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Rating Action:

Moody's affirms Lithuania's A2 ratings, maintains stable outlook

29 Apr 2022

Paris, April 29, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Lithuania's long-term issuer and senior unsecured ratings at A2. The senior unsecured MTN programme rating has also been affirmed at (P)A2. The outlook remains stable.

The affirmation of Lithuania's A2 ratings balances the following key rating drivers:

1) The increase of geopolitical risks stemming from the Russian invasion of Ukraine (Caa2, review for downgrade) affecting Lithuania, mitigated by NATO security guarantees and troop presence;

2) The very significant progress made by Lithuania in enhancing its energy security in light of heightened geopolitical tensions;

3) Moody's expectation that Lithuania's economic and fiscal strength will be largely resilient to the impact of spillover effects from the Russian invasion of Ukraine.

The stable outlook reflects Moody's expectation that the risk of a conventional military conflict directly impacting Lithuania remains low and that the country's significant progress in bolstering its energy security will limit the impact of energy-related risks. It also reflects Moody's expectation that the permanent damage of the Russia-Ukraine conflict on the Lithuanian economy will be relatively limited and that Lithuania's fiscal metrics will remain stronger than most of its A2-rated peers.

Lithuania's local currency ceiling at Aaa, five notches above the local currency rating and the foreign currency ceiling at Aaa and hence at the same level as the local currency ceiling, remain unchanged. For euro area countries, a six-notch gap between the local currency ceiling and the local currency rating as well as a zero notch gap between the local currency ceiling and foreign currency ceiling is typical, reflecting benefits from the euro area's strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also reflects our view of de minimis exit risk from the euro area.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE A2 RATINGS AND MAINTAINING THE STABLE OUTLOOK

FIRST DRIVER: THE INCREASE OF GEOPOLITICAL RISKS STEMMING FROM THE RUSSIAN INVASION OF UKRAINE, MITIGATED BY NATO SECURITY GUARANTEES AND TROOP PRESENCE

The Russian invasion of Ukraine and the increasingly protracted military conflict between the two countries have led to an increase in geopolitical risks affecting Lithuania. On account of this, Moody's recently changed Lithuania's score for political risk (one of the four sub-factors of Moody's assessment of a sovereign's susceptibility to event risk) to "ba" from "baa", which indicates that the escalation of geopolitical tensions, possibly leading up to an armed conflict, has the potential to negatively impact economic activity, fiscal outcomes and funding conditions for Lithuania.

However, although geopolitical risks and the uncertainty around such risks have increased with the Russian invasion of Ukraine, Moody's deems the likelihood of the military conflict in Ukraine spilling over into a conventional military conflict with a direct and material impact on Lithuania to be low. Such risks are notably mitigated by the fact that Lithuania benefits from full NATO security guarantees under the alliance's mutual defense clause. NATO has also reinforced its international troop presence, which has been stationed in Lithuania since 2017, in the Baltic states and other Central and Eastern European countries since the Russian invasion of Ukraine.

There is a higher probability that Lithuania could be directly impacted by more unconventional or hybrid forms of attack, such as cyberattacks, disinformation campaigns, sabotage operations or efforts to foment civil unrest. However, such hybrid attacks are on their own also much less likely than conventional military attacks to have a material negative impact on Lithuania's credit profile. Moreover, Lithuania's ethnic-Russian minority only accounts for around 5% of the population, against 25% in Estonia and Latvia, which entails that the risk that heightened geopolitical tensions would also translate into more elevated domestic political or social risks is lower for Lithuania than the other two Baltic states.

SECOND DRIVER: THE VERY SIGNIGIFICANT PROGRESS MADE BY LITHUANIA TO ENHANCE ITS ENERGY SECURITY IN LIGHT OF THE HEIGHTENED GEOPOLITICAL TENSIONS

The Russian invasion of Ukraine has also heightened risks around energy security for European countries that have historically been dependent on Russian natural gas, oil and coal for a large part of their overall energy supply. The protracted military conflict has heightened concerns that Russia could reduce energy deliveries to Europe in order to retaliate against sanctions or to gain political leverage, or that political pressure resulting in an accelerated phase-out of Russian energy imports could jeopardise the stability of the energy supply of many European countries. In an adverse scenario, this could lead to the rationing of energy in the most affected countries, potentially with a material negative impact on the economic and fiscal strength of these sovereigns.

Although Lithuania and the Baltic states have historically been highly been dependent on Russian hydrocarbon imports for their energy supply, they have also taken very significant steps particularly since the 2014 conflict in Ukraine to diversify their potential sources of energy supply and bolster their energy security. This has allowed Lithuania to quickly accelerate its plans to reduce its reliance on Russian energy imports since the Russian invasion of Ukraine in February this year. More generally, Lithuania's preparedness and proactive policymaking in the field of energy security also supports our assessment of the sovereign's institutions and governance strength, one of the four factors of Moody's assessment of a sovereign's creditworthiness and also a Governance consideration under our ESG framework. Although Lithuania like many other European countries is recording very high rates of inflation largely driven by increasing energy prices, recent efforts to end the import of Russian hydrocarbons significantly reduces the likelihood of energy-related risks having a material negative impact on the sovereign's credit profile.

Although there is no formal ban in place on the import of Russian hydrocarbons to Lithuania, the private companies involved in importing and distributing natural gas and oil in Lithuania have announced that they have stopped importing such products from Russia as of April this year. Natural gas imports from Russia will be replaced by deliveries of Liquefied Natural Gas (LNG) to a terminal established in the Lithuanian port of Klaipeda in 2014, which has the capacity to meet the annual natural gas needs of the three Baltic states combined. The Lithuanian subsidiary of Polski Koncern Naftowy ORLEN S.A. (Baa2, positive) which operates the only major oil refinery in the Baltics has also announced that it has already replaced the import of Russian crude oil from other suppliers.

THIRD DRIVER: MOODY'S EXPECTATION THAT LITHUANIA'S ECONOMIC AND FISCAL STRENGTH WILL BE LARGELY RESILIENT TO THE IMPACT OF THE SPILLOVER EFFECTS FROM THE RUSSIAN INVASION OF UKRAINE

The Russian invasion of Ukraine will have a significant, negative impact on the Lithuania economy this year, due to a combination of a sharp fall in exports to and imports from Russia and Belarus combined with weakening economic confidence and a reduction in consumer purchasing power due to sharply rising energy prices. That said, in Moody's baseline scenario, we expect economic growth to be weak but positive at 1.4% of GDP this year and 2.3% in 2023. While a significant downward revision from our February forecast of growth of over 3% of GDP in both 2022 and 2023, the immediate economic impact of the military conflict is ultimately much less sharp than that of the coronavirus pandemic which caused the Lithuanian economy to contract by 0.1% of GDP in 2020.

Although Lithuanian exports to Russia and Belarus will be sharply and permanently reduced by the Russia-Ukraine conflict, the impact on the Lithuanian economy is ultimately muted by the fact that around two-thirds of all exports to Russia and Belarus are re-exports which make a much lower contribution to gross value added than goods and services exports produced in Lithuania. The Lithuanian economy also has a demonstrated ability to quickly adapt and adjust to external shocks, including the imposition of EU-Russia sanctions in 2014, the coronavirus pandemic and the global financial crisis which had a severe initial impact on the Lithuanian economy. As such, Moody's expects that most Lithuanian exporters, with the exception of rail cargo transport services, will be able to redirect the vast majority of exports to Russia and Belarus to other markets over the coming two to three years, limiting the risk of a lasting negative impact on Lithuania's economic strength.

Weaker growth coupled with higher government spending on for instance measures to help consumers cope with rising energy prices, national defense, the accommodation of Ukrainian refugees and on the maintenance of railway infrastructure will also lead to a deterioration of the Lithuania's public finances. Moody's currently forecasts a headline government deficit of 4.9% of GDP this year, up from 2.5% of GDP in our February forecast for Lithuania. This will in turn lead Lithuania's government debt burden, which declined in 2021 following the pandemic shock of 2020, to stabilize at around 43% of GDP in 2022 and 2023. That said, Lithuania's debt burden will remain clearly lower than the median of its A2 rated peers of around 55% of GDP in 2022. Lithuania's debt affordability metrics are also among the strongest of its A2 peer group, and as a euro area country it also benefits from the ability to issue domestic currency debt in a reserve currency, further mitigating risks to its fiscal strength or the government's access to funding.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Lithuania's ESG Credit Impact Score is neutral to low (CIS-2), reflecting low exposure to environmental risk, moderately negative exposure to social risks, as well as a very strong governance profile.

Lithuania's overall E issuer profile score is neutral to low (E-2), reflecting low exposure to environmental risks across most categories.

We assess Lithuania's S issuer profile score as moderately negative (S-3), reflecting low exposure to social risks across most categories, with the notable exception of demographics. Although projections for increases in ageing-related government spending are relatively contained, the country's adverse demographic profile will act as a brake on the supply of labour and the economy's potential growth rate over coming decades.

Lithuania receives a positive G issuer profile score of (G-1). The country scores strongly for all of our sub-factors for the assessment of institutions and governance strength, and the institutional environment continues to benefit from Lithuania's membership of the European Union and euro area.

The publication of this rating action deviates from the previously scheduled release dates in the EU sovereign calendar published on www.moodys.com. This action was prompted by the Russian invasion of Ukraine and the related increase in geopolitical risk.

GDP per capita (PPP basis, US$): 39,214 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -0.1% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.1% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -7.2% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 7.4% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 27 April 2022, a rating committee was called to discuss the rating of the Lithuania, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A resolution of the Russia-Ukraine conflict that leads to a lasting reduction of geopolitical tensions and uncertainty affecting Lithuania, coupled with a sustained and material reduction of the government debt burden and a continued improvement of Lithuania's already strong institutional environment that brings it more into line with close peers such as Estonia (A1 stable) and the Czech Republic (Aa3 stable) could eventually put upward pressure on the A2 ratings.

Moody's considers a military attack on Lithuania, which would imply a military confrontation also with NATO, as a very low risk, high impact scenario. In such a scenario, Lithuania's rating would come under significant additional pressure, likely resulting in a multi-notch rating downgrade. Unconventional or hybrid attacks could also put downward pressure on the ratings if such attacks were to have a material and lasting negative impact on the fundamentals of Lithuania's credit profile, although the magnitude of the negative impact of such attacks is likely to be much more limited than that of a conventional military conflict directly affecting Lithuania.

Negative pressure could also build on Lithuania's ratings if the lasting damage to Lithuania's economic strength resulting from the Russia-Ukraine conflict is more severe than Moody's expectations for a relatively limited permanent negative impact. If the change in the geopolitical environment and negative economic spillover effects from the Russia-Ukraine conflict were to lead to a significant and sustained increase in Lithuania's debt burden and deterioration of its debt affordability metrics, this could also place negative pressure on the A2 ratings.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Petter Bryman
AVP-Analyst
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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