt overseas this year as signs of recovery boost investor demand for higher- yielding assets.
Roehmeyer says that "Investors will buy [the bonds] now because risk-aversion is gone, liquidity is in the market, and people are still looking for yields." "Now at a yield of 8 percent it's very interesting," added Lithuanian President Dalia Grybauskaite on July 30, stressing that the country won't ask for international aid as long as the markets are willing to lend money to the government.
The possibility of an international bailout, however, may be a plus, and represents an insurance against default, says Roehmeyer. "Lithuania still has a chance to go to the IMF and get the international community to help," he noted. Supplementary rounds of budgetary consolidation, alongside the rapid rebalancing of the economy, will narrow Lithuania's external financing needs over the next several years, and should improve the underlying structure of the economy," S&P said
Lithuania's economy is more flexible than that of many of its peers; this is visible in the decline in wage and price levels so far in 2009," S&P said. "The ongoing downward adjustment of Lithuania's producer cost structures should, over the medium-term, lay the foundations for a restoration of competitiveness.
