Lithuania joins the 'A' team

By bne IntelliNews June 26, 2014

Mike Collier in Riga -


Lithuania received a boost on June 26, ahead of its expected eurozone accession in the new year, as Fitch Ratings handed it an upgrade from 'BBB+' to promote it to the 'A Team'.

Fitch's new rating of the country's  long-term foreign currency credit stands at 'A-', while the outlook moved to stable from positive. In some terms, the upgrade was something of a surprise, as Fitch's next scheduled review date for Lithuania wasn't due until October 3. However, the agency said "developments in Lithuania warrant such a deviation from the calendar." 

Those developments are led by Lithuania's clear path towards the joining the euro. The European Commission's Economic and Financial Affairs Council (ECOFIN) announced on June 20 that it has recommended Lithuania becomes the 19th member of the single currency. The move will be rubber-stamped by the European Council in July.

Fitch's move is just the latest in a series of Baltic upgrades as the region continues to bounce back after its cataclysmic economic crisis from 2008-11 and deepens its links with the EU by adopting the euro. The same agency upgraded Latvia's sovereign rating to 'A-' from 'BBB+' on June 20; following in the footsteps of Moody's and Standard & Poor's, it was Riga's third upgrade in nearly as many weeks.

A year behind its Baltic neoghbour in joining the euro, rating action on Lithuania has been a little more varied. In April, S&P raised the country two notches to A-. However, while Moody's has not moved on Lithuania's rating recently, a March 28 report praised its "very high institutional strength, manageable government debt levels and declining fiscal deficits," suggesting an upgrade may not be too far away.

Vilnius has long been trying to persuade a sceptical population that joining the single European currency would bring benefits for the economy. "Euro adoption will enhance Lithuania's economic policy coherence and credibility compared with the current exchange rate peg to the euro," Fitch said in its report. "It will reduce credit risks associated with foreign currency exposures on the sovereign's balance sheet and in the banking system, as well the country's still high level of net external debt. The euro's reserve currency status will enhance the sovereign's fiscal and external financing flexibility, while Lithuanian banks will gain access to European Central Bank (ECB) liquidity facilities."

"Lithuania's strong recovery from its deep economic crisis has continued and the economy displays relatively few macroeconomic imbalances. The economy has demonstrated the flexibility required to adjust to shocks without exchange rate adjustment. Fitch expects the Lithuanian economy to operate close to potential in 2014-15, registering annual average growth of 3.5%." it added.

The agency also praised the country's stable banking system and the improving quality of loan portfolios. Non-performing loans declined to 11% last year from a peak of 20% in 2010. Fitch also spoke highly of the Baltic state's "strong governance and effective policy-making institutions."

Perhaps just as importantly, Fitch identified few if any specific major risks. Lithuania faces only the kind of worries that could hit any economy, the agency said: "A severe shock that undermines macroeconomic and financial stability," or "deterioration in ... public debt dynamics." That's a contrast to its recent report on neighbouring Latvia, in which Fitch fretted over the high level of foreign cash parked in the country's banks. 

However, not everyone is convinced of the immediate benefits of euro adoption for Lithuania. The same day, Swedish-owned SEB bank, the country's largest by assets, reined in its GDP growth forecast for 2014 by 30 basis points to 2.7%. Similarly, it cut its prognosis for next year by 20bp to leav it at 3.8%, with Economist Gitanas Nauseda expecting to see households wary of over-extending themselves.

Nauseda also urged caution over Lithuanian Central Bank suggestions that euro accession will boost the country's growth rate by around a quarter of a percentage point each year. "This in no way means that GDP will be suplemented by the same neat amount [each year], but rather that is how the trend will develop over time," Nauseda said, adding that the "tangible benefits" of euro adoption would only become clear over three to five years.

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