OREANDA-NEWS. April 26, 2010. "Swedbank" analysis note that recovering exports, significant budget deficit and wide use of the EU funds in the budget helped Lithuanian to reduce the rates of contraction of its economy, however numerous challenges have not been addressed yet and are carried forward to the future. The most complicated part of the crisis is already behind, but the scenario – gradual "U" or slow "L" shape – to which the economy of Lithuania will be exposed in 2010 and 2011 is not clear year. It is obvious that the greatest challenges will be faced by the system of social insurance which urges for immediate strategic reforms, reported the press-centre of Swedbank.

The most recent macroeconomic outlook of Sweden and Baltic States developed by "Swedbank" the analysis of the Bank maintain the same forecasts of the main economic indicators – in 2010 the country’s GDP is likely to contract by 0-2% followed by almost 3% growth in 2011, and un employment rate this year will reach 16%. However, experts of the Bank upgraded their outlook of export growth for 2010 to 6% and expect 3% growth of imports this year.

"As meanwhile economies of the main export partners of Lithuania – EU Member States – are recovering slower than USA, Japan and China, it is difficult to forecast the growth of the country’s economy for this year. Continuing weakening of domestic demand influenced by high unemployment and reducing household income do not contribute to the recovery either. These preconditions signal about the possible "L" shaped recovery in 2010, and the possibility to see a small fracture of "U" can be expected only in 2011", - says Tomas Andrejauskas, Head of "Swedbank Markets" Lithuania.

In his opinion Lithuania must focus on structural reforms in order to meet as soon as possible Maastricht criteria necessary for the adoption of the euro. "In this case the goal should be not the euro, but Maastricht criteria which always signal to the public and investors about the real sustainability of economy and adequacy of readiness for the euro adoption. Obviously, international community has far less reproaches to the northern part of Europe which demonstrates fiscal discipline, compared with the South European countries, which have failed to settle the problems of their budget expenditures and amount of public debt. Meeting Maastricht criteria would facilitate in creating healthier economy of the country, promoting investments which are particularly necessary both for labour market and social insurance system", - notices T.Andrejauskas.

Euro in 2014 is achievable

Analysts of  "Swedbank" expect that Estonia will succeed in adopting the euro in 2011 and this will be a positive stimulus not only for this country, but also for the Baltic Region at large. Lithuania, Latvia and Estonia in many cases are treated as more or less integrated area; therefore success of one country is also good for other states. It is very important for Lithuania to demonstrate that it is also rapidly moving in the same direction“, - says T.Andrejauskas.

According to the most recent macroeconomic outlook of  "Swedbank" budget deficit of Lithuania – one of the Maastricht criteria indicators – in 2010 will reach 8% of GDP, in 2011 – 6% of GDP and in 2012, as agreed upon with the European Union, the budget deficit of the country is expected to reduce to 3% of GDP.

Public debt in 2010 is forecasted to amount to 38% and in 2011 – to 42% of GDP, while Maastricht criterion is 60%. Inflation in Lithuania in 2010 and 2011 should be about 1%.

"Introduction of euro in 2014 is problematic, albeit still achievable goal. A lot will depend upon the continuity of reforms and behaviour of political parties and Government with Parliamentary elections pending in 2012. Populist decisions in that stage might have long-term negative effects for the country", - says T.Andrejauskas.

"Sodra" – the most vulnerable part of public finances

"Swedbank" analysis notes that social insurance system represents the most vulnerable part of public finances of Lithuania.

Situation of  "Sodra" still remains the largest problem for the recovering economy of Lithuania. On-lending by the state to "Sodra" almost LTL 4 273 billion in 2009-2010 helped in successfully stabilising the situation, but this only deferred the problems to the future", - explains T.Andrejauskas.

He draws attention to the fact that total amount of wages paid in the country, considering growing unemployment rate, shortening working hours and reduced wages, in end-2009 was by 20-25% smaller than a year ago and in 2010is forecasted to reduce further by 7-10%. "Social insurance taxes are paid from wages, so income of  "Sodra" at least in the nearest future will continue reducing", - says Head of  "Swedbank Markets" Lithuania.

Increasing emigration, particularly among the younger generation, is another factor which will significantly undermine long-term prospects of the social insurance system.
 
"What we need is complex solutions – structural reforms reducing costs of  "Sodra" – on one side, and promotion of economic growth and investments capable of creating new jobs – on the other. In both cases the state has a very significant role to play as for the time being stimulation of economy is almost exclusively linked only with accelerated assimilation of the EU funds and growth of public debt", - says T.Andrejauskas.

Recovery of consumption in Estonia

For Latvia and Estonia "Swedbank" analysts also retain the same outlook of the main economic indicators. In 2010, Estonian economy is expected to grow at the rate of 1.5% and Latvian economy – to contract by 2.5%. The growth rates forecasted for Estonia and Latvia in 2011 are 4.5% and 4%, respectively.

According to Bank experts, domestic consumption in Estonia is set to recover, while prospects of economic growth of Latvia as well as Lithuania are very much dependent upon external factors and in the first instate – upon the situation in the main export markets of Europe.