Frankfurt am Main, August 23, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Lithuania's A3 long-term issuer and senior unsecured ratings
as well as the (P)A3 senior unsecured MTN programme rating. Moody's
has also affirmed Lithuania's (P)P-2 domestic currency short-term
rating. The outlook has been changed from stable to positive.
The key drivers of the decision to change the outlook from stable to positive
are:
1) The continued improvement of Lithuania's fiscal strength,
underpinned by gradually declining government debt relative to GDP,
improving debt affordability and a reduction of ageing-related
fiscal risks;
2) Improving prospects for Lithuania's medium to long term growth
potential, supported by significant government structural reform
efforts and improving migration trends that support the economy's
labour supply
The affirmation of Lithuania's A3 ratings reflects the country's
relatively high wealth levels and significant economic flexibility.
It also reflects Lithuania's very high institutional strength,
which is supported by integration into European and Western institutional
structures. The government's fiscal metrics also remain strong
compared to similarly rated peers. However, geopolitical
risks emanating from Russia continue to be a negative feature of the country's
credit profile.
Lithuania's long-term local and foreign-currency bond and
deposit ceilings remain unchanged at Aaa. The short-term
foreign currency bond and deposit ceilings remain unchanged at P-1.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN THE OUTLOOK TO POSITIVE FROM STABLE
FIRST DRIVER: THE CONTINUED IMPROVEMENT OF LITHUANIA'S FISCAL
STRENGTH, UNDERPINNED BY GRADUALLY DECLINING GOVERNMENT DEBT RELATIVE
TO GDP, IMPROVING DEBT AFFORDABILITY AND A REDUCTION OF AGEING-RELATED
FISCAL RISKS
Lithuania continues to see an improvement to its key fiscal metrics.
Following a process of post-crisis fiscal consolidation and a pick-up
in economic growth, the government's headline fiscal balance
has been in surplus since 2016 and we expect the government to continue
to record moderate fiscal surpluses of 0.4 and 0.3%
of GDP this year and the next, respectively. These trends
have also supported a gradual decline of the government's debt-to-GDP
ratio which reached 34.2% in 2018, down from a post-crisis
peak of 42.6% in 2015 and below the current A rated median
of 37.0% (excluding Lithuania).
While the government's debt burden remains more than double the
14.6% of GDP recorded in 2008, we expect the affordability
of the debt to surpass that of the pre-crisis lows in coming years.
The share of interest payments to revenue stood at 2.6%
at end-2018, compared to 1.9% in 2008 and the
current A rated median of 3.9% (excluding Lithuania),
but we expect this to decline to below 1% by 2022 as bonds issued
at high coupons in US dollars in the wake of the financial crisis mature
and are refinanced at significantly lower interest rates. This
also entails that Lithuania's government debt, 23.2%
of which was denominated in foreign currency at the end of 2018,
is likely to be wholly denominated in euros by 2022.
Although Lithuania continues to face economic and fiscal challenges related
to population ageing, reforms undertaken to the country's
pension system over recent years have markedly reduced ageing-related
fiscal risks. Whereas the European Commission in its 2015 Ageing
Report projected total ageing-related expenditure would increase
from 16.6 to 19.6% of GDP from 2020 to 2030,
updated projections in the 2018 Ageing Report forecast a more muted increase
in ageing expenditure from 15.7 to 16.7% of GDP over
the same period. This primarily reflects such reforms as a change
in the indexation mechanism for pensions, a gradual increase of
the statutory retirement age as well as longer eligibility periods for
the receipt of a full state pension.
SECOND DRIVER: IMPROVING PROSPECTS FOR LITHUANIA'S MEDIUM
TO LONG TERM GROWTH POTENTIAL, SUPPORTED BY SIGNIFICANT GOVERNMENT
STRUCTURAL REFORM EFFORTS AND IMPROVING MIGRATION TRENDS THAT SUPPORT
THE ECONOMY'S LABOUR SUPPLY
Lithuania has seen robust GDP growth in recent years, averaging
3.3% in 2016-2018, broadly corresponding to
European Commission estimates of the country's current potential
growth rate. This reflects strong growth in private consumption,
on the back of increasing wages in a tight labour market, as well
as solid growth in productivity and investment. We expect GDP growth
to remain robust at 3.0% this year and 2.6%
in 2020. Although Lithuania faces medium to long term challenges
related to its growth potential, government reform efforts and improving
migration trends have improved prospects for the economy's potential
growth rate over the longer term.
The Lithuanian government is seeking to support productivity growth by
reforms to the education system as well as the innovation and R&D
ecosystem. The adopted education reforms cover the full system
from primary to tertiary education and primarily seek to consolidate an
over-sized system while also increasing the attractiveness of the
teaching and research professions by increasing salary levels.
The adopted innovation and R&D reform similarly seeks to provide clearer
structures for government support to innovation and improving ties between
business and the research community. Further progress in fully
implementing these reforms would also be important for strengthening Lithuania's
medium to long term growth potential.
With respect to its demographic profile, Lithuania saw a sharp shift
in migration patterns in 2018, with full year net emigration of
just over 3000 people and positive net immigration of more than 4000 people
registered in the first half of 2019. This contrasts markedly with
average annual net emigration of close to 27000 in 2015-2017 --
around 0.9% of the total population per year. If
these trends of broadly balanced migration are sustained over time,
this would not eliminate but significantly alleviate the underlying demographic
pressures on the Lithuanian economy and its medium to long term growth
potential.
While the government is working to alleviate demographic pressures by
providing additional support to families with children, actively
promoting return migration and facilitating labour migration from countries
like Ukraine and Belarus, a key driver behind the changing migration
patterns is also increasing wage and wealth levels in Lithuania.
At 34,826 USD, per capita incomes in purchasing power parity
terms at end-2018 were more than 50% higher than their pre-crisis
peak in 2008 and broadly comparable to more highly rated regional peers
such as Estonia (A1, stable) and Slovakia (A2, positive) while
above neighbouring Latvia (A3, stable) and Poland (A2, stable).
While increasing wage levels and unit labour costs have to date not had
a notable impact on Lithuania's export performance or export market
shares, sustaining robust levels of productivity growth will become
increasingly important for the Lithuanian economy to ensure that continued
increases in wage and wealth levels are sustainable over time.
RATIONALE FOR THE AFFIRMATION OF THE RATING AT A3:
The affirmation of the Government of Lithuania's ratings at A3 reflects
the country's robust track record of growth and solid near to medium
term economic growth prospects, as well as its comparatively elevated
wealth levels and high level of economic flexibility and resilience.
It also reflects Lithuania's strong institutional environment,
which continues to be supported by its integration into European and Western
institutions and evidenced by the government's on-going reform
efforts to tackle the country's key structural economic challenges.
Lithuania's debt levels and debt affordability metrics also remain
stronger than the A rated median and we expect these to further improve
in coming years. Set against this, we continue to believe
that a moderate level of geopolitical risk, stemming from geopolitical
tensions with Russia, remains a negative feature of Lithuania's
rating profile - as it is for the Government of Estonia (A1,
stable) and the Government of Latvia (A3, stable).
FACTORS THAT COULD LEAD TO AN UPGRADE
A continued improvement of the government fiscal metrics, including
an expansion of the revenue base and reduction of the size of the informal
economy, would support the case for an upgrade to A2. The
effective implementation of adopted structural reforms to boost competitiveness
and raise long-term growth prospects would also be credit positive,
as would a continuation of recently improving migration trends.
A general easing of geopolitical tensions would similarly be credit positive.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Conversely, a material deterioration in public finances that reverses
the decline in Lithuania's debt to GDP ratio could put downward pressure
on the rating. A severe escalation of geopolitical risk that materially
undermines Lithuania's economic and fiscal performance could also lead
to a removal of the positive outlook and eventually trigger a rating downgrade.
GDP per capita (PPP basis, US$): 34,826 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.5% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.8%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: 0.7%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.5% (2018 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 August 2019, 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 institutional strength/framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has materially increased. The issuer's
susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
