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The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Vaiva Šečkutė, Nerijus Mačiulis                                                                              No. 5 • 17 July 2012




        Higher growth and reforms improve the budget
         Budget revenues continued climbing exceeding Ministry of Finance
          expectations, and from January-June were 2.4% above the plan. The
          reasons for this were growth higher than the Ministry’s forecast and some
          decrease in the shadow economy.

         We forecast that general government debt will peak this year at 40% of GDP
          but will start decreasing afterwards. The social security fund’s deficit will
          make up the most of the deficit during this and the following year.

         Interest and credit default swap (CDS) rates for Lithuania’s borrowing have
          been falling the fastest among the Baltic countries. The ratification of the
          Fiscal Pact could be a good sign for the markets and, together with the stable
          debt level and decreasing budget deficit, should have a positive effect on
          borrowing costs.

                                                                           middle of this year. However, above-the-plan
Budget revenues – above the plan                                           revenues mean that neither tax increases nor
During the first six months of this year, national                         spending cuts are necessary. As any changes had
budget revenues rose to almost LTL 10 billion –                            to be proposed before 1 June, it is now clear that
4.6% more than during the same time a year ago                             any above-the plan income will be used to decrease
and 2.4% more than planned. State budget                                   the budget deficit rather than increase expenditure.
revenues exceeded the plan by 1.1% over the
                                                                           The higher-than-planned budget income was due to
same time.
                                                                           the higher-than-forecast (by the Ministry of Finance)
State budget revenues in January-June 2012, m LTL
                                                                           economic growth. The Ministry of Finance forecast
                                                                           2.5% GDP growth this year, whereas growth was
 9000
                                                            137.2
                                                                           3.9% in the first quarter of 2012 (Swedbank
 8000                                                                138   forecasts GDP to expand by 3.3% this year).
 7000                                                                      However, the higher-than-expected growth was not
 6000                                                                128   the only reason behind the better income collection.
 5000                                                                      The government has introduced some rather
 4000                                                                118   successful measures to fight the shadow economy.
 3000
                                   106.4
                                                                           For example, last year, the number of times to
 2000                   99.7                   99.2                  108   cross the border of a third country was limited to
            101.1
 1000                                                                      five a month. During any further trip, such goods as
    0                                                                98    fuel, tobacco, and alcohol are subject to value-
        Budget (EU       VAT       PIT       Excise    Prof it tax         added tax (VAT) and excise taxes. In addition, the
         supp.excl)                          duties                        state tax inspectorate inspects companies that pay
            2012 actual                     2012 plan                      their employees lower-than-minimum wages. Earlier
            2011 actual                     Plan execution, % (rs)
                                                                           this year, the State tax inspectorate announced that
                                           Source: Ministry of Finance
                                                                           about 5 thous. companies will have to explain if
                                                                           about 280 thous. of their employees really do not
At the end of last year, when the Ministry of Finance
                                                                           work all day. This addresses a quite common
revised its GDP growth forecast for 2012 down to
                                                                           practice of paying only a fraction of salary officially
2.5%, it said that budget revision and additional
                                                                           and paying out the remainder in cash without
consolidation measures might be needed in the
                                                                           paying taxes. According to Statistics Lithuania, in

                          Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
                                             E-mail: ek.sekr@swedbank.com www.swedbank.com
                                     Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
                      Nerijus Mačiulis +370 5 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.
The Lithuanian Economy

                                      Economic Research Department, Swedbank
                                               No. 5 • 17 July 2012




the first quarter of this year 18.9% out of all                  the tax changes will go into effect on 1 January,
employed people were part-time employees. The                    2013.
introduction of cash registers in markets (on 1 May,
2011 for food products and on 1 May, 2012 for all                General government debt will decrease
products) must have reduced the size of the                      next year
shadow economy as well.                                          The general government debt increased rapidly
Even though measures to fight smuggling mainly                   during 2009-2010; however, it will peak this year.
affect only small-scale illegal activities, the amount           We forecast that the general government debt will
of excise duties in January-June of this year was                decrease from 40% of GDP in 2012 to 39% of GDP
2.4% higher than during the same months of 2011.                 in 2013, while the budget deficit will narrow from 3%
                                                                 to 2%. The social security fund’s deficit will make up
Revenues are still 0.8% below the plan, but
                                                                 the most of the deficit during this and the following
probably only temporarily. Excise tax revenues
                                                                 year.
grew at a slower pace due to slower contraction in
smuggling – a Nielsen “empty-pack” survey shows
                                                                 General government finances, % of GDP
that the percentage of smuggled cigarettes dropped
from 43.0% at the end of 2010 to 30.8% at the end                     2%                                                                56%
of 2011 and 29.3% in the second quarter of 2012.
                                                                      0%                                                                48%
Personal income tax revenue is 6.4% higher than
                                                                     -2%                                                                40%
planned and 6.4% higher than a year ago. The
underlying reasons are the growth in wages and                       -4%                                                                32%
employment due to the recovering labour market
                                                                     -6%                                                                24%
and the possibly slightly lower unofficial
remuneration. According to the State Social                          -8%                                                                16%
Insurance Fund Board, the number of insured has
                                                                     -10%                                                               8%
been rising constantly. During January-May, the
difference between the number of employed and                        -12%                                                               0%
the number of fired workers was 31.6 thousand.                              2003     2005        2007    2009        2011       2013f
                                                                              Central gov . (ls)                   Local gov . (ls)
Profit tax revenues exceeded the plan by 37.2%
                                                                              Social sec. f unds (ls)              Debt (rs)
during January-June of this year. This large                         Source: Lithuanian MoF, Swedbank f orecasts
deviation was observed because some of the
taxpayers decided to pay taxes in June rather than               According to two different estimates made by the
in July, as had been expected. In the first half of              European Commission (EC) last year, when the
2012, compared with the same time a year ago                     general government deficit was 5.5%, the structural
these revenues have increased by 10.1% as                        deficit amounted to 4.6% or 4.3%.1 Based on the
corporate profits rose by about 20% in 2010 and                  production function approach, the EC forecasts that
2011. The profit tax income is growing slower than               the structural deficit should decrease to 2.6% in
corporate profits because companies are allowed to               both 2012 and 2013 (another EC estimate suggests
reduce their payable profit tax (up to 50%) if they              1.9% and 1.7% deficits in those years). As our
have invested in fixed capital. Furthermore,                     actual budget deficit forecast is lower than the EC's,
companies can transfer losses incurred in 2009 to                it is thus likely that the structural deficit should be
the following years and thereby reduce their                     narrowing faster than projected by the EC and
payable profit tax.                                              reach structural balance in 2014.
At the end of June, the Lithuanian parliament                    The Lithuanian parliament has ratified the Fiscal
lowered VAT taxes for press; technical assistance                Pact, which is supposed to ensure greater fiscal
means for disabled and their repair; and public                  discipline. The main rule says that the national
transport tickets. According to estimates this would             budget has to be balanced or in surplus. This would
cost the budget more than LTL 100 million, with the              be achieved if the structural deficit2 did not exceed
largest losses coming from the smaller VAT                       0.5% of nominal GDP. Adherence to this will curb
receipts from the sale of public transport tickets.              any irresponsible increase in budget expenditure by
President Dalia Grybauskaitė vetoed the law
because of this loss in revenue from public
transport tickets. According to the President, it is             1
                                                                   Based on the production function approach, the cyclical
too big a burden for the budget and the effect on                component of GDP was -0.9%; based on the Hodrick-
prices is doubtful. The parliament decided to                    Prescott filter method, it was -1.2% in 2011
                                                                 2
disregard the President’s veto and passed the law –               A structural deficit occurs when a deficit budget is in
                                                                 place even when the economy is at its full capacity


                                                         2 (3)
The Lithuanian Economy

                                                Economic Research Department, Swedbank
                                                         No. 5 • 17 July 2012




politicians willing to please their electorate. This                       positive impact as well, increasing the demand for
adherence should decrease the political cycles and                         government securities.
could be a good sign for the markets. Together with
                                                                           Compared with the peak at the end of 2011, the
the stable debt level and falling budget deficit this
                                                                           CDS rate has fallen the most for Lithuania as well. It
should have a positive effect on the borrowing
                                                                           has decreased by 109 points from its peak in
costs.
                                                                           Lithuania, by 77 in Estonia, and by 73 in Latvia.
Fastest decrease in interest rates among
the Baltic countries                                                       Credit default swaps (CDS), USD, 10 years

At the end of June, the 10-year bond rate in                                400
Lithuania fell to its lowest level this year. Since the
                                                                            350
beginning of June, it has decreased more than in
Latvia and on 28 June it was 4.78% - 34 basis                               300
points lower than in Latvia.
                                                                            250
10-year bond yield, USD
                                                                            200
 6.5
                                                                            150
 6.3

 6.1                                                                        100
 5.9
                                                                             50
 5.7
                                                                             2011.01   2011.04   2011.07     2011.10   2012.01   2012.04
 5.5                                                                                                       Lithuania      Latv ia          Estonia
                                                                            Source: Bloomberg
 5.3

 5.1
                                                                           During the rest of the year, income from personal
 4.9                                                                       income taxes will be increasing because of increase
 4.7                                                                       in employment and wages. Meanwhile, revenue
 4.5                                                                       from VAT and excise duties will depend on
  2012.01   2012.02   2012.03       2012.04    2012.05   2012.06           consumption. The scope of this will be determined
                        Lithuania         Latv ia                          by the situation in export markets and,
 Source: Bloomberg                                                         subsequently, household confidence and income. In
                                                                           May, the growth of both retail trade, except for
Meanwhile, shorter-term borrowing costs have
                                                                           motor vehicles, and manufacturing, except for
dropped below the pre-crisis level. At the end of                          refined petroleum products, accelerated, and
June, they were 1.13% for 6-month, 1.42% for 12-                           confidence kept increasing in June as well. In the
month, and 2.35% for 2-year treasury bills.                                future, household consumption will be supported by
During the latest emissions of the savings notes at                        cheaper commodities and lower inflation, as well as
the end of May and June, Lithuania also borrowed a                         by the European Central Bank’s decision to cut the
record amount - LTL 140 million for 2- and 1- year.                        base interest rate to historical lows.
Since May 2011, the borrowed sum has exceeded
LTL 10 million only a few times. The main reason
                                                                                                                             Vaiva Šečkutė
for this was the Ministry of Finance's distribution of
                                                                                                                             Nerijus Mačiulis
savings notes through the locally operating banks.
The higher savings rate and flight to safety after the
bankruptcy of Bank Snoras must have had some

Swedbank
Economic Research Department                   Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm                            customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028                          of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com                           completeness of the report and cannot be held responsible for any error or omission in the
www.swedbank.com                               underlying material or its use. Readers are encouraged to base any (investment) decisions
                                               on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
                                               losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720.
                                               monthly newsletter The Lithuanian Economy.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė, +370 5 258 2275.
Vaiva Šečkutė, +370 5 258 2156.




                                                                   3 (3)

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Lithuanian Economy, No. 5 - July 17, 2012

  • 1. The Lithuanian Economy Monthly newsletter from Swedbank’s Economic Research Department by Vaiva Šečkutė, Nerijus Mačiulis No. 5 • 17 July 2012 Higher growth and reforms improve the budget  Budget revenues continued climbing exceeding Ministry of Finance expectations, and from January-June were 2.4% above the plan. The reasons for this were growth higher than the Ministry’s forecast and some decrease in the shadow economy.  We forecast that general government debt will peak this year at 40% of GDP but will start decreasing afterwards. The social security fund’s deficit will make up the most of the deficit during this and the following year.  Interest and credit default swap (CDS) rates for Lithuania’s borrowing have been falling the fastest among the Baltic countries. The ratification of the Fiscal Pact could be a good sign for the markets and, together with the stable debt level and decreasing budget deficit, should have a positive effect on borrowing costs. middle of this year. However, above-the-plan Budget revenues – above the plan revenues mean that neither tax increases nor During the first six months of this year, national spending cuts are necessary. As any changes had budget revenues rose to almost LTL 10 billion – to be proposed before 1 June, it is now clear that 4.6% more than during the same time a year ago any above-the plan income will be used to decrease and 2.4% more than planned. State budget the budget deficit rather than increase expenditure. revenues exceeded the plan by 1.1% over the The higher-than-planned budget income was due to same time. the higher-than-forecast (by the Ministry of Finance) State budget revenues in January-June 2012, m LTL economic growth. The Ministry of Finance forecast 2.5% GDP growth this year, whereas growth was 9000 137.2 3.9% in the first quarter of 2012 (Swedbank 8000 138 forecasts GDP to expand by 3.3% this year). 7000 However, the higher-than-expected growth was not 6000 128 the only reason behind the better income collection. 5000 The government has introduced some rather 4000 118 successful measures to fight the shadow economy. 3000 106.4 For example, last year, the number of times to 2000 99.7 99.2 108 cross the border of a third country was limited to 101.1 1000 five a month. During any further trip, such goods as 0 98 fuel, tobacco, and alcohol are subject to value- Budget (EU VAT PIT Excise Prof it tax added tax (VAT) and excise taxes. In addition, the supp.excl) duties state tax inspectorate inspects companies that pay 2012 actual 2012 plan their employees lower-than-minimum wages. Earlier 2011 actual Plan execution, % (rs) this year, the State tax inspectorate announced that Source: Ministry of Finance about 5 thous. companies will have to explain if about 280 thous. of their employees really do not At the end of last year, when the Ministry of Finance work all day. This addresses a quite common revised its GDP growth forecast for 2012 down to practice of paying only a fraction of salary officially 2.5%, it said that budget revision and additional and paying out the remainder in cash without consolidation measures might be needed in the paying taxes. According to Statistics Lithuania, in Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Nerijus Mačiulis +370 5 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.
  • 2. The Lithuanian Economy Economic Research Department, Swedbank No. 5 • 17 July 2012 the first quarter of this year 18.9% out of all the tax changes will go into effect on 1 January, employed people were part-time employees. The 2013. introduction of cash registers in markets (on 1 May, 2011 for food products and on 1 May, 2012 for all General government debt will decrease products) must have reduced the size of the next year shadow economy as well. The general government debt increased rapidly Even though measures to fight smuggling mainly during 2009-2010; however, it will peak this year. affect only small-scale illegal activities, the amount We forecast that the general government debt will of excise duties in January-June of this year was decrease from 40% of GDP in 2012 to 39% of GDP 2.4% higher than during the same months of 2011. in 2013, while the budget deficit will narrow from 3% to 2%. The social security fund’s deficit will make up Revenues are still 0.8% below the plan, but the most of the deficit during this and the following probably only temporarily. Excise tax revenues year. grew at a slower pace due to slower contraction in smuggling – a Nielsen “empty-pack” survey shows General government finances, % of GDP that the percentage of smuggled cigarettes dropped from 43.0% at the end of 2010 to 30.8% at the end 2% 56% of 2011 and 29.3% in the second quarter of 2012. 0% 48% Personal income tax revenue is 6.4% higher than -2% 40% planned and 6.4% higher than a year ago. The underlying reasons are the growth in wages and -4% 32% employment due to the recovering labour market -6% 24% and the possibly slightly lower unofficial remuneration. According to the State Social -8% 16% Insurance Fund Board, the number of insured has -10% 8% been rising constantly. During January-May, the difference between the number of employed and -12% 0% the number of fired workers was 31.6 thousand. 2003 2005 2007 2009 2011 2013f Central gov . (ls) Local gov . (ls) Profit tax revenues exceeded the plan by 37.2% Social sec. f unds (ls) Debt (rs) during January-June of this year. This large Source: Lithuanian MoF, Swedbank f orecasts deviation was observed because some of the taxpayers decided to pay taxes in June rather than According to two different estimates made by the in July, as had been expected. In the first half of European Commission (EC) last year, when the 2012, compared with the same time a year ago general government deficit was 5.5%, the structural these revenues have increased by 10.1% as deficit amounted to 4.6% or 4.3%.1 Based on the corporate profits rose by about 20% in 2010 and production function approach, the EC forecasts that 2011. The profit tax income is growing slower than the structural deficit should decrease to 2.6% in corporate profits because companies are allowed to both 2012 and 2013 (another EC estimate suggests reduce their payable profit tax (up to 50%) if they 1.9% and 1.7% deficits in those years). As our have invested in fixed capital. Furthermore, actual budget deficit forecast is lower than the EC's, companies can transfer losses incurred in 2009 to it is thus likely that the structural deficit should be the following years and thereby reduce their narrowing faster than projected by the EC and payable profit tax. reach structural balance in 2014. At the end of June, the Lithuanian parliament The Lithuanian parliament has ratified the Fiscal lowered VAT taxes for press; technical assistance Pact, which is supposed to ensure greater fiscal means for disabled and their repair; and public discipline. The main rule says that the national transport tickets. According to estimates this would budget has to be balanced or in surplus. This would cost the budget more than LTL 100 million, with the be achieved if the structural deficit2 did not exceed largest losses coming from the smaller VAT 0.5% of nominal GDP. Adherence to this will curb receipts from the sale of public transport tickets. any irresponsible increase in budget expenditure by President Dalia Grybauskaitė vetoed the law because of this loss in revenue from public transport tickets. According to the President, it is 1 Based on the production function approach, the cyclical too big a burden for the budget and the effect on component of GDP was -0.9%; based on the Hodrick- prices is doubtful. The parliament decided to Prescott filter method, it was -1.2% in 2011 2 disregard the President’s veto and passed the law – A structural deficit occurs when a deficit budget is in place even when the economy is at its full capacity 2 (3)
  • 3. The Lithuanian Economy Economic Research Department, Swedbank No. 5 • 17 July 2012 politicians willing to please their electorate. This positive impact as well, increasing the demand for adherence should decrease the political cycles and government securities. could be a good sign for the markets. Together with Compared with the peak at the end of 2011, the the stable debt level and falling budget deficit this CDS rate has fallen the most for Lithuania as well. It should have a positive effect on the borrowing has decreased by 109 points from its peak in costs. Lithuania, by 77 in Estonia, and by 73 in Latvia. Fastest decrease in interest rates among the Baltic countries Credit default swaps (CDS), USD, 10 years At the end of June, the 10-year bond rate in 400 Lithuania fell to its lowest level this year. Since the 350 beginning of June, it has decreased more than in Latvia and on 28 June it was 4.78% - 34 basis 300 points lower than in Latvia. 250 10-year bond yield, USD 200 6.5 150 6.3 6.1 100 5.9 50 5.7 2011.01 2011.04 2011.07 2011.10 2012.01 2012.04 5.5 Lithuania Latv ia Estonia Source: Bloomberg 5.3 5.1 During the rest of the year, income from personal 4.9 income taxes will be increasing because of increase 4.7 in employment and wages. Meanwhile, revenue 4.5 from VAT and excise duties will depend on 2012.01 2012.02 2012.03 2012.04 2012.05 2012.06 consumption. The scope of this will be determined Lithuania Latv ia by the situation in export markets and, Source: Bloomberg subsequently, household confidence and income. In May, the growth of both retail trade, except for Meanwhile, shorter-term borrowing costs have motor vehicles, and manufacturing, except for dropped below the pre-crisis level. At the end of refined petroleum products, accelerated, and June, they were 1.13% for 6-month, 1.42% for 12- confidence kept increasing in June as well. In the month, and 2.35% for 2-year treasury bills. future, household consumption will be supported by During the latest emissions of the savings notes at cheaper commodities and lower inflation, as well as the end of May and June, Lithuania also borrowed a by the European Central Bank’s decision to cut the record amount - LTL 140 million for 2- and 1- year. base interest rate to historical lows. Since May 2011, the borrowed sum has exceeded LTL 10 million only a few times. The main reason Vaiva Šečkutė for this was the Ministry of Finance's distribution of Nerijus Mačiulis savings notes through the locally operating banks. The higher savings rate and flight to safety after the bankruptcy of Bank Snoras must have had some Swedbank Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for Legally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s Cecilia Hermansson, +46-8-5859 7720. monthly newsletter The Lithuanian Economy. Nerijus Mačiulis, +370 5 2582237. Lina Vrubliauskienė, +370 5 258 2275. Vaiva Šečkutė, +370 5 258 2156. 3 (3)