Viewing cable 08VILNIUS993
Title: LITHUANIA'S ECONOMY SLOWING BUT NO DIRE SITUATION

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08VILNIUS9932008-11-26 09:22:00 2011-08-30 01:44:00 UNCLASSIFIED Embassy Vilnius
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P 260922Z NOV 08
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 03 VILNIUS 000993 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN LH
SUBJECT: LITHUANIA'S ECONOMY SLOWING BUT NO DIRE SITUATION 
(YET) 
 
REF: A. VILNIUS 962 
     ¶B. VILNIUS 866 
     ¶C. VILNIUS 858 
 
¶1.  Summary.  Economic growth is slowing and unemployment is 
rising, with mixed news for retailers.  Banks continue to 
lend but are stingy with some sectors and charge more for 
everyone.  What happens with Lithuania's neighbors matters, 
not just as export markets, but for international and 
domestic perception of the Lithuanian economy.  Fortunately, 
the new center right coalition government has a fiscal 
austerity plan to address the budget deficit left by its 
predecessor and that may leave the country in a good position 
when the economy improves.  End summary. 
 
NO HARD BRAKING BUT SLOWING DOWN 
-------------------------------- 
 
¶2.  Recent economic indicators confirm that economic growth 
is slowing, as expected.  GDP growth dropped from 5.2 percent 
in the second quarter to 3.1 percent in the third.  Inflation 
remains high at 10.5 percent in October.  However, Lithuania 
more than halved its current account deficit (CAD) from the 
second quarter level of 16.8 percent to 7.2 percent for the 
third quarter. 
 
¶3.  Unemployment figures for the third quarter are not yet 
available but the press reports that the GOL's Labor Exchange 
saw a doubling of notification of layoffs from a previous 
average of 7 or 8 monthly layoff notifications to twenty in 
October.  Ruta Rodzko, the Head of the Macroeconomic and 
Forecasting Division at the Bank of Lithuania, told us that 
unemployment is predicted to rise from its current 4.5 
percent level to 8 percent next year.  Lithuanians leaving 
the large communities in the UK and Ireland due to economic 
difficulties there could drive this figure even higher. 
Representatives of industry groups and major American 
companies tell us they are hearing talk of layoffs.  A local 
architect told us that his firm has ceased receiving 
construction design orders, while just a year ago he 
considered increasing staff to cope with increased demand. 
Also, an accountant at a local building firm told us that his 
company had eliminated staff and cut wages for remaining 
workers by 30 percent.  Jekaterina Rojaka, an economic 
analyst at DnB Nord Bank, said that the investment banks 
Invalda and Finasta have let people go and that refrigerator 
maker Snaige and the fertilizer company Achema, both big 
players in the manufacturing sector, might decide to 
eliminate staff.  Press reports on November 24th said Snaige 
will cut staff by the end of the year. 
 
¶4.  The Director of the Lithuanian Retailer's Association, 
Marius Basiulis, told us that retailers began preparing for a 
slowdown six months ago by transferring staff amongst 
different divisions.  More recently, though, one of the main 
shopping malls in Vilnius, Akropolis, told its tenants that 
they would have to pay twenty percent more for rent. 
Basiulis said this was proof that Akropolis is not concerned 
about losing tenants, even in more difficult economic times. 
Basiulis admitted that profits have declined for retail 
centers but said they remain in the black.  Rojaka echoed 
Basiulis's comments about Akropolis but said her 
understanding is that some retail space vendors are 
sweetening offers for prospective tenants by providing fully 
outfitted spaces versus the past practice of simple cement 
boxes with utility hookups.  Giedrius Miliauskas, a local 
economics professor, said that car dealers in Lithuania were 
offering 20 percent discounts to move inventory.  For 
retailers in Lithuania, like in the United States, much will 
depend on holiday results, as according to Basiulis thirty 
percent of Lithuanian retailers' sales are at Christmas. 
 
BANKERS' TRUST? 
--------------- 
 
¶5.  Banks are still lending, according to a number of 
interlocutors, but are much more careful as to who they lend 
to and charge more for the service.  Basiulis said retailers 
are still able to get loans for store upgrades but the 
process is done on a case by case basis.  Interbank lending, 
like the rest of the world, has receded in Lithuania and is 
more expensive than before with the latest interest rate of 
8.3 percent according to Miliauskas.  Data from the Bank of 
Lithuania shows a modest rise for most interest rates for 
loans, excepting loans for non-financial corporations in LTL 
that are in excess of 1 million Litas.  These loans had an 
interest rate of 11.69 percent in September of 2008 vs. 6.17 
percent in September of 2007.  Multi year mortgage loans in 
LTL were at 5.97 percent in September of 2008 vs. 5.94 
percent a year earlier.  Multi year mortgage loans in Euros 
 
VILNIUS 00000993  002 OF 003 
 
 
were 6.08 percent in September 2008 vs. 5.53 percent a year 
earlier; an important indicator as Rojaka mentioned that 
about 55 percent of loans in Lithuanian bank portfolios are 
in Euros.  Rojaka said that a lot of banks are no longer 
offering loans on a fixed rate but are recalculating loan 
rates every 3 months, 6 months or 1 year, depending on the 
recalculation term selected by the loan recipient. 
 
¶6.  Credit is still growing in Lithuania.  Rojaka told us 
that overall credit is forecasted to grow 22 to 24 percent in 
Lithuania this year versus the last, with 12 percent growth 
forecasted for next year.  In addition, the Bank of 
Lithuania's recent cut of the reserve requirement from 6 to 4 
percent provided an approximate 1 billion LTL (about 360 
million USD) for lending.  Not all banks will use the extra 
funds to extend more loans, according to Rojaka and Mindaugas 
Leika, the head of the Financial Stability Division at the 
Bank of Lithuania, but both felt it was a positive step. 
 
¶7.  Rojaka told us that the construction, real estate and 
transportation, especially truck leasing, sectors face 
difficulty obtaining credit.  Nonetheless, agriculture and 
manufacturing are still able to obtain loans.  Established 
businesses aren't shocked by the rise in rates according to 
Rojaka; they lived through a rate rise in 2000.  It is the 
small and medium enterprises (SMEs) that were founded in the 
last few years of heady growth and unbridled optimism that 
have had to adjust their expectations. 
 
WHAT HAPPENS NEXT DOOR MATTERS 
------------------------------ 
 
¶8.  Latvia is Lithuania's second largest export market after 
Russia and both are experiencing weakening economic outlooks. 
 Fortunately, the Parex Bank nationalization by the Latvian 
government had limited real effect upon the Lithuanian 
banking system as this institution holds only a 2 percent 
share of the Lithuanian market.  What happens in Latvia, 
however, does affect the perceptions of the Lithuanian 
citizenry.  Miliauskas told us he was very concerned that if 
the Latvians were forced to devalue their currency Lithuania 
could follow suit not because its economic indicators 
necessitated such a move but because panicked decision making 
by a rattled Lithuanian populace could force the GOL to make 
a drastic move.  Nonetheless, Leika stated that Lithuania's 
declining CAD helped to provide more security that 
devaluation was unlikely. 
 
¶9.  News of the international financial crisis coupled with 
worries about the health of the Latvian economy might have 
prompted some Lithuanians to withdraw money from banks. 
Leika said that in the last month 2.6 billion LTL or about 6 
percent of total deposits had been withdrawn from Lithuanian 
banks.  Leika said that the situation is stable now and that 
the withdrawals had a limited impact.  He attributed many of 
these withdrawals to the older generation that remembers the 
Lithuanian banking crisis of the mid-nineties and wanted to 
store their money at home.  Our local staff tell us they are 
aware of some acquaintances, mostly older individuals, who 
put their money in the proverbial mattress. 
 
FIX IT OR GO BROKE 
------------------ 
 
¶10.  The incoming center-right government recognizes that its 
predecessor created a difficult economic situation.  The 
outgoing Social Democrat coalition spent profligately.  The 
new government, before even finalizing its Ministers, has 
already devised an economic plan to control spending. 
Highlights include: 
 
- VAT (currently 18 percent), income tax (currently 24 
percent) and corporate profit tax (currently 15 percent) will 
all change to 20 percent along with an elimination of VAT 
exemptions; 
 
- Abolition of last year's indexing law which automatically 
adjusted government benefits according to the level of 
inflation; 
 
- Reduction of the salaries of the President, MPs, Ministers, 
the PM and the State Ombudsman by an average of 15 percent; 
 
- Cuts for federal and municipal budget expenditures on 
salaries by 12 percent, excepting teachers' wages; 
 
- Allocation of 861 million Litas instead of the 1.91 billion 
Litas proposed by the outgoing government for teachers' 
salary increases; 
 
 
VILNIUS 00000993  003 OF 003 
 
 
- Reduction by 15 percent, on average, of the operational 
budgets of state and municipal institutions; and 
 
- Reduction in social payments for all but the poorest 
Lithuanians. 
 
COMMENT 
------- 
 
¶11.  Lithuania has only had impressive growth and enviable 
unemployment levels since 2005.  In addition, the natural 
rate of unemployment in Lithuania might be around 6 percent 
according to Miliauskas.  Thus, although unemployment might 
be rising it is not yet above a reasonable rate.  The new 
conservative-led coalition's proposed steps towards fiscal 
discipline and its willingness to talk frankly about 
financial challenges are positive signs.  Responsible 
government spending coupled with low overall debt rates for 
Lithuanians (only 10 percent have a mortgage and only 20 
percent hold any type of debt) could leave the country in a 
good position when the economy recovers.  The wild card is 
contagion, and the inability for some here and 
internationally to perceive that what happens in neighboring 
countries doesn't necessarily spell disaster for Lithuania. 
The world financial crisis will take its toll -- with 
remittances from Lithuanians in London and Dublin likely to 
drop and increasing costs for interbank lending -- but it is 
still too early to say how big it will be. 
CLOUD