Posts filed under ‘Economics’
The Lithuania’s Ministry of Finance announced that Standard & Poor’s (S&P) Ratings Services has revised its outlook on Lithuania by increasing it from negative to stable. The agency also declared that Lithuania’s Long Term local and foreign currency sovereign credit rating is at BBB and is Short Term rating is at A-3.This increase of ratings is due to the Cabinet’s successful budget cuts and Lithuania’s strong political will to keep its currency stable.
In the press release issued by the S&P its analyst Frank Gill said “The ratings on Lithuania reflect clear commitment across all political parties to support and implement budgetary and structural policies which anchor the currency board regime and enhance the economy’s flexible labor and goods markets”. He also added by saying, “While the resulting unemployment and deflation of nominal income are weighing on tax collection, the process should ultimately result in a stabilization of national income as net exports stimulate growth”.
This fantastic news to Lithuania, which has experienced an unprecedented drop of its GDP in 2009. According to the latest report from the Statistics Department Lithuania’s GDP in 2009 contracted by 15 pct. However, the Lithuanian GDP grew in the last two consequent quarters even though only by 0,1 pct in the last quarter of 2009.
Continuing his working visit to the U.S., Prime Minister Andrius Kubilius visited Silicon Valley, San Francisco, where he met with one of the most powerful groups in the IT sector, i.e. members of major Venture Capital Association Accel Partners and other IT investors. Accel Partners and associated investors hold many well-known IT companies, including MySpace, Walmart.com, Macromedia, etc. Henri Mossinac, who had invested in Facebook at its rudimentary stage, was also present.
Prime Minister Andrius Kubilius invited investors to turn an eye to Lithuania, a country that boasts highly skilled multilingual workforce and one of the best IT infrastructures in Europe and the world. According to the Prime Minister, Lithuania is an ideal place for venture capital to invest, as this is about the “investment in courage, and the Lithuanian IT sector is full of bold ideas”.
Investors got interested in the list of promising Lithuanian IT companies, drawn by the Lithuanian government.
The participants of the meeting included Ilja Laurs, founder and CEO of GetJar, the only Lithuanian capital company with the head office in the Silicon Valley. GetJar has grown into a world`s largest independent mobile apps store following the investment by Rich Wong from Accel Partners.
“Prime Minister Andrius Kubilius’s visit is very important in terms of Lithuania`s image building. The information American companies have about our country is scarce. Therefore, every opportunity must be seized to increase investor awareness about investment opportunities in Lithuania, and to offer an individual and flexible approach in each investment case. I am certain that the Prime Minister’s visit will yield tangible results”, – said Ilja Laurs.
The Lithuanian media announced that the Polish PKN Orlen is considering selling Orlen Lietuva refinery (former Mazeikiu Nafta) if it will fail to secure control over Klaipedos Nafta oil terminal.
According to the Polish daily Parket the most logical buyer of Orlen Lietuva would be a company from Russia. The paper quoted Pawel Burzinski, an analyst from BZ WBK saying, ‘”The sale of Mazeikiai is a very possible development if it will emerge that PKN Orlen has failed to agree with Lithuania’s Government. The sale of Mazeikiu Nafta may be launched by the decision of the concern’s (PKN Orlen) board.”
Mr Burzinski thinks that the sell off scenario could be such that in the first stage of it some 10-30 pct of Orlen Lietuva could be offered to an investor with an option of increasing its stake to more than 50 pct. In analysts’ opinion, then, the PKN Orlen eventually will withdraw from the shareholders of Orlen Lietuva.
Lithuania’s Government, on the other, regards the Klaipedos Nafta as a strategic object and has not intention of selling it to any other company. According to the TV3 programme Savaites komentarai on 24 January, the Polish PKN Orlen is planning to sell Orlen Lietuva to Russia’s Lukoil. However, the Russians would buy Orlen Lietuva only if the company ‘Klaipedos Nafta’ is included into the ‘package’.
Lithuania’s Statistics Department finally released data showing Lithuania’s GDP performance in 2009. According to the report Lithuania’s GDP in 2009 contracted by 15 pct compared with 2008.
In the last quarter of 2009 on year-on-year calculation Lithuania’s GDP shrank by 13 pct. However, according to the quarterly calculation in the forth quarter Lithuania’s GDP grew by 0,1 pct.
Opinions on Lithuania’s GDP performance in 2010 are split. However, the main message coming from this Baltic country is that Lithuania’s economy is stabilising and it stopped falling.
If one puts things in prospective in the beginning of 2009 many predicted that Lithuania’s GDP will fall back to the levels of 2004, when Lithuania entered the European Union. However, statistics show that Lithuania’s GDP returned to the levels of 2007. Hence, the crises, in terms of GDP threw Lithuania back by two years. It is bad, but could have been much worse.
I would like to offer you an interview of Lithuania’s newly sworn President Dalia Grybauskaite. The interview was published in the Lithuanian business daily Verslo žinios on July 13. Verslo žinios names this interview as a Grybauskaite’s vision for her presidency. I would highly recommend you to read it.
“Encompassing Ideals of Gandhi, Toughness of Churchill”
[Verslo žinios] Should the state limit its functions in a time of crisis or should it control the economy more?
[Grybauskaite] I think during an economic boom the state should limit its functions, and during a downturn it should be more active. I think history confirms this. Today we see that certain financial services were being developed faster than certain governments had predicted or anticipated. The Breton Woods safeguards and other mechanisms that had existed did not stop the crisis. It is necessary to look for something new. In the near future, governments will have to be more actively-involved in the markets. International organizations will have to get involved and participate in regulation as well.
[Verslo žinios] How do you imagine intervention?
[Grybauskaite] Theoretically, the free market system is a very good idea. In the global world, however, we witnessed the creation of global monopoly, not free market. Especially in the area of finances and financial instruments. This monopolistic system started controlling the global economy and market mechanisms. The free market system mutated. Governments and international organizations should create new mechanisms that would revive competition.
[Verslo žinios] What needs to be done?
[Grybauskaite] In the world there is a very interesting discussion: What can be done by big countries, which can fire up their money printing machines, and what can be done by small countries, which do not have resources or money printing machines. I think countries like Lithuania cannot increase public spending, deficit, and debt. Above all, they must reduce public spending and government apparatus and must eliminate overlapping functions of various institutes as well as obstacles for businesses. In addition, such countries must save. Small countries, which do not have resources and money printing machines, have only these options in addition to structural reforms. [passage omitted: The Baltic states should start recovering approximately six months after Europe's economic recovery].
[Verslo žinios] What reforms are the most necessary in Lithuania?
[Grybauskaite] Lithuania until now has been partially parasitizing and has been stuck in the old, inefficient economic structure. The economy lacks innovation and the service sector is underdeveloped. Our possibilities are innovation, services, science, and scientific research. Without abundance of natural resources, the biggest wealth one has is people, who must be valued. The problem is this: During the past twenty years we have freed the market and have reduced the state’s involvement in the economy, yet we have not reduced the state’s social obligations. The old style social security system that we have inherited does not go well with the market economy. During an economic crisis, this disproportion becomes an impossible burden for the state.
[Verslo žinios] Does this mean that in the future there will be smaller pensions, social payments, and assignations for education?
[Grybauskaite] I would phrase the problem differently. Society must decide anew what size taxes it is prepared to pay and what services it wants to receive from the state. Between these things there is a direct correlation. If one wants to maintain the same social system, one has to increase taxes. If taxes remain the same, the state’s obligations must decrease. Of course, even the funds the state has today can be used more effectively, too. For example, the latest study of the World Bank shows that our healthcare system looks like this: There are too many hospitals, there is too much equipment that is not used properly, because there are no specialists trained to use that equipment. Money disappears, but there is no impact.
[Verslo žinios] Unlike Latvia, Lithuania has refused to ask the IMF for help. You once said that such a step was unnecessary. Why?
[Grybauskaite] It is the last step a country can take. If external borrowing conditions do not get worse, Lithuania will still able to manage on its own. I do not want to criticize the IMF or the World Bank, but every politician should know that no one will solve our problems for us. I do not want to comment on Latvia’s problems, too much. I think Latvia asked the IMF for assistance when it had no other choice.
[Verslo žinios] The government completely ruled out the litas devaluation scenario and announced it would try to enter the euro zone in 2012 by reducing public spending. Do you support this strategy?
[Grybauskaite] I would not want to discuss concrete dates. However, the euro zone is synonymous with financial discipline. Order in our financial system must be the main paradigm of our thinking, as a real alternative to political populism. Concrete date for joining the euro zone will depend on the extent of the crisis and on our ability to have order. I also do not see any alleged benefits of devaluating the litas. Perhaps it would be meaningful, talking about increasing competitiveness of our exports. However, can you show me any markets that today are not gripped by recession? Therefore, devaluating the litas would only increase the country’s debt, two thirds of which are in foreign currency. In addition, energy resources would become more expensive. Therefore, we should move in the direction of euro adoption.
[Verslo žinios] Do you think Lithuania’s energy dependence on Russia is dangerous?
[Grybauskaite] Every country needs to strive to diversify its energy sources. Energy has always been measured using the geopolitical ruler. Therefore, integrating Lithuania’s electric power system and energy sources into Western networks would mean Lithuania’s political independence. It is necessary, and we will try to make sure we do not depend on one energy supplier.
[Verslo žinios] Does this mean that Lithuania must be prepared to pay higher prices for energy resources in the near future?
[Grybauskaite] Just as for any geopolitical choice. There is a certain price that needs to be paid for geopolitical orientation. Even if a competitive environment is established in Lithuania’s energy system in accordance with the EU requirements, the future of this sector will not be just a matter of economy or business. Of course, it is important to have a competitive environment in the energy market, but above all we must tame local monopolists and defend the consumer’s interests. Today in Lithuania, it is clear that local barriers are built against innovation and development of alternative energy sources.
[Verslo žinios] What is your opinion about the conditions for foreign investments in Lithuania? For example, Russian businessmen complain about discrimination here…
[Grybauskaite] The flow of investments, naturally, has subsided. The boom that started 15 years ago has ended. Yet, for now this is not too painful, because the lack of foreign investments in the country is compensated by the EU aid funds. Of course, we should analyse why the investment conditions have become worse. The Russian investments, meanwhile, are just as important to Lithuania as the investments from other countries. In certain areas non EU investments are limited and European interests are defended. The common EU investment policy is in the interests of Lithuania as well, but there is no national protectionism that would violate European principles.
[Verslo žinios] Have you heard any proposals to distance yourself from the executive branch and to remain a consolidating political figure, the way your predecessor, who was called “moral authority,” was?
[Grybauskaite] Political analysts say this is exactly what I should do. It would be nice to distance myself, point my finger, and criticize. I, however, see myself as someone who is not afraid of responsibility, and the first thing I will accept, if we work together with the cabinet, is responsibility.
[Verslo žinios] Perhaps today it would be meaningful to strictly adhere to the separation of power doctrine?
[Grybauskaite] It is an abstract theory. I know that today the nation entrusted a big credit of trust to me. Therefore, I want to talk about consolidating not only the government but also the public for big tasks. One of the most painful problems is the fact that the political elite have usurped democratic mechanisms. There cannot be a healthy economy, if the citizens’ power to make decisions is limited, and there cannot be a healthy economy without healthy politics. The decreasing interest in politics and lack of civic activeness is a problem not only in Lithuania, but also in Europe.
[Verslo žinios] All of your predecessors sooner or later started complaining about limited powers of the president…
[Grybauskaite] In politics there are de jure and de facto tools. Juridical tools are in the Constitution: The veto right, the right to initiate laws, the power to appoint officials. Factual tools – the nation’s trust, my word, which seems to have had substantial influence so far. Finally, I am also a professional in a certain field, which allows me to offer my help to the cabinet.
[Verslo žinios] Do you agree with those who say that every senior politician achieves the most important things during his first six months in office?
[Grybauskaite] This depends on one’s term in office (smiling)… Perhaps they are right: During the first six months one can look at things objectively, through a set of fresh eyes, before routine and system sucks one in. However, I think I clearly see the main tasks, which I raised not only during the election campaign, but also for myself. I hope that political and economic conditions will not obstruct their implementation.
Source BBC Monitoring
Industrial production in Lithuania rose by 7.3 % in May versus April and the rise was the steepest across the European Union (EU), the Eurostat reported.
In April the industry posted a 1.2% monthly decline, while over March the production contracted by 7%, according to the EU statistics agency.
In May compared with May 2008, industrial production in Lithuania plunged by 18.5%.
The monthly decline in industrial production was the largest in Latvia (4%) in May, while in Estonia the output rose by 1.3% from April.
The largest annual drop was registered in Estonia (29.9%), while in Latvia the industrial production contracted by 19.3% compared with May 2008.
Lithuania’s economy will contract by at least 16% this year and shrink by further 3.75% in 2010, the International Monetary Fund (IMF) forecasts writes the BNS.
“Such forecasts involve rather significant uncertainty and risks over the outlook for such a development,” Catriona Purfield, the head of visiting IMF mission, said during a news conference in Vilnius on 22 June.
Lithuania needed further corrections to the scale of approximately 7% of GDP [to reduce fiscal deficit by 7 points] over mid-term, based on current estimations including the measures already taken, she said.
The BNS writes that Lithuania had not applied to the fund for assistance and there were no discussions of a loan under way, she said. The current currency board regime was adequate yet the country had to continue reforms in order to maintain it, Ms. Purfield added.
“The road ahead will be difficult, hence regular measures to ensure fiscal and financial sustainability will be necessary during that period. Despite fast balancing of the current account, the safeguards from potential risks are limited, therefore regular efforts, including further large-scale consolidation of public finances, creation of additional safeguards in the financial system, further regulation of wages and structural reforms, will be required in order to ensure smooth functioning of the currency board until the adoption of euro,” she said.
“The figures provided in the IMF working report are very clear – the consolidation of public finances, which exceeds 7% of GDP and which will have to be implemented in coming two years, is a great challenge, yet it is possible to be implemented since everybody understands what will happen if it is not implemented,” Prime Minister Andrius Kubilius told the reporters after the meeting with the IMF representatives.
The IMF mission arrived to Lithuania on 11 June.
On 23 June the SEB, Lithuania’s largest commercial bank forecasted that Lithuania’s GDP should contract by 15.5 % this year and that is forecast downgrading its previous projection of a 9 percent economic decline this year.
As the BNS informed for 2010 the bank’s analysts are projecting a 3.5% decline, unchanged from earlier forecasts. In 2011 the economy should expand by 3%.
Fiscal deficit should reach 7% of GDP this year and 5% in 2010.
“It means that the hopes of the head of Lithuania’s government to adopt the euro in 2012 are too optimistic since the authorities will not manage to reduce the fiscal deficit to the required 3 percent level until mid-2011,” Gitanas Nauseda, an adviser to SEB bank president, said on 23 June.