Bloomberg News

Lithuania’s Economy, Budget, Vulnerable to Germany, Banker Says

May 25, 2012

Lithuania’s dependence on exports to Germany leaves its economy and state budget vulnerable to a slowdown in Europe’s largest economy, central bank Governor Vitas Vasiliauskas said.

German business confidence fell in May to 106.9 from 109.9 in April, the steepest decline since August, and manufacturing contracted at the fastest pace in almost three years, clouding the economic outlook for the second quarter. Lithuania ships 8.5 percent of its exports to Germany.

“If one of the most important markets, Germany, will slow down, it’ll have a big impact on our export figures,” Vasiliauskas said in an interview in Vilnius, the capital, yesterday. “It’ll have an impact on our budget figures too.”

The Baltic nation’s economy advanced at a faster rate than forecast in the first quarter, expanding a preliminary 3.9 percent, as domestic demand strengthened and the country’s main export markets of Russia, Germany, Latvia and Estonia, posted quicker economic growth than economists predicted.

The central bank estimates growth may slow to 3 percent this year after output rose 5.9 percent in 2011, the second- fastest pace in the 27-member European Union behind Estonia.

Lithuania will probably meet targets for euro adoption by the end of the year, Vasiliauskas said. Better-than-projected budget revenue is helping the government narrow the deficit to the planned 3 percent of gross domestic product from 5.5 percent in 2011, he said.

Inflation Goal

Inflation, the key obstacle to Lithuania’s euro adoption plans, will also slow this year to within limits required for the currency switch, the governor said.

“We see the possibility to reach the inflation criteria this year,” Vasiliauskas said. “Everything depends on external factors.”

To join the euro area, inflation must be within 1.5 percentage points of the average in the three EU countries with the lowest rates. Countries must also meet fiscal, debt, interest-rate and exchange-rate targets.

The central bank is diversifying its foreign-currency reserves, invested in euro-denominated securities, as sovereign- debt downgrades narrow investment options in the euro area, Vasiliauskas said.

The bank is disposing some of its investment in the euro region by adding bonds from outside the monetary union and debt securities of German regions that offer “better profitability,” he said. The regulator has become stricter in executing its own investment rules as concern over southern European debt soars, he said.

The sovereign credit grades of euro members are under pressure as policy makers struggle to rein in government debt levels while growth slows and joblessness mounts.

Seven of the 17 countries using the euro saw their credit assessment fall below A, the sixth-highest investment grade, at Standard & Poor’s, which also rates Cyprus, Greece and Portugal non-investment grade.

To contact the reporters on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net; Hellmuth Tromm in Berlin at htromm@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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