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Market Overview

Lithuanian Business Overview

The economic situation in Lithuania has seen the bottom in June 2009 as until then the Lithuania and other Baltic countries were falling without any idea how deep they would fall. The government has responded with austerity measures and preparation for early euro adaptation. Lithuania maintains one of the best position in Europe of doing business because of labor market level and its costs.

Lithuania has not escaped the global economic storm and the flexibility of its economy is being put to the test. GDP grew by 3.1 % in 2008 but declined in the first two quarters of 2009 by 17 %. The speed of the downturn has been surprisingly strong given that the Lithuanian economy had lagged the economic cycle of its Baltic neighbors with around two quarters. The GDP decline was accelerated in 2009 as shrinking internal and external demand limit consumption and exports. On the positive side, a sharp fall in imports significantly reduced the current account deficit.

Lithuania: GDP, Inflation anf Current account(%)
Sources: SEB, Swedbank, IMF

In 2009 downside pressure is manifesting mainly in domestically oriented sectors such as construction (-46,1% in the 2 Q), retail trade (-18% in the 2Q), energetic (-25,3% in the 2 Q) and transport (-21,4% in the 2 Q). It should be the most attractive moment for the investors to consider the biggest Baltic country because the real estate prices have decreased about 30%.

Economic confidence of citizens is increasing

In addition, the export-led sectors were also hurt by collapsing demand in major export markets, compounded by currency depreciation in Russia, Poland, Belarus and Ukraine. One way to ease the pressure might be to devalue local currency and so boost exports. But all three 3 Baltic states are all grimly hanging on their “pegs”-fixed exchange rates with the euro. In these countries about 2/3 of private loans have been taken out in Euros. The Lithuanian and Latvian governments fear that devaluation would bankrupt many citizens and they might come look like second-class members of the Europe Union. So governments are adamant that they will not devalue. According to this the economic confidence of citizens and various business sectors is increasing since June 2009.

Economic sentiment indicator and it's components(%)
Source: Department of Statistics to the Government of the Republic of Lithuania


Lithuania: Import & Export
Sources: SEB, Swedbank, IMF

Despite of this shrinkage the Lithuania maintains its leaders position in the region and it’s a half of the Baltic State’s economy(Lithuania 48%, Latvia 29%, Estonia 23%).
 

The most attractive sectors of doing business in Lithuania are:

  • Shared Services and Business Process Outsourcing(BPO)
    (one of the best-educated and multilingual workface in CEE )
     
  • ICT
    (excellent telecommunications infrastructure – companies leading among the Baltic States)
     
  • Biotechnologies
    (production doesn’t have equivalents in the Central Eastern Europe)
     
  • Plastics
    (3 regional leaders are based in Lithuania, the world’s best PET technologies)
     
  • Lasers
    (leader in global production of ultra-fast parametric light generators)
     
  • Metal Processing, Machinery and Electric Equipment
    (regional leader, the biggest technical university in Baltic Countries)
     
  • Furniture and Wood Processing
    (one of the largest factories in Eastern Europe, among the most important suppliers for IKEA)
     
  • Textile and Clothing
    (one of the most specialized EU countries in the textile and clothing sector)
     
  • Real Estate and Construction
    (largest market among the Baltic States with the great development potential)
     
  • 2 free economic zones(FEZ) and 9 industrial parks(IP)
    (located in the country’s economically important centre’s and provide favourable conditions)
     
  • Tourism
    (untouched ecological countryside, well developed rural tourism network)
FDI in Lithuania by economic sector, 2008
Sources: Lithuanian Development Agency


 

How to regain lost competitiveness?

Lithuania is regaining lost competitiveness through the internal devaluation, meaning severe wage restraint, cutting bonuses, increased labor market flexibility and labor productivity. Many people have to accept longer work hours and wage cuts, not least in the government sector. Both nominal and real pay are declining in 2009 and will decline in 2010 too. So Lithuania maintains one of the best position in Europe of doing business because of labor market level and its costs. Also Lithuania offers exciting investment opportunities for foreign businesses across a range of industries. Its well-developed infrastructure, skilled labor force, and excellent geographic location make it an attractive place for locating production facilities.

Lithuania: Unemployment & wages
Sources: SEB, Swedbank, IMF

At the end of 2008, the parliament adopted the government’s proposed 1bn. austerity package in close cooperation with IMF and a tax reform(a VAT increase from 18 to 19 since 01/01/2009 and from 19 to 21 since 01/09/2009)to support the ailing economy and to prepare for rapid euro accession. The aims at keeping the budget deficit below 3 % of GDP to be able to adopt the euro.

Prepared by Aivaras Ciurinskas, Student from Master of Science in Economics and International Policies, University of Lugano (USI)

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