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
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same series, category/class of debt, security or pursuant
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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
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Canary Wharf, London E14 5FA under the law applicable to credit
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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.
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for additional regulatory disclosures for each credit rating.
Petter Bryman
Asst Vice President - Analyst
Sovereign Risk Group
Moody's France SAS
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Alejandro Olivo Villa
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
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