Moody's: Strong domestic demand supports Lithuania's economy, but demographics weigh on potential

While Lithuania benefits from economic growth in excess of the euro area average, adverse demographics which weigh on competitiveness and fiscal sustainability could pose challenges, says Moody's Investors Service in a report published today.

Moody's report, entitled "Government of Lithuania -- A3 Stable: Annual Credit Analysis," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

"Economic activity has become more balanced between external and domestic demand, which will support economic growth. However, the volatility of real GDP growth given Lithuania's small size and high degree of openness constrains creditworthiness," says Evan Wohlmann, an AVP-Analyst at Moody's.

Moody's forecasts that Lithuania's real GDP will expand by 2.5% in 2016 and 3.3% in 2017, compared to the relatively weak growth rate of 1.6% recorded last year. Private consumption will remain strong based on the ongoing labour market recovery, with annual nominal growth in wages exceeding 8% in Q2 2016.

The government's fiscal strength supports its creditworthiness, reflected in the substantial decline in fiscal deficits to 0.2% in 2015, the lowest deficit in the EU. Moody's expects that the government will remain focused on reducing the gross government debt-to-GDP ratio from current levels of around 43% in 2015. Moody's notes there is also consensus among stakeholders especially towards aligning more closely with Europe and OECD accession, which anchors policy predictability ahead of the forthcoming elections.

Lithuania's challenges are primarily related to the structure of unemployment and its adverse demographic trends. The long-term unemployment rate has fallen to 3.3% but the structure of unemployment is a credit concern given elevated youth unemployment (16.5%); the latter reflects significant skills mismatches and has led to high youth emigration.

Challenging demographics also constrain creditworthiness in that they reduce the labour force, impede competitiveness, constrain economic potential and may eventually weigh on Lithuania's fiscal sustainability. For example, growth in wages and salaries has outpaced labour productivity since 2013, reflecting repeated increases in the minimum wage, which adds to competitiveness pressures. In addition, Lithuania's rapidly ageing population is forecast to add around 2% of GDP to public spending between now and 2060, which poses a risk to the government's fiscal position.