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Fitch Revises Lithuania's LTFC IDR Outlook to Positive; Affirms at 'BBB+'
April 4, 2014 / 4:05 AM / in 4 years

Fitch Revises Lithuania's LTFC IDR Outlook to Positive; Affirms at 'BBB+'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Lithuania - Rating Action Report here LONDON, April 03 (Fitch) Fitch Ratings has revised the Outlook on Lithuania's Long-term foreign currency Issuer Default Rating (IDR) to Positive from Stable. The Outlook on Lithuania's Long-term local currency IDR is Stable. The Long-term foreign and local currency IDRs have been affirmed at 'BBB+' and 'A-' respectively. The issue ratings on Lithuania's senior unsecured foreign and local currency bonds are also affirmed at 'BBB+' and 'A-' respectively. The Short-term foreign currency IDR has been affirmed at 'F2' and the Country Ceiling at 'A+' KEY RATING DRIVERS The rating actions reflect the following key rating drivers and their relative weights: High -Lithuania continues to make positive steps towards meeting the necessary criteria for eurozone accession in January 2015. We expect Lithuania to receive positive assessments of its convergence progress by the ECB and European Commission in mid-2014. Eventual euro adoption would reduce foreign-currency credit risks in the domestic banking sector, eliminate the exchange-rate risks posed by foreign-currency government debt, and allow greater fiscal financing flexibility afforded by the euro's reserve currency status. Medium -Sound economic policy coherence and credibility support Lithuania's ratings. As a result, there are few severe economic imbalances in Lithuania. The economy is lowly leveraged. Private sector debt to GDP at 62.5% is significantly below the EU28 average of 157%. Inflation is low, and while unemployment at 11% is higher than the 'BBB' and 'A' medians of 7.8% and 6.4% respectively, employment prospects have continued to improve. -Near-term growth prospects for Lithuania are positive. We expect the Lithuanian economy to operate close to potential in 2014-2015, with real GDP growth averaging 3.8%. For 2014, we project Lithuania to achieve real GDP growth of 3.3%, in line with the 'BBB' average and higher than the 'A' average of 3.1%. -Lithuania's fiscal balance has improved significantly. Structural fiscal consolidation between 2009 and 2013 of 4.5% of GDP, estimated by the European Commission, has brought Lithuania's fiscal deficit position in line with both 'BBB' and 'A' rated peers. For 2014 and 2015, we project Lithuania's fiscal deficit to narrow to below the average deficits of 'BBB' and 'A' rated peers to 2.2% and 1.7% of GDP respectively. The pre-funding of a USD1.5bn bond in 2015 means general government debt-to-GDP is expected to increase to 42% in 2014 from 39.5% in 2013 before declining gradually thereafter. Lithuania's ratings also reflect the following key rating drivers: -Lithuania's banking sector is judged as stable. Capitalisation levels of banks have increased, with the average capital adequacy ratio of the sector now at 17.6% compared with 15.7% at end-2012. The quality of banks' portfolios has also improved. Non-performing loans have decreased to 11% currently from a peak of 20% in 2010. The vast majority of the Lithuanian banking sector is foreign-owned, mostly by Nordic banks. However, their reliance on parent funding has diminished in recent years as resident deposits have grown faster than credit, bringing down the sector's average loan-to-deposit ratios. -Strong governance and effective policy-making are among Lithuania's key rating strengths. Indicators of Human Development Index, Governance and Ease of Doing Business are significantly higher than the 'BBB' median. Lithuania's GDP per capita is also higher than the 'BBB' median, but still lower than the 'A' median. -Lithuania is a net external debtor. A high share of foreign-currency debt means that Lithuania's external debt service as a share of current external receipts at 20.3% is higher than the median ratios of 'BBB' and 'A' peers of 14.2% and 9.8% respectively. However, future adoption of the euro will lessen risks associated with foreign-currency debt. RATING SENSITIVITIES Future developments that could individually or collectively result in positive rating action include: -Adoption of the euro in January 2015 with net benefits to the Lithuanian economy and sovereign's creditworthiness -Stronger-than-expected economic growth. -Continued progress in fiscal consolidation leading to a faster-than-expected decline in the debt-to-GDP ratio The Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a negative rating change. However, future development that could individually or collectively result in the Outlook being revised to Stable include: -Prolonged delay in euro adoption KEY ASSUMPTIONS Fitch expects Lithuania to continue making progress towards meeting the Maastricht criteria for euro accession in January 2015. Fitch assumes that Lithuania will continue to build on its recent track record of prudent economic policy-making. Fitch's fiscal projections are based on the assumption that medium-term budget deficit outcomes are broadly in line with Ministry of Finance targets and consistent with continued fiscal consolidation. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. Fitch assumes that there will be no material escalation in developments between Russia and 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 Charles Seville Director +44 20 3530 1048 Committee Chairperson Shelly Shetty Senior Director +1 212 908 0324 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at 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.

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