Lithuanian Macroeconomic - SEB bankasNo. 49, September 2012 Macroeconomic outlook and forecasts In...

SEPTEMBER 2012No. 49

Lithuanian Macroeconomic Review

No. 49, September 2012

The cut-off date for the statistics included in this publication was September 14,

2012 (except for fiscal deficit and current account data).

Contacts:

Dr. Gitanas NausėdaChief Economist, SEB Lithuania

Vilija TauraitėSenior Economist, SEB Lithuania

Julita VaranauskienėHousehold Economist, SEB Lithuania

Phone +370 5 268 2517 Fax +370 5 268 2521

E-mail [email protected]

Phone +370 5 268 2521Fax +370 5 268 2521

E-mail [email protected]

Information and opinions contained within this document are given in good faith and are based on eco-nomic theory and sources believed to be reliable. However, no representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents. Changes may be made to opinions or information contained herein without notice.

Anyone considering taking actions based upon the content of this document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent permitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document or its contents. Certain information in this report is forward-looking. By its nature, forward-looking information involves a number of risks, uncertainties and assumptions. Should any of these risks or uncertainties materialise, or should underlying assumptions prove incorrect, actual results may vary from those described in this report as anticipated, believed, estimated or expected. Opinions expressed in this document belong solely to the authors, does not represent the official position of SEB Bank and may not concur with official position of SEB Bank.

Phone +370 5 268 2518E-mail [email protected]


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Macroeconomic outlook and forecasts

In the second quarter of 2012, Lithuania’s real GDP growth made up 2.2 per cent on an an-nual basis. The fastest growing sectors were IT and communications (7.6 per cent), agriculture (6.7 per cent), real estate operations (4.8 per cent), construction (3.8 per cent), trade, cater-ing and accommodation, transport and logistics (3.2 per cent). Growth of value added in the manufacturing industry was rather sluggish (0.2 per cent) due to specific one-off factor, i.e. maintenance works at oil refinery Orlen Lietuva which produces almost 30 per cent of total industrial production.

Currently, Lithuania’s economy is in rather good shape with even surprisingly strong situation in export-oriented sectors. However lately Lithuanian companies and consumers were increas-ingly worried about possible negative external shocks on the country’s economy. Thus far, euro zone’s economic recession had limited negative effect on Lithuania’s economy due to good export competitiveness and diversification. Lithuanian exporters continue keeping production costs and effectiveness under control, including slow wage growth. Real wages even continue declining but it allows creating new job places and reducing unemployment.

Industry maintains its robust development pace. In July 2012, industrial production increased by 6.2 per cent on an annual basis at constant prices, and working-day adjusted increase made up 4.3 per cent. Production growth notably accelerated over recent months, as in January–July 2012 it made up 1.4 per cent only (0.3 per cent after working-day adjustment). Manufacturing industry expanded its production by 2.4 per cent and 1.0 per cent, respectively. In June and July, Orlen Lietuva factory returned to its normal working regime after the closure for maintenance and upgrading works for the entire May.

Managers of industrial companies share rather strong sentiment. According to the poll of Con-federation of Lithuanian Industrialists, in the third quarter of 2012 indicator of manager expec-tations was much higher than the recession threshold (50) in all the industry branches. Total industry expectations indicator made up 76, and it ranged from 81 in the wood and furniture industry to 62 in the chemical industry. 65 per cent of industry managers expected an increase in exports in the third quarter of 2012. Export forecasts were the most optimistic in the food processing industry where 72 per cent of managers expected an increase in exports while in wood and furniture industry only 33 per cent of managers expected growth. Nonetheless, the rest of 67 per cent wood and furniture makers forecasted stable export volumes and no one expected a decrease.

In some sectors, manager expectations about the future of their business in general and their exports were clearly different. For instance, managers of wood and furniture companies were positively-minded about their future despite the fact that only a third of them foresaw an in-crease in exports. On the contrary, overall sentiment of food industry somewhat declined while a large share of the managers expected export growth. However, this contradiction may be easily explained. Firstly, domestic market is quite important for the abovementioned sectors and its trends might differ from developments of external demand. Furthermore, managers’ sentiment does not entirely depend on possible expansion of exports and production. A lot of companies are completely satisfied with stable production volumes and they do not plan to make investment into capacity development. Their reluctance to invest is based on the uncer-tainty about euro zone crisis, bleak of prospects of global economy and risk aversion.

Foreign trade volumes continued to grow robustly. In July 2012, as compared with July 2011, exports increased by 13.2 per cent and imports by 13.6 per cent. In January–July 2012, annual growth made up 8.3 per cent and 6.1 per cent, respectively. Russia strengthened its positions as the top export destination with export share reaching as high as almost 20 per cent. At the end of August, Russia was officially declared a member of WTO. In a longer term, the mem-bership means turning away from protectionist foreign trade policies. After Russia ratifies its

General economic situationGeneral economic situation

Manufacturing industryManufacturing industry


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membership agreement, average import tax rate will decrease from 10 per cent to 7.8 per cent. However Russia’s membership in WTO does not remove the possibility of new unilateral import bans on certain goods. Exporters to Russia still are under a threat of unexpected trade barriers, especially producers of meat and milk products and growers of vegetables and fruit. Russia made it quite clear that it will continue restricting imports of live pigs by all means which do not contradict WTO agreement. In addition, Russia continues seeking new ways to protect lo-cal producers, e.g. after being forced to reduce import tariffs on cars, it started applying a car utilization tax.

Despite complicated and hardly predictable business conditions, Lithuanian companies con-tinue gradually penetrating Belarusian market. According to the surveys, key negative factors to decision upon opening business in Belarus are macroeconomic instability, bureaucracy, politi-cal risk and strict currency regulations. Most of the companies develop their activities through local partners, without establishing their own company or representation, thus trying to mini-mize the loss in case of unexpected government actions. Current business establishments in the Belarusian market should be treated as the attempts to enter the market in time and set up a basis for future business expansion. Most of surveyed Lithuanian businessmen expected positive changes in Belarusian business environment over the upcoming 3–5 years.

Mining and quarrying companies still face shrinking activity volumes. In January–July 2012, production of the mining industry was by 8.1 per cent lower on an annual basis at constant prices (after working-day adjustment, the decrease made up 9.1 per cent).

Company Minijos Nafta announced that the works at the first shale gas exploration drill were completed in May. In a few months, estimating of the volume of shale gas available in the drill will be completed and then Minijos Nafta will be able to decide upon launching industrial ex-traction of shale gas or refraining from it.

Energy sector does not show stabilization signs thus far. In January–July 2012, production of electricity, gas, steam supply and air conditioning decreased by 6.2 per cent on an annual basis (after working-day adjustment, by 5.2 per cent).

Local regional institutions have approved the environmental impact assessment (EIA) of LNG terminal, planned to be built in Klaipėda port. According to EIA review, negative environmental impact will be short-lived in most of cases and will largely manifest itself during the construc-tion and installation phase.

State-controlled power production group Lietuvos Energija has decided to expand capac-ity at Kruonis Pumped Storage Plant by building the fifth unit. The project is valued at LTL 350–400 million and would be carried out over the course of three years. The most important advantage of the new unit is its flexibility, as it will be able to store flexible power quantities (e.g. 120, 160, 180 or 200 MWh). The flexibility is extremely important for the development of renew-able energy sources due to wide fluctuations of their power production. In addition, it will be useful in power supply regulation. Higher reserve capacity will also be demanded when power links to Sweden and Poland are built and power systems are synchronized with continental European grids. Currently, the capacity of Kruonis plant is 900 MW.

The government keeps alternative energy sources as a priority in its energy strategy. Direct pay-ments to green power producers (excluding payments to small renewable energy producers) may reach as much as LTL 800 million until 2020. These payments would be financed from the budget of public service obligation. Renewable energy market (excluding wind, biomass, solar, and hydro plants with capacity up to 30 kW) may make up as much as LTL 1.76 billion in eight years. These indicators are based on assumptions of Law on Energy of Renewable Resources, which state that until 2020 renewable sources should make up not less than 23 per cent of the country’s total electricity consumption and define specific amounts of power produced at biomass, wind, hydro and solar plants.

Mining and quarryingMining and quarrying

Energy sectorEnergy sector


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In 2012, the amount of direct payments to renewable energy producers is forecasted to make up LTL 115 million, or 16 per cent of total public service obligation budget in 2012 (or LTL 0.0112/kWh, VAT excluded).

In July 2012, retail trade turnover increased by 5.0 per cent as compared with July 2011. Trade of food products increased by 1.7 per cent while trade of non-food products went up by 11.4 per cent. Sales of clothing and footwear and household equipment increased at the fast-est pace, 21.6 per cent and 10.2 per cent, respectively. The Olympic Games, digital television transition and various discounts obviously encouraged the sales of video- and audio-equip-ment. Analogue television switch-off in Lithuania is scheduled for October 29. Consequently, retailers and TV service providers work longer hours and hire more specialists to satisfy higher demand but they still do not rule out a possibility of a bottleneck effect in TV service market in November.

In January–July 2012, retail turnover increased by 5.9 per cent at constant prices on an annual basis, but the dispersion of growth rates in separate retail sectors was quite wide. Sales of fuel increased by 0.9 per cent only, sales of food products, alcoholic beverages and tobacco went up by 1.9 per cent, pharmaceuticals and cosmetics by 6.1 per cent. Meanwhile, sales of audio- and video-equipment, household equipment and furniture increased by 15.4 per cent, sales of clothing and footwear by 21.4 per cent. One of the largest clothing retailers Apranga announced that its turnover in January–August was higher by 25.4 per cent on an annual basis, and in August alone the company hit record monthly turnover. Previous sales record of Apran-ga was reached in August 2008, i.e. before the financial and economic crisis. In August 2012, the company opened 7 new shops, reconstructed one shop and closed one shop.

Starting from January 1, 2013, VAT rate for books, newspapers and magazines will be reduced from 21 per cent to 9 per cent. However, publishers do not promise lower prices as they would like to improve their financial situation instead of cutting production prices. Political campaigns ahead of parliamentary election are also expected to have positive effect on the results of the publishing companies.

Recent increase in fuel prices has raised public discussions whether it is grounded by unbi-ased reasons or the consumers are simply abused by profit-oriented fuel sellers. The survey of Competition Council of Lithuania did not indicate any signs of misbehaviour or cartel pricing in the fuel market. According to the survey, the fuel price margins are higher than in Lithuania in 17 EU countries while they are lower in 7 countries. Together with UK and France, Lithuania shares 8–10 positions among the EU countries according to the average size of fuel price mar-gin. According to Competition Council, fuel price margin recently fluctuated from 3 per cent to 14 per cent which fits in normal pricing limits.

Agriculture, forestry and fishery was the second-fastest growing sector in the second quarter of 2012, as its real value added increased by 6.7 per cent on an annual basis. Increasing pur-chasing of agricultural products also confirms that the sector is performing rather well. In Janu-ary–July 2012, the purchasing of leguminous grains increased by 2.4 times on an annual basis, purchasing of fruit by 2.2 times, purchasing of cereals by 96 per cent, potatoes by 63 per cent, vegetables by 40 per cent, eggs by 20 per cent, birds by 12 per cent, pigs by 9 per cent and nat-ural milk by 7 per cent. The only decreases were registered in purchasing of sheep and goats (10 per cent) and cattle (2 per cent).

Recently, international prices of agricultural products were quite favourable to local producers. In July alone, grain prices jumped by 17 per cent due to draught in the United States and Russia. Meanwhile, in Lithuania grain harvest reached 4.1 million tonnes and was the largest over last two decades. As compared to 2011, grain productivity increased by 30 per cent and grain-sown areas increased by 10 per cent. On the other hand, due to quite rainy weather, the share of poorer quality grain is higher than in previous years. Due to large harvest, grain exporters even faced a problem of shortage of export ships but at the beginning of September, the situation

Retail tradeRetail trade

AgricultureAgriculture


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normalized when big ships returned to the port. The volume of grain export is estimated to reach around 2.5 million tonnes out of 4 million tonnes of total harvest.

Russia claimed that it will send inspectors to Lithuanian pig farms in the fourth quarter of 2012. This means a chance for Lithuanian producers to resume exports of live pigs to Russia after a break of more than 1.5 years. The exports of live pigs to Russia were banned last year after an outbreak of classical swine fever in Lithuania. Another piece of good news for pigs farms were rising purchasing prices of pigs. Pig breeders report that they have started working into the profit while over several recent years they hardly escaped the losses.

In the second quarter of 2012, transport sector results did not materially improve as com-pared with poor performance in the first quarter of 2012. In January–July 2012, the volume of cargo loaded and unloaded at Klaipėda State Seaport and Būtingė terminal decreased by 8.5 per cent. Maintenance works at oil refinery Orlen Lietuva and lower loading and unloading volume of fertilizers had their negative effect on the results of marine transportation.

In January–July 2012, the flow of passengers through airports increased by 22.9 per cent on an annual basis. 66.2 per cent of passengers travelled through Vilnius airport, 29.5 per cent through Kaunas airport and 4.2 per cent through Palanga airport. The volume of cargo loaded and unloaded at the airports decreased by 3.1 per cent.

Overall, airports and road transportation companies demonstrated relatively strong positions and the best results in the transport sector. The volume of cargo carried by roads was higher and the routes were longer as thriving country’s exports gave a boost. Naturally, optimism of road transportation companies increased and they started investing more, e.g. in recent months, registration of semi trailers reached record heights. However, the uncertainty about the euro zone crisis forced transport companies to take wait-and-see approach rather than to invest into capacity expansion during the recent months.

In the second quarter of 2012, value of construction works increased by 3.2 per cent at con-stant prices on an annual basis. Civil engineering works made up 55 per cent of total construc-tion works, construction of non-residential buildings comprised 36 per cent and construction of residential buildings only 9 per cent.

In the second quarter of 2012, 700 new residential houses were completed with 1046 apart-ments in them, which was by 32 per cent less on an annual basis. Meanwhile the number of residential construction permissions increased by 14 per cent and the number of apartments licensed to be built in multi-storey buildings almost doubled.

There were 338 non-residential buildings completed in the second quarter of 2012 and their overall area made up by 27 per cent less as compared with the same period of 2011. Most of non-residential buildings were built for agricultural, trade, accommodation and catering, trans-port and communication purposes.

In the near future, non-residential construction should be supported by several large-scaled projects. While construction of new nuclear plant remains surrounded by uncertainty, other energy projects are already under the way, including construction of LNG terminal in Klaipėda. Construction of LNG terminal will include construction of embankment for ship with LNG stor-age tanks, deepening the port, installing radiolocation equipment, adjustment of port systems and other preparatory works. The port company itself will invest around LTL 129 million (includ-ing VAT) and will compensate to state-owned company Klaipėdos Nafta around LTL 66 million for construction works. However, more exact numbers will be available only after the winners of the tenders are announced.

The mood in the residential property market remains quite gloomy. Housing prices continue somewhat declining and the ratio of supply to demand does not encourage launching new projects. According to data of real estate agency Ober-Haus, housing prices in July decreased

TransportTransport

Construction and real estate marketConstruction and

real estate market


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by 0.2 per cent month-on-month and by 1.2 per cent year-on-year in Vilnius. In Kaunas and Klaipėda, annual decrease made up 1.0 per cent and in Panevėžys, 0.8 per cent.

Despite slower economic growth in the second quarter of 2012, various indicators of separate economic sectors in July and August were quite firm. We leave our forecasts for GDP growth unchanged at 3.5 per cent in 2012 and 4 per cent in both 2013 and 2014 (see Diagram 1 and Table 1 in the Appendix) acknowledging that they are situated at the optimistic end of the fore-cast range. We expect quite solid economic growth in the third quarter of 2012 and somewhat weaker development at the end of the year.

Fiscal discipline remains of crucial importance when striving to reduce public deficit to 3 per cent of GDP and to meet the respective Maastricht criterion. According to data of Ministry of Finance, in January–July of 2012, national budget revenue exceeded its target by 1.4 per cent and was by 6.1 per cent higher as compared with the same period of 2011.

Collection of indirect taxes (VAT and excise duties) remained under some pressure but col-lection of personal income tax was much better than forecasted. In January–July, corporate profit tax revenues made up 98.6 per cent of their target, VAT revenues made up 99.6 per cent of their plan and excise duties 100.8 per cent. Nonetheless, the personal income tax plan was executed by 106.5 per cent. Both increase in average wages and salaries and decrease in unem-ployment were the reasons behind good collection of personal income tax. With a certain time lag, higher employment should also have positive effect on residents’ purchasing power and consumption, and consequently on the budget revenue from indirect taxes.

Ministry of Finance has pushed forward the adoption of programming approach in the budget formation process in line with transition of EU directives into national legal acts. It was pro-posed that the medium-term target of public deficit reduction (for three forthcoming years) should be included into the legal package of state and municipality budgets. The proposal also included setting the rules, which would require using excess budget revenue exclusively for trimming the deficit.

The shift of the power after the parliamentary election in October technically cannot materi-ally affect public deficit indicator in 2012 and even in 2013. Despite the fact that programs of some of the most popular parties contain proposals which contradict the reduction of public deficit, we make an assumption that continuity of prudent fiscal policy will be maintained at least partially. Within the limits of the Law on Fiscal Discipline, public expenditure may increase by 1.9 per cent or by LTL 500 million in 2013. Nevertheless, the space for political manoeuvre will not be large next year, as higher expenditures should be allocated to cover debt interest payments, payments to EU budget and the expenses of Lithuania’s EU Presidency in 2013.

GDP forecast for 2012–2014GDP forecast for 2012–2014

Public financePublic finance

Diagram 1. Annual change in real GDP (per cent)

10.37.4 7.8 7.8

9.8

2.9 1.4

5.9

-14.8

3.0 4.03.5(3.5)* (4.0)*

4.0

-20

-15

-10

-5

0

5

10

15

(4.0)*

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H 2012 2012F 2013F 2014F * Previous forecast of SEB Bank given in parenthesis.


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Our forecasts for public deficit remain unchanged at 3 per cent of GDP in 2012 and 3.5 per cent of GDP in both 2013 and 2014 (see Diagram 2). We include a certain portion of political uncer-tainty in the forecasts although we do not expect that the political effect will be large.

Annual CPI inflation rate somewhat declined during the summer but this trend will hardly continue in autumn and winter. In August 2012, monthly inflation rate made up 0.2 per cent while annual inflation stood at 3.3 per cent. The highest annual increases were recorded in utilities (5.4 per cent), alcoholic beverages and tobacco and transport (4.5 per cent each), food products and non-alcoholic beverages (2.9 per cent) and healthcare (2.7 per cent). Prices de-creased for communication goods and services only (2.1 per cent). Administered prices went by 6.8 per cent year-on-year while unregulated prices went up by 2.7 per cent. In August 2012, average annual CPI inflation made up 3.5 per cent.

The most important inflationary factor in Lithuania at the moment is the price of energy re-sources and food products on the international market. Despite the fact that Lithuania’s grain harvest was record-large, price of bread and other bakery and flour products is predicted to rise. Due to unfavourable weather conditions in some of the largest grain-growing countries, global grain prices stay high and Lithuanian grain producers look forward to exporting around 60 per cent of total harvest rather than pushing down prices inside the country.

On the other hand, demand-pull pressures and wage-inflation spiral are absent under current market conditions. Wage growth in Lithuania remains low and does not exceed growth of la-bour productivity or price level. In order to maintain export competitiveness, employers keep unit labour costs under control. In addition, wage increases are limited to separate employees and are not subject to widespread indexation.

Taking into regard rather stubborn inflation in the first half of 2012 which occurred due to high prices of energy resources, we raise our average annual HICP inflation forecast for 2012 from 2.5 per cent to 3.4 per cent and from 3.0 per cent to 3.5 per cent in both 2013 and 2014 (see Diagram 3). A crucial assumption for contained inflation in the medium term is continuity of fiscal discipline after the parliamentary election.

In the first quarter of 2012, current account deficit stood surprisingly high at 10.2 per cent of GDP, i.e. record-high since the end of 2008 (see Diagram 4). However, an increase in cur-rent account deficit did not reflect deterioration of Lithuanian export competitiveness or fast-strengthening domestic demand. In the first quarter of 2012, support from EU funds was tem-porarily halted due to additional inspections what was a one-off negative factor. Already in the second quarter of 2012, current account recorded a 4.7 per cent of GDP surplus. As compared with the second quarter of 2011, trade deficit declined while surplus of current transfers nota-bly increased after EU payments were resumed. In the first half of 2012, current account deficit made up 2.3 per cent of GDP.

InflationInflation

Balance of paymentsBalance of payments

Diagram 2. Public balance (ESA’95, per cent of GDP)

-1.3 -1.5-0.5 -0.4 -1.0

-3.3

-5.5

-7.2

-9.4

-4.0-3.0(-3.0)*

-3.5(-3.5)*

-3.5(-3.5)*

-10-9-8-7-6-5-4-3-2-10

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H 2012 2012F 2013F 2014F

* Previous forecast of SEB Bank given in parenthesis.


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In the second quarter of 2012, the main factor behind export development was maintenance and upgrading works at Orlen Lietuva oil refinery. As compared with the second quarter of 2011, exports increased rather modestly, by 3.6 per cent. However excluding refined oil products, ex-ports increased by 10.2 per cent on an annual basis and their growth was constantly accelerat-ing during each month of the second quarter. The reasons behind export drop in some goods can hardly be attributed to weaker competitiveness of Lithuanian exports. Exports of transport vehicles decreased by 23.2 per cent due to very high statistical base in the first half of 2011 before increase in import duties on used cars in Belarus and Kazakhstan as of July 2011; exports of mineral products contracted by 16.7 per cent due to maintenance works at Orlen Lietuva factory; textiles exports decreased by 0.5 per cent because of tough international competition and partially due to capacity shortage. Meanwhile exports of all other goods performed well in the second quarter of 2012. Exports of machinery and equipment, food products and furniture increased the most, by 26.3 per cent, 21.7 per cent and 21.4 per cent, respectively (see Table 3 in the Appendix).

Regarding the destinations, diversification of Lithuanian exports is plausibly wide and keeps in-creasing. In the second quarter of 2012, exports to emerging markets grew notably faster than to developed countries. For instance, exports to CIS countries increased by 9.7 per cent on an annual basis (of which to Russia by 32.2 per cent) while to euro zone countries by 1.3 per cent only (and declined by 8.4 per cent to Germany).

Gross external debt made up LTL 85.0 billion at the end of the second quarter of 2012. It de-creased by 2.7 per cent on a quarterly basis but went up by 3.3 per cent on an annual basis. The sole driver behind the increase was larger government borrowing. Gross external debt as a ratio to GDP made up 75 per cent which was the lowest level since the end of 2008. Having in mind

Diagram 3. Annual average HICP inflation (per cent)

-1.1

1.22.7

3.85.8

11.1

4.2

1.23.4

(3.0)*3.5 3.53.54.1

-2024681012

2003 2004 2005 2006 2007 2008 2009 2010 2011 August2012

2012F 2013F 2014F

(2.5)* (3.0)*


Diagram 4. Current account balance (per cent of GDP)

-6.0(-6.0)*

-4.0(-4.0)*

-3.0(-3.0)*

-2.3-3.7

0.1

3.7

-12.9-14.4

-10.6

-7.1-7.6-6.7

-16-14-12-10

-8-6-4-20246

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H 2012 2012F 2013F 2014F



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that public sector financing need is incomparably lower than in the midst of economic reces-sion, gross external debt will probably decrease in the coming quarters.

Thus far, we do not see any reasons to alter our previous forecasts for current account balance. In 2012, current account deficit should make up 3.0 per cent of GDP, 4.0 per cent of GDP in 2013 and 6.0 per cent of GDP in 2014 (see Diagram 4).

According to survey data, unemployment rate made up 13.3 per cent in the second quarter of 2012 and was by 1.2 percentage points lower on a quarterly basis. The number of the unem-ployed totalled to 215.1 thousand and was by 15.8 thousand (6.8 per cent) lower as compared with the first quarter of 2012. Youth unemployment rate (15–24 years old) made up 25.2 per cent and was twice as high as compared to overall unemployment rate, but it was declining faster than the average rate and decreased by 3.5 percentage points on a quarterly basis. Long-term unemployment rate (being unemployed for 1 year or more) made up 6.4 per cent and was by 0.9 percentage point lower on a quarterly basis, but almost every second unemployed person (48.5 per cent) did not have a job for more than 1 year.

The government tried to tackle youth unemployment problem by establishing exemptions on social security contributions for young persons. However, youth unemployment rate remains high what shows that more measures are needed, e.g. exemptions in personal income taxa-tion for young persons who enter the labour market for the first time. High share of long-term unemployed suggests that the proportion between minimum monthly wages and unemploy-ment benefit does not encourage returning to labour market. Therefore, the gap between mini-mum wages and unemployment benefit should be widened in order to reduce the number of long-term unemployed. This could be done by raising both minimum wages and tax-exempt income. Enhancing flexibility of labour market should not be forgotten as well. Trade unions might sometimes be discontent with higher flexibility of labour market but it may benefit the unemployed persons a lot.

The registered unemployment data from Labour Exchange show that positive labour market developments continued in the third quarter of 2012. At the end of August, the number of reg-istered unemployed made up 207.5 thousand, or 10.3 per cent of working-age population, and it decreased for four weeks in a row in August.

Taking into mind the latest developments, we revise down unemployment rate forecast for 2012 from 14 per cent to 13.5 per cent while leaving the forecasts for 2013 and 2014 unchanged at 12 per cent and 10 per cent, respectively (see Diagram 5). In the fourth quarter of 2012, unem-ployment rate may shrink at a slower pace due to unfavourable seasonal factors.

In the second quarter of 2012, average gross wages and salaries increased by 2.2 per cent on an annual basis. In the public sector, they increased by 2.2 per cent and in the private sector by 2.4 per cent. As compared with the first quarter of 2012, wage growth has decelerated from 3.2 per cent. In the first quarter of 2012, various bonuses and add-ons had their positive effect

UnemploymentUnemployment

Wages and salariesWages and salaries

Diagram 5. Unemployment level (survey data, average, per cent)

12.4 11.4

8.35.6

4.35.8

13.7

17.815.4

13.9(10.0)*10.0

(12.0)*12.0

(14.0)*13.5

02468

101214161820

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H 2012 2012F 2013F 2014F * Previous forecast of SEB Bank given in parenthesis.


11

which was higher than in 2011 due to improved financial results of companies. In the second quarter of 2012, increase in wages and salaries was also supported by wage increases in manu-facturing, construction and other companies where wages and salaries are based directly on the amount of work done.

On an annual basis, wages and salaries increased the most in financial and insurance companies (5.3 per cent), manufacturing industry (4.4 per cent), wholesale and retail trade (3.8 per cent), mining industry (3.7 per cent) and energy sector (3.5 per cent). Meanwhile wages and sala-ries decreased in accommodation and catering (by 0.8 per cent), leisure and artistic services (0.6 per cent).

At the moment, average increase in wages and salaries does not compensate for increase in price level and therefore real wages keep declining. In the second quarter of 2012, net wages and salaries increased by 2.0 per cent (2.0 per cent in the public sector and 2.3 per cent in the private sector) as compared with the second quarter of 2011. As a consequence, real wages and salaries declined by 0.7 per cent upon the average (by 0.7 per cent in the public sector and by 0.4 per cent in the private sector).

As of August 1, the government has raised minimum monthly wages from LTL 800 to LTL 850 (from EUR 232 to EUR 246), i.e. by 6.25 per cent which is a modest increase. However, it will have a positive effect on official statistics of wages and salaries in the third quarter of 2012.

The factors which push the wages down are quite abundant at the moment. One of them is maintaining good competitiveness on the international market by keeping labour costs at a low level. Employers are not willing to apply universal indexation of wages and salaries. Lithuania’s terms of trade are deteriorating at the moment as import price level is rising faster than export price level. Under such circumstances, wage indexation would not raise the standard of living but rather exert demand-pull pressures on price level.

Taking into view recent trends, we leave the forecasts for growth of wages and salaries un-changed. We predict that wages and salaries will be by 2.0 per cent higher in the fourth quarter of 2012 as compared with the fourth quarter of 2011, and respective increase in 2013 will make up 2.5 per cent and 3.5 per cent in 2014 (see Table 1 in the Appendix).

Loan portfolio started increasing only in some segments, e.g. business credits. However busi-ness credit demand soon will be satisfied if companies do not launch new investment projects but limit themselves to current activity volumes. Lending to individuals is faltering despite the fact that banks are willing to lend and have sufficient resources. Private individuals still remain cautious after the real estate crisis and therefore credit demand is limited. Cheap money and expansionary monetary policy of European Central Bank is nearly ineffective in the Lithuanian market as the main obstacle to credit recovery is not the price or availability of money, but the need and willingness of companies and households to borrow. Interest rate level may gain more importance in crediting process only when consumption and investment start growing more robustly.

The duration of the cheap money era also is not carved in stone as international economic situation remains under tension. The world’s main central banks now declare that they will not tighten their policy for next 2–3 years, but some important factors are out of their control, for instance, interbank confidence and risk level of the banking system. Price of banks’ credit de-fault swaps was shrinking lately, but this trend may reverse anytime. In addition, one should not forget about national interest rate risk premium which is quite low in Lithuania at the moment but it may increase suddenly if any signs of financial destabilization appear.

Thus far we leave our forecast for loan portfolio growth unchanged at 0 per cent in 2012, 2 per cent in 2013 and 5 per cent in 2014 (see Diagram 6). It should be noted that risk to credit portfolio growth forecast in 2012 is on the upside.

Loan portfolioLoan portfolio


12

Deposit market holds up extremely well and continues reaching new records. In recent quar-ters, deposit development was notably ahead of credit growth what meant certain difficulties for banks. It was hard to lend out the deposit liabilities and make profit due to stalling credit demand. In addition, deposits are mostly short-term (up to 1 year) while credit term most often is longer.

The deposit accumulation will hardly subside in the near future. Uncertainty about the future and the unfolding of euro zone debt crisis encourages saving for a rainy day and postponing consumption and investment plans. Meanwhile alternative investment measures (stocks, other securities, real estate) are not perfect substitutes and are not always acceptable to conserva-tive investors. Deposit interest rates already are very low but they still might be reduced, if credit growth does not accelerate.

Bankruptcy of any financial institution usually brings turbulences to the banking system, but the bankruptcy of bank Snoras surprisingly had a positive effect on deposit market. After Sno-ras’ failure, deposit insurance system had worked perfectly and the residents were persuaded that their deposits in the banks are absolutely safe (up to the maximum insurance amount) what encouraged them to keep their deposits in the credit institutions.

Our forecasts for deposit portfolio growth remain unchanged at 5.0 per cent in both 2012 and 2013 and 8.0 per cent in 2014 (see Diagram 6).

Interest rates in Lithuania have almost reached their bottom. After Snoras’ bankruptcy, banks had large surplus liquidity but the situation normalized in several months. Meanwhile, risk pre-miums of the country and the banking system remain small. Last but not least, European Cen-tral Bank has already cut interest rates to very low level and mostly likely will use quantitative easing rather than reduce interest rates further in the near future.

During recent months, interbank interest rates in Lithuania have stabilized or slightly de-creased. For instance overnight VILIBOR interest rate made up 0.47 per cent on June 4, 2012, 0.41 per cent on July 4, and 0.32 per cent both on August 3 and on September 4. Longer-term VILIBOR also somewhat declined. For instance, 6-month VILIBOR made up 1.55 per cent, 1.53 per cent, 1.37 per cent and 1.24 per cent on respective dates; 1-year VILIBOR stood at 1.89 per cent, 1.89 per cent, 1.75 per cent and 1.61 per cent, accordingly.

In line with developments on the international financial market, interest rates on new loans in litas headed downwards. For instance, average interest rates on new loans to non-financial corporations and households in national currency made up 5.80 per cent in April, 5.70 per cent in May, 5.23 per cent in June and 5.14 per cent in July. On the other hand, interest rate did not

Deposit portfolioDeposit portfolio

Credit interest ratesCredit interest rates

Diagram 6. Annual change in stock of loans and deposits

52.5

39.7 53

.6

48.9

46.9

18.8

-13.

8 -5.2

-7.6 -4.8

16.2

31.6 40

.7

20.5

22.6

-4.7

7.4 10

.6

-5.0 -1.6

5.0

(5.0

)*

2.0

(2.0

)*

0.0

(0.0

)*

8.0

(8.0

)*

5.0

(5.0

)*

5.0

(5.0

)*

-30-20-10

0102030405060

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H 2012 2012F 2013F 2014F

Annual change in loan portfolio (per cent)Annual change in portfolio of deposits and letters of credit (per cent)



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materially change from last year’s level (average interest rate made up 5.26 per cent in Decem-ber 2011). Interest rates on loans in euro made up 3.89 per cent, 3.36 per cent, 3.41 per cent and 3.48 per cent, respectively.

Taking into consideration recent developments of interest rates, we leave our forecasts for average interest rates on loans in litas unchanged at 5.50 per cent at the end of 2012 and 5.75 per cent at the end of both 2013 and 2014 (see Diagram 7).

Diagram 7. Average interest rate on loans in litas (end of year, per cent)

5.07 5.674.70

5.37

8.6110.08

8.14

5.62 5.26 5.145.75

(5.75)*5.75

(5.50)*5.50

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 July 2012 2012F 2013F 2014F

(5.75)*



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APPENDIX

Table 1. Main Macroeconomic and Financial Indicators in 200�–201�

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(a

ctua

l)

2012

(fo

reca

st)

2013

(fo

reca

st)

2014

(fo

reca

st)

Annual change in real GDP (%)

10.3 7.4 7.8 7.8 9.8 2.9 –14.8 1.4 5.9 3.0 (1H) 3.5 4.0 4.0

Nominal GDP (LTL billion) 57.232 62.997 72.402 83.227 99.229 112.084 91.914 95.074 106.01953.939

(1H)113.335 121.835 130.972

Public sector balance (ESA’95, % of GDP)

–1.3 –1.5 –0.5 –0.4 –1.0 –3.3 –9.4 –7.2 –5.5–4.0 (1H)

–3.0 –3.5 –3.5

Annual average HICP inflation (%)

–1.1 1.2 2.7 3.8 5.8 11.1 4.2 1.2 4.13.5

(August)3.4 3.5 3.5

Current account balance (% of GDP)

–6.7 –7.6 –7.1 –10.6 –14.4 –12.9 3.7 0.1 –3.7–2.3 (1H)

–3.0 –4.0 –6.0

Average gross monthly wages and salaries (excl. entrepreneurships, 4Q, LTL)

1207.9 1310.2 1453.4 1731.7 2052.0 2319.1 2118.3 2121.5 2175.02153.6 (2Q)

2218.5 2274.0 2353.6

Annual change in average gross monthly wages and salaries (excl. entrepre-neurships, 4Q, %)

5.5 8.5 10.9 19.1 18.5 13.0 –8.7 0.2 2.52.2

(2Q)2.0 2.5 3.5

Unemployment level (survey data, average, %)

12.4 11.4 8.3 5.6 4.3 5.8 13.7 17.8 15.413.3 (2Q)

13.5 12.0 10.0

Loan porftolio of commer-cial banks (end of period, LTL billion)*

12.099 16.898 25.957 38.641 60.114 71.441 61.558 58.338 54.00954.211 (1H)

54.009 55.089 57.844

Annual change in loan portfolio (%)*

52.5 39.7 53.6 48.9 43.9 18.8 –13.8 –5.2 –7.6–4.8 (1H)

0.0 2.0 5.0

Portfolio of deposits and letters of credit (end of period, LTL billion)*

13.574 17.860 25.133 30.293 40.109 38.232 41.073 45.443 43.17444.095

(1H)45.333 47.599 51.407

Annual change in portfolio of deposits and letters of credit (%)*

16.2 31.6 40.7 20.5 23.4 –4.7 7.4 10.6 –5.0–1.6 (1H)

5.0 5.0 8.0

Average interest rate on loans in litas (end of period, %)

5.07 5.67 4.70 5.37 8.61 10.08 8.14 5.62 5.265.14

(July)5.50 5.75 5.75

* Data of loans and deposits is not strictly comparable in 2003–2006 and 2007–2014 due to changes in methodology.


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Table 2. Structure and Growth Rates of Value Added by Economic Activity

Share of total value added (%) Annual change at chain-linked volume (%)

1H 2008 1H 2009 1H 2010 1H 2011 1H 2012 1H 2008 1H 2009 1H 2010 1H 2011 1H 2012

Gross value added* 100.0 100.0 100.0 100.0 100.0 6.4 –14.8 0.0 6.2 3.0

Agriculture, hunting and forestry 2.6 2.1 2.8 2.8 2.6 2.2 –14.0 19.1 –1.7 5.2

Mining and energy 4.2 5.1 5.3 4.7 4.5 0.7 –6.8 2.3 –10.3 –3.7

Manufacturing industry 18.6 16.8 18.1 21.0 21.0 8.3 –19.2 3.9 15.9 2.6

Construction 10.2 6.3 5.3 5.3 5.5 5.9 –43.1 –14.3 11.7 6.6

Domestic trade; transport; accomodation & food service

28.7 29.1 30.6 30.9 31.8 7.9 –17.6 1.0 7.8 4.3

Information and communication 3.5 3.9 3.6 3.0 3.2 2.8 1.8 –4.3 1.7 8.3

Financial & insurance activities 3.3 2.8 2.4 2.6 2.3 6.8 –3.9 0.4 10.7 –0.3

Real estate activities 7.1 7.5 6.7 6.3 6.2 13.5 –0.4 –1.0 2.5 3.8

Professional, scientific & technical activities 5.4 6.1 5.8 5.7 5.5 9.4 –17.1 2.5 2.9 1.4

Public administration and defence; education; compulsory social security

14.7 18.3 17.4 15.9 15.6 1.2 0.6 –3.2 0.5 0.9

Arts & entertainment; household services 1.7 2.1 2.0 1.7 1.7 –4.3 –11.4 –10.9 1.9 1.4

* GDP equals the sum of all values added (total value added) plus taxes on products minus subsidies.

Table �. Exports by Commodity Groups (LTL million)

ExportsForeign trade

balance at f.o.b. prices (%)*

2007 2008 2009 2010 2011 1H 2012 Relative share in 1H 2012 (%)

Annual change in 1H

2012 (%)

1H 2011 1H 2012

Total 43 192 55 511 40 732 54 039 69 577 35 642 100.0 7.4 –4.3 –3.1

Mineral products 5902 13 825 8746 12 733 17 762 8032 22.5 0.4 –20.2 –23.1

Agricultural and food products 7346 8893 7979 9710 11 530 6134 17.2 15.9 8.0 8.7

Machinery and equipment 5589 5915 4078 5643 7214 4038 11.3 26.1 –15.9 –5.6

Chemical products 3477 5354 3695 4397 6374 3483 9.8 9.2 –8.5 –7.5

Transport vehicles 4557 4757 2956 4196 5339 2468 6.9 –23.8 –5.2 –10.9

Plastics, rubber and their products 3430 3304 2751 3677 4315 2404 6.7 14.8 14.8 16.2

Furniture 2665 2646 2404 2875 3549 2007 5.6 22.1 72.7 74.2

Wood, paper and their products 2660 2465 2004 2900 3578 1910 5.4 8.6 16.6 16.2

Textile and textile articles 3263 3059 2625 3225 3671 1789 5.0 –0.3 10.4 12.3

Metals and their products 2262 2647 1817 2421 3265 1768 5.0 13.6 –9.0 –5.4

Other goods 2041 2646 1676 2259 2980 1610 4.5 14.2 –0.4 3.4

* As a percentage of the turnover of trade in a certain commodity group.


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Table �. Main Foreign Trade Partners of Lithuania in 1H 2012

Exports ImportsForeign trade balance

at f.o.b. prices (%)*

LTL million Share (%) Annual change (%)

LTL million Share (%) Annual change (%)

1Q 2011 1Q 2012

Total 35 642.0 100.0 7.4 39 906.7 100.0 4.8 –4.3 –3.1

European Union 21 946.4 61.6 10.6 22 974.2 57.6 5.1 –2.3 0.3

CIS** 10 448.3 29.3 10.0 13 991.7 35.1 4.9 –14.3 –12.0

Other countries 3247.2 9.1 –15.7 2940.7 7.4 2.3 17.0 7.5

Russia 6775.0 19.0 28.2 12332.1 30.9 3.5 –36.3 –26.7

Latvia 3827.2 10.7 21.7 2403.0 6.0 –3.0 14.4 25.3

Germany 2961.8 8.3 –3.0 3936.2 9.9 0.8 –9.7 –11.6

Estonia 2454.0 6.9 26.8 1120.8 2.8 4.3 30.9 39.5

UK 2293.5 6.4 62.3 817.4 2.0 22.6 38.1 49.4

Netherlands 2183.0 6.1 15.9 2383.5 6.0 18.4 –0.8 –1.8

Poland 2071.6 5.8 –15.3 3920.7 9.8 15.6 –13.7 –28.5

Belarus 1564.1 4.4 –33.6 1105.6 2.8 29.8 48.8 19.7

France 1269.3 3.6 –1.0 896.3 2.2 –11.3 14.4 19.7

Sweden 1249.1 3.5 7.6 1337.5 3.4 0.5 –4.3 –0.9

Ukraine 1168.0 3.3 32.4 308.2 0.8 –21.9 40.4 59.9

Denmark 789.3 2.2 9.6 741.6 1.9 6.5 4.3 5.7

Norway 699.3 2.0 12.3 144.4 0.4 –8.2 61.3 67.2

Italy 648.9 1.8 8.7 1239.0 3.1 3.0 –31.4 –28.9

US 520.4 1.5 –52.4 407.9 1.0 –24.4 36.1 14.6

Kazakhstan 517.1 1.5 –24.0 217.2 0.5 97.8 73.4 42.9

Finland 471.2 1.3 –0.8 775.2 1.9 2.8 –20.3 –22.0

Belgium 362.6 1.0 –14.9 1227.7 3.1 –0.1 –46.5 –52.6

Spain 322.1 0.9 –13.9 454.6 1.1 3.5 –5.5 –14.6

Turkey 304.0 0.9 31.3 192.8 0.5 14.7 18.4 24.8

Czech Rep. 261.5 0.7 9.5 536.8 1.3 11.5 –31.4 –32.2

Togo 202.1 0.6 103.5 times 82.9 0.2 – 100.0 43.9

Hungary 195.0 0.5 49.4 286.4 0.7 3.2 –33.8 –16.5

Canada 150.5 0.4 –73.6 91.9 0.2 96.7 85.6 26.6

Tajikistan 132.8 0.4 3.0 times 0.1 0.0 6.8 times 99.9 99.9

China 118.0 0.3 48.1 853.5 2.1 16.7 –79.4 –74.6

Kyrgyztan 113.4 0.3 2.6 0.4 0.0 –92.6 90.6 99.3

Ireland 105.1 0.3 –10.0 91.7 0.2 –0.7 14.2 9.3

Austria 102.5 0.3 14.5 274.8 0.7 8.1 –45.9 –43.6

Romania 89.6 0.3 32.2 74.0 0.2 22.2 8.2 12.1

Portugal 84.0 0.2 –20.5 34.9 0.1 13.3 56.6 43.4

Slovakia 78.4 0.2 31.3 181.7 0.5 2.8 –47.5 –37.5

* As a percentage of the turnover of trade with a certain country or country group.** Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

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