Focus on Lithuania (IBR 2013)

Focus on: LithuaniaGrant Thornton International Business Report 2013

3 million inhabitants

200businessinterviews

US$42bngross domestic product

Focus on: Lithuania 2

Introduction

Focus on: Lithuania

Lithuania is a country is an eastern European economy of around 3m people. In 2012, its GDP was approximately US$42bn, making it the 82nd largest economy in the world. It is the largest and most populous of the three Baltic states and accounts for 46% of the region’s total GDP.

Drawing on data sources such as the Economist Intelligence Unit (EIU), the International Monetary Fund (IMF) and the Grant Thornton International Business Report (IBR), this short report considers the outlook for the economy, including the expectations of 200 businesses interviewed in Lithuania, and more than 12,500 globally, over the past 12 months.

Genadijus MakuševasGrant Thornton Rimess UABManaging partnerT +370 5 212 7856E [email protected] W www.grantthornton.lt

10.0%

13.2%

6.4%

9.1%

15.0%

13.0%

9.2%

46.4%

12.0%

15.0%

0

1

2

3

4

2012 2013 2014 2015 20172016

5.9% 4.4%

10.0%

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2012 2013 2014 2015 20172016

5.9% 4.4%

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2012 2013 2014 2015 20172016

5.9% 4.4%

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46.4%

12.0%

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0

1

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2012 2013 2014 2015 20172016

5.9% 4.4%

Economyslowed to

3.6%in 2012


The pace of expansion in the Lithuanian economy slowed to 3.6% in 2012, down from 5.9% in 2011, as the eurozone sovereign debt crisis dampened regional growth prospects.

Focus on: Lithuania

The government is still aiming to follow neighbours Estonia and Latvia into the single currency in 2015 and is expected to comfortably meet accession criteria for the deficit, public debt and exchange rate but this will require significant fiscal

consolidation which will rub against calls for more budget target flexibility that the ruling party campaigned on in 2012. Russia and Germany are key trading partners. Refined petroleum account for 22% of exports.

• the economy expanded by 2% year-on-year in Q3, slightly down on growth of 3.5% and 3.8% in the previous two quarters of 2013 respectively

• real wages rose for the first time since the financial crisis in Q1 and Q2-2013, helping to boost private consumption by 4.9% year-on-year in the second quarter

• the unemployment rate fell to 11.9% in September, the lowest level since Q4-2008, and down from 13% a year

earlier, although net migration is still negative and more than 250,000 jobs have been lost since the financial crisis

• exports climbed by 16.0% in Q3 from the same period 12 months previously, up from 10.6% in Q2; imports grew by 11.5% in Q3, down from 15.9% in the previous quarter

• inflation was up by 0.4% in September from the same period in 2012, with a 0.7% rise recorded since August

Key indicators

EconomyExport markets

Russia GermanyLatviaPolandNetherlands

GermanyRussiaPolandLatviaNetherlands

Source: Observatory of Economic Complexity (2013)

Import sources

Other

Other

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%

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0 1 2 3 4

20

12

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20

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15

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5.9

%4

.4%

forecast growth3.7%

in 2013forecast growth3.2%

in 2014


Focus on: Lithuania

Stronger than expected growth in Q3 of 2.0% means forecast growth of 2.9% across 2013 is likely to be beaten, with the government forecasting expansion of 3.7%. Private consumption has picked up in recent months as rising real wages and consumer confidence coupled with falling unemployment boosts spending. This trend is expected to continue on into 2014 with real GDP growth of 3.2% currently forecast, rising to 3.4% in 2015.

Wage growth has been supported by the 18% nominal increase in public sector wages for the lowest paid but private sector salaries (3.8% vs 2.2%) actually rose faster in Q2 suggesting a more sustainable, less fiscally draining, outlook for earnings. Rising domestic demand will boost imports but the external sector is likely to remain a net contributor to GDP growth next year (0.4%) as internal demand in Lithuania’s major trading partners accelerates even faster.

The government is targeting a fiscal deficit of 1.9% of GDP in 2014, well within the level necessary for eurozone entry. Tax revenues are expected to increase by 5.1% as rising wages and falling unemployment boost returns from income and consumption. Maastricht criteria for eurozone entry should easily be met and with inflation falling, the government is expected to ask in early 2014 to be admitted into the single currency. The budget balance is expected to decline from -3.3% of GDP in 2012 to -1.3% in 2016.

Economic outlook

Growth and inflation forecasts

Source: Economist Intelligence Unit (2013)

Consumer price inflation (av; %)

Real GDP growth (%)

10.0%

13.2%

6.4%

9.1%

15.0%

13.0%

9.2%

46.4%

12.0%

15.0%

0

1

2

3

4

2012 2013 2014 2015 20172016

5.9% 4.4%

expect31%revenues

to rise


Business growth prospects

Focus on: Lithuania

Net percentage of businesses expecting to increase exports (next 12 months)

Source: Grant Thornton IBR 2013

Net percentage of businesses expecting to increase investment in plant & machinery (next 12 months)


Business optimism in Lithuania remained steady at 15% in Q3, ahead of peers in Estonia (12%) and Latvia (-4%), and the eurozone average (8%). Business leaders are more optimistic about the growth of their own operations: 42% of Lithuanian businesses expect revenues to rise in the year ahead, in line with average over the past 12 months. The Baltics average is marginally higher at 44% but the eurozone average much lower at 26%. Expectations for profitability are subdued in Lithuania: just net 9% expect to see profits climb in the year ahead, behind Estonia (32%) and Latvia (14%).

Increasing regional vitality is evidenced in the exports figures. Across the eurozone net 26% of business leaders expect to see exports increase over the next 12 months, up from 19% three months previously. In Lithuania the figure is even higher at net 31%, ahead of Estonia (26%) and Latvia (18%).

Levels of expected investment in plant & machinery remain elevated in Lithuania which bodes well for long-term growth prospects. At net 57%, Lithuanian businesses are planning more spending that peers across the Baltics (54%) and more than double that in the eurozone (25%).

Q3-2013 Q3-2013

Q1-2013 Q1-2013

Q2-2013 Q2-2013

Q4-2012 Q4-2012

26 25

24 38

eurozone eurozone

eurozone eurozone

19 19

17 22

31 54

26 64

31 57

26 66

22 47

32 52

24 56

36 56

Baltics Baltics

Baltics Baltics

Lithuania Lithuania

Lithuania Lithuania

eurozone eurozone

eurozone eurozone

Baltics Baltics

Baltics Baltics

Lithuania Lithuania

Lithuania Lithuania

constraining

shortage offinance

growthtalent is aa lack of

challenge

Percentage of businesses citing factors as constraints on their ability to grow their operations

Lithuaniaeurozone

ICT infrastructure

116

Regulations & red tape

41 35

Lack of skilled workers

4226

Shortage of finance

45 27

Transport infrastructure

12 7

Shortage of orders

24 36


Focus on: Lithuania

Constraints on expansionA shortage of finance emerges as the most pressing constraint on the ability of Lithuanian businesses to grow their operations. It is cited by 45% of businesses in the economy, well above neighbouring Latvia (36%) and Estonia (24%) which are much closer to the eurozone average (27%).

A lack of skilled workers (42%) is also a major constraint and is brought into sharper focus as the population continues to decline. Business leaders in Latvia (50%) and Estonia (38%) are also struggling with a lack of talent in comparison to the eurozone average (26%).

More than two in five businesses in Lithuania cite regulations and red tape as a constraint (41%), slightly above the eurozone average (35%) but much higher than the other Baltic nations – Latvia (30%); Estonia (18%).

The principal area in which Lithuanian businesses are struggling less that the eurozone average is demand for their goods and services. More than a third of businesses within the single currency are cite a shortage of orders (36%) compared to just under a quarter in Lithuania (24%).

Infrastructure is well down the list of concerns of Lithuanian business leaders. Just 12% cite transport infrastructure as a constraint on growth and just 6% cite ICT infrastructure.


79

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22

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5

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33

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85

21

40

14

8

89

40

66

39

40


Focus on: Lithuania

Lithuania in Europe Lithuania joined the European Union in 2004, the same year as Estonia and Latvia. However, with Latvia joining the euro in 2014 and Estonia a member since 2011, Lithuania will be last of the Baltic states to join the single currency. All indicators suggest that the economy will meet the strict conditions for entry, including public debt below 60% of GDP and a budget deficit of under 3%, ahead of a proposed entry in 2015.

This will please 61% of Lithuanian businesses who indicate that they would like their country to join the euro. Latvian businesses are only slightly more positive about adopting the single currency (64%). Entry may also come as a bit of surprise to many Lithuanian businesses as only 36% expect the economy to join before 2016.

The flipside of course is that more than a third of Lithuanian business leaders (35%) do not want to adopt the euro. Indeed one in ten want the currency union to break up, double the rate in Latvia, and a further 34%

believe no more countries should join in the near future.

Lithuanian businesses are positive about further European integration however; 85% would like to see cooperation between EU member states. This compares to 83% in Latvia and 79% in Estonia. Two in five Lithuanian businesses want to see further economic integration and one in five wants to see a deepening of political ties.

For more on these results please look at our recent IBR report: Future of Europe 2013.


Would you like like to see further integration of EU member states?

Yes

What form of integration would you like to see?

Political

Economic

Industrial

Legal

Would you like your country to adopt the Euro? (% yes)


Latvia Lithuania Denmark Poland Sweden United Kingdom

64 61 59 56

2011

Estonia

Estonia

Latvia

Latvia

Lithuania

Lithuania

eurozone

eurozone

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IBR 2013 methodologyThe Grant Thornton International Business Report (IBR) is the leading mid-market business survey in the world, interviewing approximately 3,300 senior executives every quarter in listed and privately-held businesses all over the world. Launched in 1992 in nine European countries, the report now surveys more than 12,500 businesses leaders in 45 economies on an annual basis, providing insights on the economic and commercial issues affecting companies globally.

The data in this report are drawn from interviews with chief executive officers, managing directors, chairmen and other senior decision-makers from all industry sectors in businesses with 20-249 employees in Lithuania. Q3 data is drawn from 3,300 interviews globally (50 in each of Estonia, Latvia and Lithuania) conducted in September 2013. 2013 data is drawn from over 12,500 interviews (200 in each of Estonia, Latvia and Lithuania) conducted between November 2012 and September 2013.

To find out more about IBR, please visit: www.internationalbusinessreport.com.

Dominic KingGrant Thornton International LtdGlobal research managerT +44 (0)207 391 9537E [email protected]

Gerli SoosaluGrant Thornton Rimess OÜMarketing managerT +372 626 4500E [email protected]