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Rating Action:

Moody's upgrades Lithuania's ratings to A2, outlook stable

12 Feb 2021

Paris, February 12, 2021 -- Moody's Investors Service ("Moody's") has today upgraded the Government of Lithuania's long-term issuer and senior unsecured ratings to A2 from A3. Concurrently, the senior unsecured MTN programme rating has been upgraded to (P)A2 from (P)A3. The outlook has been changed to stable from positive.

The key drivers of the decision to upgrade Lithuania's ratings are:

1) Lithuania's strong medium-term growth prospects, supported by increased EU-funded investment, structural reforms to raise productivity growth and improved migration and demographic trends, and exemplified by the economy's relative resilience to the pandemic shock;

2) Moody's expectation that Lithuania's debt burden will remain lower than that of most A2 rated peers notwithstanding the impact of the crisis, with fiscal strength supported by strong debt affordability metrics and a reduction of foreign currency debt.

The stable outlook reflects our expectation that the Lithuanian economy will remain relatively resilient to the impact of the coronavirus and will return to robust rates of growth in 2021 and beyond. It also reflects our expectation that the government debt burden will broadly stabilize from 2022 onwards as the economy and public finances improve in the wake of the crisis. Moreover, Moody's expects geopolitical risks stemming from Lithuania's tense relations with Russia to remain stable over the coming 12-18 months.

Lithuania's local and foreign-currency country ceilings remain unchanged at Aaa.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO A2

FIRST DRIVER: LITHUANIA'S STRONG MEDIUM-TERM GROWTH PROSPECTS, SUPPORTED BY INCREASED EU-FUNDED INVESTMENT, STRUCTURAL REFORMS TO RAISE PRODUCTIVITY GROWTH AND IMPROVED MIGRATION AND DEMOGRAPHIC TRENDS, AND EXEMPLIFIED BY THE ECONOMY'S RELATIVE RESILIENCE TO THE PANDEMIC SHOCK

The outbreak of the coronavirus and the restrictions imposed to curb its spread caused the Lithuanian economy to contract in 2020, following ten consecutive years of robust growth averaging 3.6% of GDP per year since the country's 2009 financial and economic crisis. That said, the -0.9% of GDP contraction of the Lithuanian economy in 2020 will likely be the smallest of any sovereign in the European Union (Aaa stable), reflecting structural features which illustrate economic resilience and dynamism. Although Moody's expects the pandemic to continue to weigh on economic activity particularly in the first half of 2021, the Lithuanian economy's demonstrated resilience to date (which is also supported by a favourable economic and export structure as well as significant government support to the economy) suggests that the risk of significant lasting damage to the economy's growth potential is limited.

To the contrary, a number of factors further support Moody's expectation that Lithuania will maintain its robust growth potential also in the wake of the pandemic, with the economy returning to growth of 2.6% of GDP in 2021 and averaging growth of 3.3% in 2022-2024.

Moody's expects that the agreement on the EU's 2021-2027 Multi-Annual Financial Framework (MFF) and Next Generation EU (NGEU) recovery fund will lead to a material increase in public investment in Lithuania. Although funding under the MFF will be reduced compared to the 2014-2020 budget cycle, we expect that the 6.6% of 2018 GDP in grants Lithuania will receive under NGEU[1] will lead to an overall increase in EU grant funding over the coming seven-year period. In addition, Lithuania is entitled to borrow a further 6.8% of GNI for investment projects under NGEU. These funds will directly support investment and growth when disbursed, predominantly in 2022-2024. Most importantly, the strength of Lithuania's executive and legislative institutions supports Moody's expectation that this funding will be effectively targeted and spent to promote objectives such as digitalization and the green transition, thus also supporting productivity and economic growth on a more lasting basis.

Detailed plans for how this funding will be spent will be set out later this year in Lithuania's Recovery and Resilience Plan, which we also expect will tie funding to meeting structural reform objectives in areas such as education and innovation, health care and taxation. Lithuania's previous government already adopted a range of reforms in these fields from 2016-2020, which if fully implemented as planned will also support the economic and fiscal outlook over Moody's forecast horizon until 2024 and beyond.

Moody's also expects that Lithuania's medium-term growth potential will continue to be supported by the shift in international migration patterns that has occurred in recent years. Lithuania recorded the first years of positive net immigration in its independent history in 2019 and 2020 [2]. This shift reflects both a significant increase of labour immigration from countries such as Belarus (B3 stable) and Ukraine (B3 stable) but also a trend of increasingly positive net migration by Lithuanian citizens. This shift likely reflects significant labour shortages and strong wage growth in Lithuania, itself in part attributable to the country's shrinking working age population, as well as stricter post-Brexit immigration rules to the United Kingdom (Aa3 stable), a favoured destination of Lithuanian emigrants. As such, Moody's expect this shift in migration trends to persist over the course of our forecast horizon, alleviating pressures on the supply of labour and the country's overall growth potential.

SECOND DRIVER: MOODY'S EXPECTATION THAT LITHUANIA'S DEBT BURDEN WILL REMAIN LOWER THAN THAT OF MOST A2 RATED PEERS NOTWITHSTANDING THE IMPACT OF THE CRISIS, WITH FISCAL STRENGTH SUPPORTED BY STRONG DEBT AFFORDABILITY METRICS AND A REDUCTION OF FOREIGN CURRENCY DEBT

Moody's expects that the economic contraction caused by the outbreak of the coronavirus and the measures adopted by the Lithuanian government to mitigate its impact on the economy led to a deficit of 7.6% of GDP in 2020 and an increase in the government debt-to-GDP ratio from 35.9% in 2019 to 47.5% at the end of 2020. That said, Lithuania's total debt burden had fallen markedly prior to the pandemic and will remain below the A2 and A3 rating medians despite the impact of the current crisis. Although Moody's expect the 2021 headline deficit will remain substantial at 7.1% of GDP and the government debt burden to continue increasing to just over 50% of GDP at the end of year, we expect the debt burden to remain the third lowest of the eight A2 rated sovereigns. Furthermore, Moody's expects that the economy's robust growth potential and the government's strong track record of fiscal management over the past decade will support a stabilization of the debt burden from 2022.

The affordability of Lithuania's debt burden has improved markedly since Moody's 2015 upgrade of the sovereign rating to A3 from Baa1. We expect that the ratio of interest payments to government revenue declined from 4.4% in 2015 to 1.4% at the end of 2020. This is also significantly stronger than the median of both A3 and A2 rated peers (excluding Lithuania) which we expect stood at 6.8% and 3.7% respectively at the end of 2020.

Lithuania's improved debt affordability since 2015 reflects factors common to many other A2 and A3 rated sovereigns, such as the global low-yield environment of recent years and purchases of euro area sovereign bonds by the European Central Bank since 2015. However, despite the significant increase in Lithuania's debt burden in 2020, Moody's expects that its debt affordability metrics will continue to improve in coming years as two large USD-denominated bonds, issued at coupons and yields of between 6% and 7% in the wake of the global financial crisis will mature in 2021 and 2022[3]. A third such bond matured already in 2020, and together these three bonds accounted for more than 20% of Lithuania's total debt in 2019. We thus expect Lithuania's interest payments to revenue ratio to continue to improve, reaching 1.1% in 2022 -- the lowest of any A2 rated sovereign based on our current forecasts. The redemption of these bonds will also eliminate Lithuania's remaining foreign currency debt, a further positive for Moody's assessment of the government's fiscal strength.

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.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the Lithuanian economy will remain resilient to the impact of the pandemic and return to robust rates of growth in 2021 and beyond. It also reflects Moody's expectation that the government debt burden will broadly stabilize from 2022 onwards as the need for extraordinary economic support measures wanes and the government's strong fiscal policy effectiveness combine to reduce the fiscal deficit. Moreover, Moody's does not see the Lithuanian banking system as posing a material risk for the sovereign in the current crisis, nor do we expect geopolitical risks stemming from Lithuania's tense relations with Russia to change materially over the coming 12-18 months.

GDP per capita (PPP basis, US$): 38,587 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.3% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.7% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.3% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 3.3% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a3

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

On 09 February 2021, 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 materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's institutions and governance strength have not materially changed. The issuer's susceptibility to event risks has not materially changed.

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

FACTORS THAT COULD LEAD TO AN UPGRADE

A sustained and material reduction of the government debt burden following the pandemic would put further upward pressure on the rating, as would 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). A reduction in geopolitical tensions with Russia or successful efforts to materially mitigate such risks would also be credit positive.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Conversely, negative pressure could build on the rating if the public finances continue to deteriorate relative to peers and Moody's current expectations in the wake of the pandemic. A failure of Moody's expectations underpinning the post-pandemic growth outlook to materialize would also be credit negative, as would evidence that Lithuania's institutions are struggling to manage the many economic, fiscal and social challenges wrought by the pandemic. A sustained and material increase in geopolitical tensions with Russia could also put downward pressure on the rating.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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.

REFERENCES/CITATIONS

[1] European Commission 12-Feb-2021

[2] Statistics Lithuania, Eurostat 12-Feb-2021

[3] Lithuanian Ministry of Finance 12-Feb-2021

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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo Villa
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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

No Related Data.
© 2021 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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