Nuclear plant closure will be just one more blow to economy

VILNIUS - Dismantling of the Ignalina nuclear power plant in Lithuania, which is scheduled for complete shutdown by the end of this year, continues apace as workers pile up the discarded steel parts, tubes and cowlings in a nearby storage building, reports Bloomberg. The closure of the Soviet-era nuclear plant was a condition for Lithuania’s entry into the European Union in 2004.
With the loss of the plant, a substantial portion of the country’s energy-generating capacity will be lost. The shutdown threatens to slash as much as 1.3 percentage points from GDP next year, adding an additional obstacle to hopes for a rapid emergence from recession. Ignalina provides about 80 percent of Lithuania’s electricity consumption and in 2008 comprised 23 percent of total power exports to Latvia, and 45 percent to Estonia.

With the low-cost producer turned off, and the government having failed to find other low-cost long-term energy alternatives, electricity imports from countries such as Russia, who use less efficient gas-fired plants, will push the average cost of power to 0.15 litas (0.043 euros) per kilowatt-hour from 0.06 litas. The final price for consumers will rise to around 0.45 litas, up from 0.36 litas.

Lithuania’s GDP shrank 14.3 percent in the third quarter. The economy risks further contraction because of higher energy prices and its lost energy-export revenue, says head of the economics department at the Stockholm School of Economics in Riga, Latvia, Morten Hansen. “It’s quite substantial and quite dramatic and it’s the worst time for this to happen,” Hansen said.
Prime Minister Andrius Kubilius, who took office in November 2008, said previous administrations delayed work on new electricity sources. His cabinet is the first to have a formal energy ministry. The current government “inherited close to nothing in terms of preparation,” he said, adding “This is why we’ll have to pay more” for electricity.

This is only adding to Lithuania’s woes, as economic growth will remain sluggish for as long as three years, says Moody’s Investors Service, as the country adjusts to reduced capital inflows and slower income growth. The country’s Baa1 government bond ratings reflect its “medium economic and high institutional strength, as well as its poor fiscal outlook and rising government debt,” says Moody’s in its sovereign credit report on Lithuania.
Vice President-Senior Credit Officer Kenneth Orchard said that “Lithuania’s economic strength has been damaged by the economic crisis, and growth is unlikely to return to its previous pace in the foreseeable future.”
Lithuania is expected to post a budget deficit equal to 9.8 percent of GDP this year, 9.2 percent in 2010 and 9.7 percent in 2011, reports the European Commission. Government debt will rise to 49.3 percent of the economy by 2011, compared with 29.9 percent this year.

“De-leveraging, slower growth in the major European Union countries and diminished capital inflows are likely to reduce the country’s long-term potential GDP growth to 3 to 4 percent, down from 5 to 6 percent per year previously, and this means convergence with the eurozone average is likely to take many decades,” says Orchard. He explains that “The economic downturn has resulted in large budget deficits and rapidly rising levels of government debt. Government revenues are highly geared toward domestic demand growth and therefore will probably be weak until private investment returns.”
With the long-term foreign currency rating just three notches above junk status, Lithuania is listed among the countries with the highest perceived default risk, according to London-based Credit Market Analysis. Other countries in the highest perceived default risk category include the Ukraine, Argentina, Venezuela, Latvia, Iceland, Kazakhstan, Lebanon and Russia. Countries listed as having the least probability of default include Finland, the U.S., Denmark, Australia and New Zealand.