1. EXECUTIVE SUMMARY
The conservative Homeland Union – Lithuanian Christian Democrats (HU-LCD) won the October 2020 election and formed a ruling coalition with the Liberal Movement and the Freedom Party.
Lithuania's economic contraction in 2020 was among the smallest in Europe, but its recovery will be slower than in the other Baltic states in 2021.
Budget and debt outlook
Ingrida Simonyte, the new Lithuanian PM, says her priority will be to address growing public debt; with the state budget leaner in years to come as the result of the COVID-19 crisis.
Real economy outlook
The rapid modernisation of Lithuania’s economy and diversified industrial sector have supported economic growth in recent years.
There were some major development in the energy sector in Lithuania in 2020, with the results of the projects to be felt throughout 2021 and beyond.
Although the news on the COVID-19 vaccine is encouraging, new virus outbreaks in 2021 causing potential prolonged lockdowns over the coming months could portend a bumpy economic road ahead. This backdrop will likely create above average volatility next year, with downside protection coming in the form of fiscal and monetary policy support.
2. POLITICAL OUTLOOK
The opposition conservative Homeland Union – Lithuanian Christian Democrats (HU-LCD), known colloquially as the Conservatives, won the two-round parliamentary election in Lithuania in October and entered into a centre-right ruling coalition with the Liberal Movement and the Freedom Party. The HU-LCD secured 50 seats, while the Liberal Movement and the Freedom Party secured 13 and 11 seats respectively, meaning that the coalition will have 74 representatives in the 141-seat Seimas.
Political scientists say the election results reflect a wish for change. But the Lithuanian Farmers and Greens Union (LFGU), which ruled Lithuania in 2016-2020, scored fairly well in rural areas and avoided a crushing defeat. The Farmers and Greens Union will have 32 representatives.
The Social Democratic Party of Lithuania will have 13 seats in the new parliament. The Labour Party secured ten mandates, and the Electoral Action of Poles in Lithuania – Christian Families Alliance and the Social Democratic Labour Party of Lithuania will have three lawmakers each.
Ausrine Armonaite, leader of the Freedom Party, has been elected to the Lithuanian Seimas in the special constituency established for Lithuanians living abroad. Armonaite received over 12,900 votes, or 53.15% of the total, figures from the Central Electoral Commission show.
Notably, half of the 14-member cabinet will be women and the average age of the ministers is just over 40. The new cabinet has been praised as most unusual, meaning very young and liberal, compared to other governments since the country gained independence in 1990.
Among the new government’s foreign policy priorities, it has pledged to help those fighting for freedom all over the world and specifically to support pro-democracy protesters in Belarus. It also identifies Paris and Berlin as the key “EU centres” to build stronger relationships with, calls for a “real strategic partnership” with the other Baltic states, and advocates for EU enlargement.
Lithuania aims to deepen transatlantic ties with the US, develop a “strategic partnership” with Poland and achieve closer cooperation with the UK and the Lithuanian diaspora there.
The government wants the country to punch above its weight in international politics by spreading Lithuania’s historical narrative, spreading the idea of Lithuania as a space for freedom by admitting political asylum seekers, underlining Lithuania’s economic innovations, transforming Lithuania into a country of green technology and establishing an agency to attract experts and investment.
The government programme pledges to make its work more transparent, saying that open data will be the cornerstone behind the government’s decisions and communication.
In the healthcare sector, besides the pressing need to target the pandemic, the government has pledged to improve efficiency and assign more financing for GPs, review the wage system for all healthcare workers and raise life expectancy in the country by one year to 77.
The new government has pledged to prepare the National Regional Development programme, with the aim of establishing specialised and effective economic growth plans for each of the country’s regions a priority.
Challenges faced by the government include the lack of a high-tech workforce, poor demographics and emigration. Other adverse factors for the Lithuania economy include the escalation of the political situation in Belarus and the impact of the potential imposition of economic sanctions on demand for freight transportation through the seaport of Klaipeda.
President of Belarus Alexander Lukashenko made threats against Lithuania on August 28, 2020. He stated that he had submitted to the government a proposal to reorient all trade flows from Lithuanian ports to other directions. The Lithuanian port of Klaipeda plays a key role for Belarusian cargo traffic. Firstly, the Klaipedos Nafta oil terminal is located there, which allows Belarusian oil products to be exported, and it receives oil purchased by Minsk from countries other than Russia.
Secondly, the Biriu Krovini Terminalas terminal for mineral fertilisers in Klaipeda is also largely focused on the Belarusian cargo traffic. In 2019 alone, it handled 10mn tonnes of cargo, 98% of which were products of Belaruskali, the Belarus fertiliser holding. Consequently, if Belarus stops the transit of mineral fertilisers through Klaipeda, the terminal will actually be left without loading, and its employees without work and income. The volume of tax revenues to the Lithuanian budget will also decrease.
Belarus’s opposition leader in exile, Svetlana Tsikhonouskaya, said in early December 2020 she will urge the EU to impose sanctions on Belarusian companies, including Belaruskali.
3. MACROECONOMIC OUTLOOK
Lithuania has seen significant growth over recent years, including in 1Q20, induced by the rapid modernisation of its economy, a diversified industrial sector and a well-performing banking system. The sudden arrival of the COVID-19 pandemic delivered a big blow to the country’s economy. Nevertheless, Lithuania's economic contraction in 2020 will be the smallest one in Europe, the International Monetary Fund (IMF) said in October 2020.
According to IMF projections quoted by the Bank of Lithuania, the country's economy will contract 1.8% in 2020, before growing 4.1% in 2021. In its previous report in June, the IMF expected Lithuania's GDP would fall 8.1%. However, the numbers are subject to change as a result of the rapidly changing COVID-19 situation. As of early December 2020, Lithuania had the sixth highest COVID-19 rate per 100,000 people in the entire European Union.
The EC expects Lithuania's 2020 GDP drop to be the smallest in EU – the Commission says Lithuania's economy will contract by 2.2% in 2020. The latest forecast differs greatly from the 7.9% decline projected by the EU's executive body in May 2020. That would have been the sharpest fall in the Baltic region.
For comparison, in its Autumn 2020 European Economic Forecast, the Commission forecast GDP contractions of 5.6% in Latvia and 4.6% in Estonia.
Meanwhile, according to the IMF's latest World Economic Outlook, published on October 13, 2020, Estonia and Latvia's GDP are estimated to shrink 5.2% and 6% respectively in 2020 and grow 4.5% and 5.2% in 2021.
However, Lithuania's projected recovery in 2021 is slower than Latvia's and Estonia's, and below the average rates for the EU and the euro area.
At the beginning of the pandemic in March 2020, the Lithuanian government raised its borrowing limit to respond to the economic challenges of the pandemic. In May 2020, it unveiled a €6.3bn stimulus plan that includes national and European funds.
The money helped Lithuanian companies weather the first wave of COVID-19 very well, but rising unemployment and social exclusion will likely grow in 2021, in the immediate aftermath of the COVID-19 crisis.
Lithuania’s exports of goods and services bounced back at the end of 2020, growing 1.6% in Q320 after falling by 11.3% y/y in the previous quarter, pointing to a recovery in foreign demand. In addition, imports of goods and services declined at a much slower rate of 1.8% in Q32020 (Q2 -18.2% y/y).
Lithuania's monthly annual deflation rate, as measured by the EU Harmonised Index of Consumer Prices (HICP), stood at 0.2% in November 2020, initial data from the country's statistics office, Statistics Lithuania, showed on November 27, 2020. The EU-harmonised annual rate stood at 0.3%.
The annual consumer price index was driven up by an increase in prices for healthcare goods and services, alcoholic beverages and tobacco products, furnishings, household appliances and daily household care goods and services.
This was partly offset by a decrease in the prices for transport, housing, water, electricity, gas and other fuel goods and services.
In February 2020, Fitch upgraded Lithuania’s credit rating for the first time in six years. Later the same month, Standard & Poor’s also upgraded the country’s credit rating to A+, in what Lithuanian Finance Minister Vilius Sapoka said was a “historic moment”.
Lithuania's ratings reflect high governance indicators and a credible policy framework supported by EU membership, against a lower level of GDP per capita relative to the 'A' category median, and a small and open economy exposed to external shocks.
Lithuania's flexible economy, with diversity in industry and export markets, and lack of macroeconomic imbalances, including a low level of private sector indebtedness — in 1Q20 non-financial corporate debt stood at 42% of GDP and household sector debt at 23% of GDP — are fundamentals that will help support a gradual economic recovery in 2021. Fitch forecasts real GDP to grow by 4.4% in 2021 and 3.3% in 2022, driven mainly by domestic demand. The contribution from net exports is projected to remain negative in 2020-2021, weighed down by a weak demand outlook in key trading partners (e.g. Russia, Latvia, Germany and Sweden).
The value of Lithuanian residents’ bank deposits has grown by around €1.4bn since the start of the pandemic in March 2020 to reach €16.6bn, which is the fastest growth rate in the euro area, Lithuania’s central bank said.
According to Paulius Morkunas, chief economist at the central bank's macroprudential analysis division, the autumn quarantine did not stop that upward tendency as banks have seen household deposits grow by around €1.4bn since March, which is almost triple the 2017-2019 average for March-September.
Deposits have been almost continuously growing since 1994, reaching a record high in September 2020.
This means that although part of the population will struggle to make a living in 2021 and will have to depend on benefits, many others, with larger savings and still opaque possibilities of travelling, will invest their money in real estate, aspecially in the resort municipalities such as Neringa or Palanga on the Baltic coast. In the two municipalities, real estate sales have been up by one third y/y.
At the end of 2020, the Lithuanian banking sector was in a much stronger position to withstand an economic shock than it was at the onset of the global financial crisis in 2009-2010. The banking sector is highly profitable and well capitalised, dominated by subsidiaries of Nordic banks.
4. BUDGET AND DEBT OUTLOOK
The state's revenue for 2021 is budgeted at €11.385bn, down by 1.3% compared to the 2020 plan. Expenditure is projected to grow by 21% to €15.49bn.
The state budget deficit in 2021 is estimated at €4.105bn, up by €2.857bn, or 3.3 times, from 2020’s projected €1.248bn.
Lithuania's state budget revenue, including EU and other international assistance funds, will be smaller in 2021, compared to this year's budget, and expenses will grow.
The minimum monthly wage will grow from January 1, 2021, from €607 to €642 before tax, and the monthly child benefit will increase from €60 to €70. The average old-age pension should increase by about 7% in 2021, from €377 to €404,
The Lithuanian central government's budget deficit is estimated at 5% GDP in 2021. The country's debt is projected at 50.2% of GDP in 2021, according to the bill.
Lithuania is a net external debtor (9.2% of GDP as of 2019) and held a negative net international position of 23.7% of GDP in 2019. Projected current account surpluses, of 2.9% of GDP in 2020 and 3.8% of GDP in 2021, will support a continued gradual improvement in external metrics. Gross external debt is highly inflated by European Central Bank (ECB) operations and intra-company debt, owing to the large presence of foreign banks in Lithuania, according to rating agency Fitch.
Direct measures taken during the pandemic included payments to the self-employed and small businesses affected by COVID-19, COVID-19-related health sector costs, in addition to deferrals in tax payments (applicable to personal income tax, VAT and social security contributions). Including the impact from automatic stabilisers, Fitch estimates Lithuania's headline fiscal balance to deteriorate to a deficit of 12.1% of GDP in 2020, from a surplus of 0.3% of GDP in 2019. Unwinding of some discretionary measures and a rebound in economic activity should shrink the deficit to 3.0% of GDP in 2021.
Significant fiscal easing will increase the general government debt-to-GDP ratio to 53.8% in 2020 and 54.9% in 2021 from 36.2% of GDP in 2019. However, risks from higher government debt over the short to medium term are mitigated by favourable financing conditions supported by ECB measures and improving debt composition. The effective cost of new government borrowing was 0.4% at end-June, with an average maturity of debt of 9.8 years.
Foreign-currency debt will be fully paid off by 2022, after standing at 9.3% of GDP in 2020. Upcoming debt maturities are manageable, averaging 7.4% of GDP in 2020-2022. Fiscal risks from potential contingent liabilities are low. According to Fitch, Lithuania’s debt ratios will remain slightly below the projected median ratios of its 'A' category peers (56.3% in 2020 and 59.5% in 2021).
5. REAL ECONOMY OUTLOOK
Lithuania's registered unemployment rate rose by 0.8% in October 2020 to reach 14.9%, the country's Employment Service said on November 9, 2020. Unemployment and social exclusion will likely grow in 2021 as a result of the COVID-19 crisis. The news signals trouble ahead for the country's new Conservative-Liberal coalition, which signed a coalition agreement on November 9. The number of jobseekers totalled 256,800 on November 1, 2020.
Lithuania has been allocated a €300mn loan from the European Union to help the country preserve jobs during the coronavirus pandemic. Lithuania is set to receive a total of more than €600mn under the SURE instrument. The first loan was expected to come in two parts at the end of 2020, a five-year loan of €200mn with a zero interest rate and a 30-year €100mn loan with a 0.3% interest rate.
In addition, on October 6 Lithuania officially launched its business support fund, worth €1bn, aimed at providing temporary support to medium-sized and large enterprises affected by the coronavirus crisis. The tasks of the fund include supporting sectors that are considered important for the national economy and their preparation for recovery, promotion of capital markets, mobilisation of institutional investors and the pursuit of investment returns for the participants of the fund.
The government will initially invest €100mn and provide state guarantees for bonds, worth up to €400mn, which will be issued to raise additional money for the fund. The remaining €500mn is expected to be raised from private investors. The European Commission approved the support scheme in May.
There have also been some major development in the energy sector in Lithuania in 2020, with the results of projects to be felt throughout 2021 and beyond.
The European Commission allocated €720mn for the second stage of the synchronisation of the power grids of three Baltic countries and Poland with that of continental Europe on October 1. Of the amount, €300mn will go to Lithuania.
The total amount earmarked by the Commission matched the maximum co-financing rate of 75%. The key projects of the synchronisation – the construction of Harmony Link, a 700 MW submarine HVDC cable, and synchronous compensators – will be financed with the funds.
Lithuania’s €360mn Kauno Kogeneracine Jegaine (Kaunas Cogeneration Power Plant), a joint venture between state-owned energy company Ignitis Grupe and Finnish-owned Fortum Heat Lietuva, has launched commercial operations. Built at the Kaunas free economic area, the plant burns non-recyclable household waste and non-hazardous industrial waste to produce energy. Its capacity will be sufficient to generate about 40% of the city's centrally supplied heat energy and cover the needs of some 230,000 households. The project was financed using EU funding (up to €140mn), a European Investment Bank's (EIB) loan (up to €190mn) and Ignitis Grupe's own funds.
6. MARKETS OUTLOOK
Lithuania’s Ignitis Grupe held an IPO in 2020, setting the final price at €22.5 per share. This came toward the end of a year during which the most tangible impact of the global COVID-19 health crisis on the NASDAQ Baltic stock exchanges was reflected in late 2020 as an increase in trading activity and a decrease of market prices. In 2019 the average daily share turnover was equal to €1.07mn, while during March 2020, when the pandemic was starting to spread through the Baltic states, the average daily share turnover increased to €3.5mn.
As the Baltic states closed their borders in the spring, the companies that were affected the most were those whose business relied mainly upon tourism, such as travel business Novaturas and ferry operator Tallink Group.
The specific COVID-19 vaccine impact is difficult to distinguish from other factors that affect share price development and trading activity, the NASDAQ bourse said.
Yet, if looking at the overall trading activity, during the middle of November, when the news about successful vaccine trials came out, there was a small increase in both turnover and the number of trades executed on the market. The news had a positive impact on companies dependent on tourist flows such as Novaturas.
Although the news on COVID-19 vaccine is encouraging and uplifting, the possibility of new outbreaks of the virus in 2021 causing potential prolonged lockdowns over the coming months could portend a bumpy economic road ahead. The backdrop will likely create above-average volatility in 2021, with downside protection coming in the form of fiscal and monetary policy support.
But with a vaccine on the way hope will prevail as the Baltic states’ additional monetary stimulus revs up the monetary supply and stokes growth and inflation expectations.
Analysts expect investor appetite in the Baltics in 2021 will continue to tilt towards stocks that favour diversification and both growth and value segments of the market, in a relatively low interest rate environment that favours equities, real assets and other asset classes over fixed income for intermediate and longer-term objectives. But of all these factors, the COVID-19 vaccine rollout is arguably the most important in determining the trajectory of NASDAQ Baltics in 2021.