Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Lithuania (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A/Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1/Stable) on 9 October 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Lithuania’s A rating reflect several credit strengths, including its: i) sound institutional set-up, anchored by euro-area and NATO memberships, which ensure a robust framework for fiscal and economic policy making alongside mitigating external security risks; ii) improved economic resilience and a robust medium-run growth outlook, underpinning an expectation for continued convergence of income levels to euro-area averages over the coming years; and iii) a sound fiscal position with moderate public debt levels, underpinning strong debt affordability despite fiscal costs associated with recent shocks and higher financing costs for the government following rapid tightening of ECB monetary policies in the past months.

The main challenges for the ratings are: i) still moderate income levels, despite continued convergence of income towards euro-area averages over past decades; ii) exposures to external shocks given the small size and openness of the economy; iii) adverse demographic trends exacerbating labour-market shortages and fiscal pressures; and iv) financial-sector risks related to the dependence on Nordic banks and elevated cross-border financial flows.

The Lithuanian economy is expected to shrink by 0.7% in 2023, primarily reflecting weak private consumption, amid high inflation and rapidly tightening financial conditions. Scope forecasts a rebound in economic momentum over the next two years, with annual growth rates of 2.0% and 2.8% in 2024 and 2025, respectively, driven by improvements in real income dynamics and a more favourable external environment.

The general government deficit is expected to widen to 2.2% of GDP in 2023, up from 0.6% of GDP last year, from the effects of the war and cost-of-living shocks. It should rise slightly to 2.6% of GDP next year, as revenue growth decelerates and the indexation of pension and social benefit payments pushes up spending, before gradually declining in subsequent years. The debt-to-GDP ratio should remain broadly stable over coming years, around 38%, amid still favourable interest-growth differentials and improving budgetary dynamics from 2025 onwards.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) solid economic growth and continued income convergence were maintained via reform implementation and investment; ii) the public debt-to-GDP ratio remained anchored at low levels, supported by balanced government finances medium run; iii) external- and/or financial-sector vulnerabilities continued to moderate; and/or iv) geopolitical risks affecting the region moderated significantly.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) fiscal fundamentals weakened, resulting in a significant rise in the debt-to-GDP ratio medium run; ii) macroeconomic imbalances rose, weakening growth prospects; iii) external- and/or financial-sector vulnerabilities rose substantially; and/or iv) geopolitical risks rose further, undermining macroeconomic stability.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Brian Marly, Analyst

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