March 10, 2017 / 9:06 PM / 5 months ago

Fitch Affirms Lithuania at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, March 10 (Fitch) Fitch Ratings has affirmed Lithuania's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A-', with Stable Outlooks. The issue ratings on Lithuania's senior unsecured foreign and local currency bonds have also been affirmed at 'A-'. The Country Ceiling has been affirmed at 'AAA'. The Short-Term Foreign and Local Currency IDRs have been affirmed at 'F1'. KEY RATING DRIVERS Lithuania's ratings are supported by stable fiscal finances, institutional strengths and a credible policy framework that comes with EU and eurozone membership. However, the country's external finances are weaker, and the ratings remain constrained by structural bottlenecks, which hold back progress in convergence towards the income levels of higher-rated countries. Parliamentary elections in October 2016 resulted in a new coalition government led by the Farmers and Greens Union (LVZS) and its junior coalition partner the Social Democrats (LSDP). The outcome reinforces Fitch's pre-election view that government policy will continue in a positive direction, most recently in the form of structural measures implemented under a "New Social Model". While part of this legislation (for example, the Labour Code) remains under discussion, but expected to be implemented in 2H17, the 32 bills of the social model package is a credible step forward by authorities to address long-term demographic challenges facing Lithuania's pensions system and the labour market. Fitch forecasts Lithuania to grow an average 2.7% p.a. in 2017-2018, up from an estimated 2.3% in 2016. Real GDP will be driven by domestic demand, supported by resilience in household consumption and an increase in investment using EU funds. Higher domestic demand will increase imports, which given Fitch's subdued outlook on Lithuania's key trading partners, is expected to outpace exports, turning the contribution of net exports negative. At 3%, Lithuania's five-year average GDP is in line with the 'A' median. However, the country's growth prospects have softened against a weak external environment. Lithuania is a small and highly open economy, and its GDP volatility (6.6%) is significantly worse than the median of its 'A' category peers (3%). Stable fiscal finances continue to support Lithuania's ratings. For 2016, Lithuania's deficit and debt-to-GDP ratios are projected to have reached 0.6% and 40% of GDP, respectively, against the category 'A' medians of 1.9% and 52%. Fiscal policy remains focused on strengthening tax administration, tackling the grey economy, improving social assistance and public investment. For 2017, Fitch forecasts Lithuania to achieve a fiscal deficit 0.7% of GDP and debt to reach 43.6% of GDP. The projected higher government debt ratio for 2017 reflects mainly expected pre-financing in external markets for the February 2018 Eurobond redemption. Lithuania's banking sector is stable. The sector is well-capitalised (capital adequacy ratio at 19.4% at end-3Q16), and on-going deleveraging has improved banks' balance sheets, with non-performing loans now at 4.2% (end-3Q16) compared with a peak of 20.4% in 2010. Fitch views positively the high level of foreign ownership in the banking sector, which reduces the risk of financial sector liabilities migrating onto the sovereign balance sheet. Lithuania is weaker in some external finance indicators than its 'A' category peers. A structural trade deficit means that Lithuania will see its current account balance fall back into a deficit of around 1% of GDP in 2017 from a surplus of 0.3% in 2016, as the trade balance worsens on account of higher energy prices, as well as a pick-up in investment-related imports. This compares with a median current account surplus of 2% across 'A' category peers. In addition, Lithuania remains a large net external debtor (estimated 31.6% of GDP in 2016) relative to the median net external creditor position of 'A' category peers (12.4% of GDP). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Lithuania a score equivalent to a rating of 'A' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: -External Finances: -1 notch, to reflect high net external debt relative to the peer median. In addition, though Lithuania benefits from the euro's "reserve currency flexibility", Fitch believes that this status would likely offer Lithuania only limited protection in case of a global or domestic financial crisis. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently balanced. The main factors that could, individually or collectively, trigger positive rating action include: - A sustained improvement in external debt ratios; - A longer track record of strong and stable economic growth that fosters higher income per capita, without the re-emergence of macroeconomic imbalances. The main risk factors that could, individually or collectively, trigger negative rating action are: - Deterioration in Lithuania's public debt dynamics, for example, from sustained fiscal slippage or economic underperformance; - Deterioration in external finances, for example, associated with overheating of the domestic economy. KEY ASSUMPTIONS The global economy performs broadly in line with Fitch's Global Economic Outlook Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnaud Louis Director +33 144 299 142 Committee Chairperson Shelly Shetty Senior Director +1 212 908 0324 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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