Boston, MA -- (ReleaseWire) -- 05/28/2014 -- Recent growing geopolitical tensions between Russia and the West over Ukraine will darken investor sentiment in 2014, weighing on Lithuania's trade flows and domestic demand. We expect goods exports to expand by 6.5% in 2014, down from 7.0% growth in 2013.
Lithuania's fiscal consolidation prospects remain in place with the budget deficit to narrow to 2.9% of GDP in 2014 and to 2.6% in 2015 from an estimated 3.3% in 2013. Despite the growing external public debts in recent years, the government's debt dynamics remain on a stable footing due to the government's fiscal consolidation efforts and the upcoming euro adoption which will bolster investor confidence and anchor borrowing costs.
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Real GDP growth in Lithuania will arrive at 3.3% in 2014 equal to the outturn for 2013, before slowing to 3.1% in 2015. We expect fixed investment to slow to 5.0% in 2014, and to 4.0% in 2015, down from 12.8% in 2013, as regional geopolitical tensions weigh on investor sentiment.
Major Forecast Changes
We have revised slightly our forecasts for Lithuania's budget deficit for 2014 to 2.9% of GDP from 2.4% previously as the government has pledged to ramp up military spending to 2.0% of GDP from the current 0.9% level. Nevertheless, we maintain that this will not jeopardise Lithuania's prospects of joining the eurozone by 2015.
Key Risks To Outlook
Still-depressed business investment into traditional sectors of the economy, such as construction, do not bode well for a continuation of the ongoing trend in GFCF growth. Indeed, recent years have shown that this expenditure component of GDP has been volatile, and we cannot rule out an erratic recovery in fixed investment going forward.
The recent push into surplus for the current account in 2013 could become a more permanent feature of a still-weak domestic economy and a stabilising external consumption picture. However, Lithuania's improving domestic demand picture means that import growth will move in tandem with export growth, precluding the probability for current account surpluses from 2014 onwards, which remains our core scenario.
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