Lithuania solid bonds show strength in public finances

Lithuania’s A2 foreign and local currency government bond ratings balance a strengthening in the country’s public finances and policy framework against growing external vulnerabilities, particularly the large current account deficit and rising external debt ratios, Moody’s Investors Service said in its annual report on the country.

The A2 government bond rating, along with Moody’s assessment of a very low risk of a payments moratorium in the event of a government default, serves as the basis for Lithuania‘s Aa1 foreign currency country ceiling for bonds.

“Distinct improvements in fiscal policy and structural reforms, including reform of taxes, municipal finance, social security and healthcare, have led to a gradual reduction in government debt relative to GDP and revenues,” said Moody’s Senior Vice President Kenneth Orchard, author of the report.

Despite these improvements, he said, Lithuania remains one of the weaker EU-10 members, as evidenced by lower real per capita income, lower levels of government revenues, and less foreign investment as a percentage of GDP.

“While rapid economic growth has swelled wages and helped the government to balance its budget, it has also caused a gradual worsening of economic imbalances,” explained Orchard. “The current account deficit and inflation have both increased recently, and neither is expected to decline in the near future.”

In May 2006, said the analyst, the European Commission ruled that Lithuania was not ready to join the Economic and Monetary Union (EMU) because it did not meet the Maastricht inflation criterion.

“The wider current account deficit has been largely financed by external borrowing from foreign banks,” said Orchard. “However, the fact that local banks are now almost entirely foreign-owned, and that the bulk of the borrowing is from parent institutions, lessens concerns about refinancing risks.”