Fitch Upgrades Lithuania to 'A-', Outlook Stable

Wed Jun 25, 2014 4:07pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Lithuania - Rating Action Report here LONDON, June 25 (Fitch) Fitch Ratings has upgraded Lithuania's Long-term foreign currency Issuer Default Rating (IDR) to 'A-' from 'BBB+' and revised the Outlook to Stable from Positive. The Short-term foreign currency IDR has also been upgraded to 'F1' from 'F2' and the Country Ceiling raised to 'AAA' from 'A+'. The Long-term local currency IDR has been affirmed at 'A-' with a Stable Outlook. The issue ratings on Lithuania's senior unsecured foreign currency bonds have been upgraded to 'A-' from 'BBB+' and the issue ratings on its senior unsecured local currency bonds affirmed at 'A-'. Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on Lithuania is 3 October 2014, but Fitch believes that developments in Lithuania warrant such a deviation from the calendar and our rationale for this is laid out below. KEY RATING DRIVERS The rating actions reflect the following key rating drivers and their relative weights: High The upgrade of Lithuania's Long-term foreign currency IDR follows the announcement on 20 June by the European Commission's Economic and Financial Affairs Council (ECOFIN) that it has recommended Lithuania becomes the 19th eurozone member on 1 January 2015, which will be formally agreed by the European Council in July. Euro adoption will enhance Lithuania's economic policy coherence and credibility compared with the current exchange rate peg to the euro. It will reduce credit risks associated with foreign currency exposures on the sovereign's balance sheet and in the banking system, as well the country's still high level of net external debt. The euro's reserve currency status will enhance the sovereign's fiscal and external financing flexibility, while Lithuanian banks will gain access to European Central Bank (ECB) liquidity facilities. The increase of the Country Ceiling to 'AAA' represents the maximum cap for the foreign currency rating of issuers and transactions based in Lithuania. The agency views the risk of the imposition of capital or exchange controls within the eurozone as low but not negligible. Consequently, the agency imposes a maximum Country Ceiling uplift of six notches above the Long-term foreign currency IDR for eurozone member states. Lithuania's ratings also reflect the following key rating drivers: Lithuania's strong recovery from its deep economic crisis has continued and the economy displays relatively few macroeconomic imbalances. The economy has demonstrated the flexibility required to adjust to shocks without exchange rate adjustment. Fitch expects the Lithuanian economy to operate close to potential in 2014-15, registering annual average growth of 3.5%, broadly in line with the 'A' median. Lithuania has undertaken significant fiscal consolidation since 2009, successfully exiting the EC's Excessive Deficit Procedure in 2Q13. Fitch forecasts Lithuania's general government deficit at 2.2% of GDP in 2014 and 1.7% in 2015, after 2.2% in 2013. Government debt was 39.4% of GDP at end-2013, below the 'A' range median of 50%. Lithuanian's banking system is stable. Capital adequacy ratios increased to 17.6% at end-2013 from 15.7% at end-2012. The quality of banks' loan portfolios has also improved, with non-performing loans declining to 11% from a peak of 20% in 2010. External finances compare weakly against rating peers. Lithuania's net external debt was equivalent to 25.2% of GDP at end-2013, compared with a net creditor position for the median of 'A' rated peers. It has strong governance and effective policy-making institutions. Measures of human development, governance and ease of doing business are broadly in line with the 'A' median. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that individually or collectively could trigger a positive rating action include: - A longer track record of strong and stable growth that fosters income convergence towards the 'A' median, without the re-emergence of macroeconomic imbalances. - Further material reductions in public indebtedness. The main factors that individually, or collectively, could trigger a negative rating action include: - A severe shock that undermines macroeconomic and financial stability, leading to renewed macroeconomic imbalances. - Deterioration in Lithuania's public debt dynamics, reflecting economic underperformance and/or sustained fiscal slippage. KEY ASSUMPTIONS The ratings and Outlooks are based on the following key assumptions: The European Council formally endorses the recommendation of ECOFIN, as it has in the case of every other eurozone accession country, and Lithuania becomes a eurozone member on 1 January 2015. Medium-term budget deficit outcomes are broadly in line with the Ministry of Finance's targets and are consistent with continued fiscal consolidation. The gradual progress in deepening fiscal and financial integration at the eurozone level will continue, key macroeconomic imbalances within the currency union will be slowly unwound, and eurozone governments will tighten fiscal policy over the medium term. Fitch assumes no material escalation in developments between Russia and the Ukraine that would lead to a significant external shock to Lithuania's economy. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria', dated 13 August 2012, and 'Country Ceilings', dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.