Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Lithuania (Lithuania)’s long-term issuer and senior unsecured debt-category ratings at A, in both local- and in foreign-currency, and revised the Outlooks to Positive, from Stable. Short-term issuer ratings have been affirmed at S-1 in both local and foreign currency, with the Outlooks revised to Positive.

The revision of the Outlooks to Positive on Lithuania’s credit ratings reflects the country’s robust medium-term growth prospects, benefiting from structural improvements derived from an ambitious reform agenda and sizeable EU-funded public investments. These will allow for a continued convergence towards euro area income levels and further enhance the country’s resilience to shocks. The Outlook revision furthermore reflects Lithuania’s robust fiscal trajectory, anchored by a strong track record of fiscal prudence, favourable growth prospects and robust debt affordability. The expected gradual decline in the debt-to-GDP ratio over the coming years should be driven by continued high nominal growth, a low interest burden and declining primary deficits.

Download the rating report.

Key rating drivers

Robust growth prospects and improvements in external position. The Lithuanian economy contracted by 0.3% in 2023 due to weak private consumption amid elevated inflation and uncertainty, and despite high public investment and resilient services exports. The economic momentum has improved markedly since the beginning of the year, however, with real output in the first half of 2024 up 2.4% year-on-year (y-o-y). Household consumption is recovering strongly, amid rapid disinflation (monthly HICP inflation averaged 0.8% over January-August 2024, down from 12.1% over the same period last year) and elevated wage growth (up by about 10% y-o-y in H1 2024). Despite an uptick in the unemployment rate (at 7.4% in H1 2024, up from 6.7% in H1 2023), employment growth has remained robust (2.3% YoY in H1 2024) as labour supply grew, amid still-elevated net migration flows (+18,600 over January-August 2024), increasing participation rates (close to historical highs at 79.9% of the population aged 15-64 as of Q2 2024) and robust labour demand. Scope expects growth will reach 2.2% this year and 2.8% in 2025 driven by robust household consumption and a pick-up in business investment, supported by gradually loosening funding conditions.

The Lithuanian economy’s recovery has also yielded improvements in the country’s external position. After declining to a 5.5% of GDP deficit in 2022, the current account balance returned to 2.8% surplus by Q1 2024. The rebound reflects the resilience of Lithuania’s services export surpluses (which have returned to their pre-Ukraine war shock levels of above 10% of GDP) and a sharp moderation in nominal commodity imports. Lithuania’s net international investment position had improved to 1.3% of GDP by end-2023, from -23.5% at end-2019. Prospects of steady current account surpluses and of sizable EU fund inflows underpin Scope’s expectations of steady improvements in Lithuania’s external balance sheet over coming years, which should further strengthen the Lithuanian economy’s resilience to external shocks.

Structural reforms support the medium-term growth outlook and strengthen economic resilience. The medium-run growth potential is comparatively strong, at an estimated 2.5% annually, underpinned by a favourable structural reform momentum, alongside access to sizable EU funding and effective absorption capacity. EU fund allocation under the country’s Recovery and Resilience Plan (RRP) and cohesion policy funding amounts to EUR 10.1bn over 2021-27 (14% of 2023 GDP). Lithuania’s RRP also includes a set of structural reforms that should help address long-standing bottlenecks such as skills shortages, notably via education and vocational training reforms. Importantly, Scope notes that the recovery in economic output, exports and employment has been driven by the ICT and financial services sectors, reflecting the continued transition of the Lithuanian economy away from low-tech manufacturing towards high value-added services. This shift, alongside a very resilient financial position of non-financial corporates (which display some of the lowest indebtedness ratios in the EU) and forceful government support, positioned the Lithuanian economy well to absorb the recent terms of trade shock with no apparent scarring on potential output.¹

Lithuania's economic resilience has also been bolstered by significant progress regarding energy security, in line with authorities’ decision to phase out energy imports from Russia in H1 2022. This shift was supported by an infrastructure push that enhanced interconnectedness with EU neighbours and expanded the country’s own energy storage and regasification capacities.

Moderate public debt levels, track record of fiscal prudence and strong debt affordability. Lithuania’s fiscal deficit was broadly stable last year, at 0.8% of GDP, below an initial target of 1.9%. This outperformance results from stronger-than-anticipated revenue growth and the partial phase out of energy-support measures, which outweighed inflation-related pressures on social expenditures and public sector wages. Scope expects a deterioration of the fiscal deficit over the medium-term, to 1.8% of GDP in 2024 and 2.2% in 2025. This reflects persistent inflation-related pressure on personnel costs and welfare transfers, and slowing revenue growth amid normalising nominal growth. The medium-term fiscal outlook will also be impacted by government commitments to raise defence spending to 3% of GDP over 2025-30 (from 2.8% in 2023). This additional spending should be largely funded through measures already adopted in early-2024 under the ‘Defence Fund Package’, notably via hikes in excise duties and in the corporate income tax rate.

The fiscal deficit is expected to moderate in subsequent years and to average at 1.3% over 2026-29. This projected trajectory accounts for expectations of robust revenue growth and is underpinned by Lithuanian authorities’ strong track record of fiscal prudence, as reflected in pre-pandemic budgetary surpluses (averaging 0.4% of GDP over 2016-19). General government revenue stood at 37.1% of GDP in 2023, up 3.1 percentage points (pp) from 2019, reflecting successful efforts from Lithuanian authorities to broaden its tax base and improve compliance. It is expected to continue increasing over coming years, gradually rising towards euro area averages (46.4% of GDP in 2023), notably thanks to policies agreed under Lithuania’s Recovery and Resilience Plan.

Lithuania’s general government debt-to-GDP ratio is among the lowest in the euro area, at 38.2% at end-2023. It is seen remaining broadly stable over 2024-25, before resuming a gradual declining trend from 2026 and concluding a forecast horizon at around 35% in 2029 – broadly in line with its pre-pandemic level. This trajectory is anchored by prospects of robust nominal growth, still-moderate interest payment burden and declining primary deficits. Scope expects Lithuania’s debt-to-GDP ratio to remain significantly below the 60% Maastricht threshold even under a stressed scenario of durably weaker economic growth and looser fiscal stance.

Lithuania is expected to retain robust debt affordability over coming years, with net interest payments forecast to rise to 3.4% of general government revenue by end-2029 from the impact of durably higher market rates – a moderate 1.4 pp increase from end-2023. This relatively benign trajectory reflects moderate indebtedness levels, manageable funding needs over the forecast horizon (at around 10% of GDP on average over 2024-29) and a favourable debt profile. The latter is the result of conservative debt management policies, with elevated average debt maturity of around nine years, a negligible share of variable rate liabilities and no foreign currency exposure. Lithuanian authorities can issue on favourable terms in domestic and international capital markets despite tighter global funding conditions, with a low effective interest rate on the debt portfolio of 1.6% as of end-2023.

Rating challenges: exposure to external shocks and longer-term demographic pressures.

Lithuania is a small and very open economy, with the export and import sectors accounting for around 75% of GDP each. This, coupled with still-moderate wealth levels (GDP per capita of EUR 25,070 compared with the euro area average of EUR 41,400), exposes Lithuania to external shocks. This vulnerability is exacerbated by the present environment of heightened geopolitical tensions following Russia’s invasion of Ukraine in February 2022. While Scope assesses direct military risks from Russia as low due to Lithuania’s strong international alliances, the country’s geographical proximity to Russia and strategic location on the Baltic Sea make it one of the EU countries most exposed to spillovers from the conflict, including to broader security challenges such as cyber risks or disinformation campaigns. While Scope assesses the country’s preparedness to such hybrid forms of aggression positively compared to other Central and Eastern European peers, a protracted conflict adds significant uncertainty to the medium-term macroeconomic and fiscal outlooks.

Additionally, Lithuania’s ratings are constrained by adverse demographic trends, which are likely to weigh on the longer-term economic and fiscal outlooks. The country’s working-age population is expected to decline by an average of 1.4% annually over 2024-30.² While demographic challenges were temporarily alleviated in recent years by large inflows of Ukrainian refugees, an ageing population is expected to exacerbate pressures in the labour market, where labour shortages already constitute a key bottleneck to output growth and risk fuelling further wage increases, in turn potentially eroding the country’s external competitiveness. Adverse demographic trends are furthermore a challenge for fiscal sustainability in the long run. The IMF estimates the net present value of changes in healthcare and pension spending through 2050 at above 50% of GDP.³

Outlook and rating sensitivities

The Positive Outlook reflects Scope’s view that risks for the ratings are tilted to the upside over the forthcoming 12 to 18 months.

Upside scenarios for the long-term ratings are (individually or collectively):

1. Robust economic growth and income convergence were maintained via reform implementation and investment.
    
2. The public debt-to-GDP ratio remained anchored at low levels, supported by balanced government finances over the medium run.

Downside scenarios for the rating and/or Outlooks are (individually or collectively):

1. Geopolitical risks increased, undermining macroeconomic stability.
    
2. Fiscal fundamentals weakened, resulting in a significant rise in the debt-to-GDP ratio over the medium run.
    
3. Macroeconomic imbalances rose, weakening growth prospects.
    
4. External- and/or financial-sector vulnerabilities rose substantially.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘a’ – approved by the Rating Committee – for Lithuania. This ‘a’ first indicative rating receives a further one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This sees a final SQM indicative credit rating of ‘a+’ for Lithuania. On this basis, the final SQM quantitative rating of ‘a+’ is reviewed by the Qualitative Scorecard (QS) and can be adjusted by up to three notches depending on Lithuania’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following QS relative credit weaknesses of Lithuania: i) social factors; ii) governance factors. Conversely, Scope did not identify QS relative credit strengths for Lithuania. On aggregate, the QS generates a one-notch negative adjustment affecting Lithuania’s credit rating, resulting in the final A long-term ratings. A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues within its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Lithuania displays favourable scores in the SQM, reflecting comparatively moderate levels of CO2 per unit of GDP, a low footprint of consumption compared to available biocapacity, and favourable marks as regards its exposure and vulnerability to natural disaster risks, which balance relatively elevated levels of greenhouse gas emissions per capita. Lithuania’s QS evaluation on ‘environmental factors’ is ‘neutral’ against a peer group of countries. Lithuania has achieved significant progress in the development of renewable energies, whose share in gross final energy consumption amounted to nearly 30% in 2022 (above an EU average of 23%). Lithuanian authorities aim to raise this share to 50% by 2030. Reducing the carbon footprint of the economy has proven challenging in recent years, especially given rising emissions in the transport sector. Lithuania has dedicated 38% of its Recovery and Resilience programme funding to climate actions and plans to allocate the resources to upgrading its building stock, enhancing the sustainability of the transport sector and further developing its renewable-energy sector.

Regarding social factors, Lithuania receives a strong score in the SQM model for labour-force participation but weak marks on income inequality and on the old-age dependency ratio. The complementary QS assessment of ‘social factors’ is ‘weak’ compared to a peer group of countries. This reflects challenges related to demographic trends and elevated poverty and exclusion risks, which remain markedly above EU averages.

The complementary QS assessment of ‘governance factors’ is ‘weak’ compared to peers to account for Lithuania’s comparatively heightened exposure to spillover from the Russia-Ukraine war. External security risks for Lithuania have increased materially since the escalation of the Russia-Ukraine war, though NATO and EU memberships strongly limit the risk that the conflict will expand into the Baltic region. Under governance-related factors in the SQM, Lithuania performs very strongly relative to peers, in line with high scores under the World Bank’s Worldwide Governance Indicators. Policy-making has been effective and enjoyed broad continuity. EU and euro area memberships also enhance the quality of Lithuania’s macroeconomic policies and macroprudential framework. Prime Minister Ingrida Šimonytė has led a centre-right coalition government since 2020, with the next parliamentary elections scheduled to take place in October 2024.

Rating committee
The main points discussed by the rating committee were: i) Lithuania’s economic outlook and medium-term growth potential; ii) fiscal and debt-sustainability developments; iii) external-sector vulnerabilities; iv) banking-sector and non-financial private sector balance sheet developments; v) ESG considerations; and vi) peer comparisons.

Rating driver references
1. IMF: Republic of Lithuania: Selected Issues, July 2024
2. European Commission: 2024 Ageing Report, April 2024
3. IMF: Fiscal Monitor, April 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation     NO
With access to internal documents                                  NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Brian Marly, Senior Analyst
Person responsible for approval of the rating: Eiko Sievert, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Ratings/Outlooks were last updated on 28 April 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.