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 2 April 2024.

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

For the updated report accompanying this review, click here.

Lithuania’s A rating reflects 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.

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

The Lithuanian economy experienced a moderate contraction of an estimated 0.3% of GDP last year, as tighter funding conditions and elevated price pressures negatively affected private consumption and weak external demand weighed on export activity. These headwinds outweighed otherwise favourable resilient investment growth. Scope expects a gradual recovery of 1.7% in 2024 and 3.1% in 2025. A gradual loosening in lending conditions and decelerating price pressures are supporting a rebound in private demand, while exports should benefit from improvements in external demand.

The fiscal deficit increased to about 1.5% of GDP in 2023, up from 0.7% in 2022. It should increase to 2.3% of GDP this year, driven by spending pressures stemming from higher public sector wages and pension payments following the inflation shock, higher public investment and growing military expenditures. The government balance should improve gradually in subsequent years, in part thanks to robust nominal growth and a low debt service burden. The debt-to-GDP ratio stood at an estimated 37.3% at the end of 2023, broadly stable from the previous year. Scope expects it to decline gradually over the medium-term, down to about 34% by 2028.

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) geopolitical risks in the region declined; ii) solid economic growth and continued income convergence were maintained via reform implementation and investment; iii) the public debt-to-GDP ratio remained anchored at low levels, supported by balanced government finances medium run; and/or iv) external- and/or financial-sector vulnerabilities continued to moderate.

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

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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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