Lithuania’s Economy May Start to Grow in 2010, Sarkinas Says
Lithuania’s recession, the deepest in the European Union, is close to bottoming out and the economy may start growing next year if trade demand continues to gain strength, central bank Governor Reinoldijus Sarkinas said.
“Under positive external conditions, a recovery, even if at very low growth rates, may begin next year,” Sarkinas said in an interview in Vilnius yesterday.
The government of Prime Minister Andrius Kubilius expects the economy to contract 4.3 percent next year as the Baltic state adapts to tough austerity measures needed to comply with euro adoption terms. Lithuania, like neighboring Latvia and Estonia, pegs its currency to the euro inside the exchange rate mechanism, obliging the government to deflate the economy to stay competitive instead of relying on a weak litas.
The Baltic nation’s top monetary policy official called on the government to cut spending to a level “it can afford.”
Government spending cuts and tax increases contributed to a 20.2 percent economic contraction last quarter. The Cabinet yesterday proposed savings including cuts on social spending to stop next year’s deficit from widening beyond the 8 percent of gross domestic product estimated for this year.
“The deficit needs to start narrowing next year,” Sarkinas said. “We shouldn’t borrow just for consumption. One must live within one’s means.”
A swelling budget gap doesn’t mean the country will need outside help with its finances, he said. Lithuania has “no need at the moment” to ask for money from international lenders, “but there’s nothing frightful if such a need occurs,” he said.
IMF
Latvia, which is suffering the second-deepest recession in the EU after Lithuania, is relying on a 7.5 billion euro ($11 billion) loan from the International Monetary Fund and the European Commission to stay afloat.
Latvia’s economic difficulties “can’t be comforting to anyone, neither to us, nor to Latvians, nor to other countries,” Sarkinas said. “We’d benefit if the situation there would be solved as soon as possible and would begin improving.”
The government can avoid a bailout if it raises funds on the domestic bond market or abroad. “The Baltic region is three separate countries with different situations, and one shouldn’t put an ‘equals’ mark,” Sarkinas said.
Borrowing opportunities in foreign markets “have significantly improved since the start of the year,” he said, and the government is likely to borrow at a cheaper rate than earlier this year, when it sold euro-denominated bonds.
The Baltic economic crisis has had repercussions outside the region, with western European lenders suffering depleted loan portfolios as a growing number of Baltic borrowers were unable to service their debt.
‘Most Serious Risk’
The recession in the Baltic region poses the “most serious risk” to Sweden’s economy and budget, Swedish Finance Minister Anders Borg said on Sept. 21. Stockholm-based Swedbank AB and SEB AB are the biggest lenders in the region.
Sarkinas said Swedish lenders are operating “completely fine” in Lithuania, while adding an improvement in the banking industry’s loan quality may take longer. “It’s a difficult time for banks,” he said.
Loan provisions average 3.28 percent of total lending, compared with 0.8 percent a year ago, and “will continue increasing.” Even so, lenders are “well-prepared” and “have accumulated sufficient capital to absorb future losses,” Sarkinas said.
Capital adequacy ratios average more than 13 percent, compared with the 8 percent ratio required by the central bank, Sarkinas said.
Credit portfolios, which shrank about 7 percent from the start of the year, are showing the first signs of stabilizing and may start growing in coming months, Sarkinas said. Loans to households and businesses were almost unchanged in August after shrinking in each of the first seven months.