Politics 

Two important elections — for Lithuania’s new president and the European parliament — will take place in May 2019. 

The presidential election campaign period formally started in November, six months before the vote, and seven candidates were already lining up to become the successor of President Dalia Grybauskaite, who is not eligible to serve for another term. The final candidate list will be known on February 21, 2019. 

Some of the contenders are former finance minister Ingrida Simonyte who is backed by the opposition Homeland Union — Lithuanian Christian Democrats (TSLKD), MEP Petras Austrevicius backed by the Liberal movement, and former SEB chief economist Gitanas Nauseda, the frontrunner in early opinion polls. 

Prime Minister Saulius Skvernelis would also be a serious contender should he decide to run; polls in autumn 2018 showed falling trust in the government but that Skvernelis’s popularity has not been dented. 

Towards the end of 2018, the government was under pressure to deal with swelling unrest over the introduction of a new pay system for teachers that sparked mass protests, and has already claimed the jobs of Lithuania’s ministers for education, culture and environment. 

Economics 

Swedbank predicts growth of 3.2% in 2018 and 2.5% in 2019. The European Commission forecasts a similarly uneven rate of expansion of 3.4% and 2.8%, respectively.

“The main reasons for [growth easing in 2019] are likely to be slowing growth of global demand and diminishing cost competitiveness. The main drivers of growth will be consumption and investments. Tight labour market should provide conditions for income growth and therefore consumption expansion,” Swedbank forecast.

“On the other hand, labour shortages should incentivise firms to invest in productivity improvements. External sector performance is likely to worsen as there will be less room for export expansion, while demand for imports should grow,” it added.

Lithuanian GDP grew an adjusted 2.9% y/y in the third quarter of 2018, according to the latest estimate from Statistics Lithuania. The reading confirms that Lithuanian economic growth disappointed in the third quarter — mainly because of a 25% crash in crop yields — although the revised figures show the slowdown was less pronounced than in the estimate published a month earlier. 

Growth in the third quarter relied on household consumption, which expanded 6.4% y/y in seasonally and working day adjusted terms, compared to a revised growth of 3.2% y/y in the second quarter.

Investment improved its high rate of growth, expanding 7.6% y/y in adjusted terms, 0.3pp above the adjusted growth rate recorded in April-June.

Looking ahead, the European Bank for Reconstruction and Development (EBRD) has warned of risks to future growth. 

“The expected weakening in external demand from Lithuania’s major trading partners, amid an investment-led surge in imports, will result in a negative trade balance, and thus will weigh on GDP growth in the forecast horizon,” the EBRD said.

As elsewhere in the region, the shrinking labour supply will hurt businesses in Lithuania. On the other hand, the accelerated utilisation of EU funds will likely propel a rise in public investment. 

Consumption will moderate despite strong wage expansion, the EBRD also predicts for Lithuania. That will be due to the savings rate recovery, limiting the amount of money households will be willing to spend.

Lithuanian retail sales growth picked up to an unadjusted 8.5% y/y in October at constant prices, Statistics Lithuania reported on November 28. The pick-up comes in at 1.9pp above the annual reading for September, affirming the good shape of the Lithuanian retail sector. An improving labour market and growing incomes remain drivers of retail turnover in Lithuania.

The consumer price index (CPI) grew 2.5% y/y in November, 0.4pp below the annual reading in the preceding month, Statistics Lithuania said on December 10. The annual price growth in November extends the inflationary trend in the Lithuanian CPI to 35 months. 

Prices increased in all but three segments in November. Similarly to October, growth in the headline CPI was driven by a 6% annual expansion in transport prices. With oil prices beginning to decline, however, the impact of the transport category should diminish as well.

Finance 

Lithuania’s budget for 2019 envisages an increase of €1.5bn in revenues, or almost 20%, compared to the previous year. However, some economists have warned that the expectation of being able to extract €200mn from the shadow economy is overly optimistic. 

In April 2018, the government issued its debut sovereign “green bond”, the first issue of government securities in the Baltic states whose proceeds will be used for green projects. The issue, to be used to improve the energy efficiency of apartment buildings, was seen as setting a benchmark for future corporate issues of green bonds. It was followed a few months later by a €300mn issue of green bonds by state-owned Lietuvos Energija, which is using the proceeds for investments into wind energy, co-generation and biomass projects, and improving the efficiency of the grid. 

And there was a more traditional, but equally large, offer from Lithuanian supermarket giant Maxima, which raised €300mn with its debut bond offering, the first of its size by a private sector company from the Baltic states. The proceeds from the bond issue helped Maxima to refinance short-term financing for the acquisition of Polish retailer Emperia Holding, which the Lithuanian company completed earlier in 2018. The company plans to increase its focus on Poland going forward. 

Business 

Manufacturing, in particular food processing, continues to account for a substantial share of the Lithuanian economy, but the ICT sector is growing rapidly. While still lagging behind tech frontrunner and fellow Baltic state Estonia, Lithuania is seeking to establish itself as a tech hub too. The closing weeks of 2018 saw some major developments: London-based fintech company Revolut has obtained a European banking licence from the Bank of Lithuania, picking the country partly because of its “incredibly fintech friendly” regulatory environment, while Lithuanian car-sharing service CityBee secured a €110mn investment from its owner Modus Group that will allow it to buy over 5,000 new vehicles as well as expanding into Estonia and Latvia, propelling it among the continent’s major car-sharing firms. 

Not only that, but Vilnius’ ambitions to position itself as a bridge to China in the fintech sector were vindicated when China’s Paytend opened its European headquarters in the Baltic state. According to Economy Minister Virginijus Sinkevicius, at least five Chinese companies have been licensed by the Lithuanian central bank, taking advantage of new rules that allow companies to apply remotely for fintech licences.