16
Lithuanian Macroeconomic Review MARCH 2012 No. 47
Lithuanian Macroeconomic Review MARCH 2012
No. 47
No. 47, March 2012
The cut-off date for the statistics included in this publication was
March 14, 2012 (except for fiscal deficit forecast and current account data).
Contacts:
Dr. Gitanas NausėdaChief Economist, SEB Lithuania
Vilija TauraitėSenior Economist, SEB Lithuania
Phone +370 5 268 2517 Fax +370 5 268 2521
E-mail [email protected]
Phone +370 5 268 2521Fax +370 5 268 2521
E-mail [email protected]
Information and opinions contained within this document are given in good faith and are based on eco-nomic theory and sources believed to be reliable. However, no representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents. Changes may be made to opinions or information contained herein without notice.
Anyone considering taking actions based upon the content of this document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent per-mitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document or its contents. Certain information in this report is forward-looking. By its nature, forward-looking information involves a number of risks, uncertainties and assumptions. Should any of these risks or uncertainties materialise, or should underlying assumptions prove incorrect, actual results may vary from those described in this report as anticipated, believed, estimated or expected. Opinions expressed in this document belong solely to the authors, does not represent the official position of SEB Bank and may not concur with official position of SEB Bank.
No. 47, March 2012
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Macroeconomic outlook and forecasts
In 2011, development of Lithuania’s economy was quite robust as real GDP increased by 5.9 per cent on an annual basis. In the fourth quarter of 2011, real GDP grew by 4.4 per cent, of which value added in construction increased by 33.8 per cent, agriculture, forestry and fish-eries by 7.6 per cent, retail trade, hotels and restaurants, transport and communications by 5.4 per cent. Value added in manufacturing industry increased by 1.5 per cent only, while value added of total industry declined by 1.1 per cent due to poor results of energy sector. Despite the fact that economy was in generally good shape, a certain slowdown started at the end of 2011.
Lithuania’s economy will grow slower in 2012 as compared with 2011 both due to weaker ex-ports and more cautious consumption. Consumer confidence has deteriorated in autumn and winter because of increased uncertainty about the country’s economic situation and unem-ployment level. External demand for Lithuania’s goods and services is also deemed to grow weaker. Nonetheless, the country will remain relatively resilient to unfavourable external devel-opments. The most important export markets are expected to grow in 2012, e.g. no recession is forecasted for top five export markets (Russia, Germany, Latvia, Poland and Estonia). Real exchange rate predictions are quite favourable to Lithuania in Russia (economic growth and positive inflation differential will more than compensate for forecasted rouble depreciation) but negative in Poland (strengthening of litas against zloty will outweigh beneficial effect of GDP growth).
Growth of wages and salaries in Lithuania was quite modest lately while labour productivity continues rising. Companies clearly prefer enhancing effectiveness to expanding production capacity. Reduction of unit labour costs helps to boost export competitiveness, however its importance should not be overestimated as it affects, e.g. labour-intensive textile industry to a much higher extent than manufacturing of machinery or chemical products.
Notable increase in industrial production inventories indicates worsening problems at the mi-cro level. According to the poll of Statistics Lithuania, industrial managers responded that ex-cess inventories currently are at the same level as just before the failure of Lehman Brothers in autumn 2008. In winter 2008–2009, inventories continued to increase and production capac-ity utilization declined from more than 70 per cent to 60 per cent. At the moment, capacity uti-lization stands at around 70 per cent and is not likely to fall as dramatically as a few years ago.
In 2011, production of manufacturing industry increased by 10.4 per cent at constant prices as compared with 2010. Nevertheless, in the fourth quarter of 2011 industrial growth made up merely 1.6 per cent on an annual basis, which confirmed our suspicions in previous issue of “Lithuanian Macroeconomic Review” that separate industrial branches would slow their rapid development pace. In 2011, production of metals and metal articles grew by 38.4 per cent (in January–Octo-ber 2011, the growth rate was 40.8 per cent), furniture by 33.8 per cent (35.4 per cent), textiles by 25.0 per cent (27.0 per cent), clothing by 19.8 per cent (24.0 per cent), electric equipment by 15.5 per cent (24.5 per cent), leather articles by 14.3 per cent (26.1 per cent), rubber and plas-tics by 13.3 per cent (15.8 per cent) and chemical products by 3.3 per cent (6.2 per cent).
The number of manufacturing sectors that suffered an annual drop in production increased to 5. Maintenance and installment of machinery and equipment declined by 0.4 per cent in 2011, production of beverages decreased by 0.7 per cent, computer, electronic and optical products by 3.7 per cent, pharmaceuticals by 10.3 per cent and other transport vehicles and equipment by 40.6 per cent.
Manufacturing industry in Lithuania is export-oriented and therefore closely related to export prospects. Lower export growth rate signals that industry will not enjoy buoyant growth in 2012. Recovery of domestic demand also supported manufacturing industry in 2011, but recently it
General economic situationGeneral economic situation
Manufacturing industryManufacturing industry
No. 47, March 2012
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has been under the threat of somewhat losing its momentum. High global energy prices add up to the list of unfavourable factors to manufacturing development.
Mining and quarrying industry performed successfully in 2011. Mining production increased by 10.3 per cent at constant prices as compared with 2010. Extraction of crude oil slightly de-creased by 0.5 per cent to 113.9 thousand tonnes, extraction of gravel, pebbles shingle and flint declined by 7.0 per cent to 2371.8 thousand tonnes and that of silica sand went down by 20.7 per cent to 53.4 thousand tonnes. Extraction of dolomite increased by 44.4 per cent to 3312.3 thousand tonnes and that of peat grew by 17.7 per cent to 384.7 thousand tonnes.
Energy sector continued to shrink last year. In 2011, as compared with 2010, production of elec-tricity, gas, steam supply and air conditioning went down by 14.4 per cent at constant prices.
Lithuanian plans to build LNG terminal in Klaipėda, the seaport city. It is a project of utmost importance for Lithuania’s energy independence, as it would guarantee diversity of gas import and would have an effect on Gazprom’s gas prices. The new government, which will come into power after October’s parliamentary election, should assign the highest priority to construc-tion of LNG terminal while policy continuity might become a certain challenge after a change in ruling coalition.
The cost of LNG terminal is estimated at around EUR 200 million and terminal’s capacity should make up 2–3 billion cubic meters per year. The manager of the project is state-controlled com-pany Klaipėdos Nafta.
As of March 1, 2012 Gas Exchange started its operation in Lithuania. The exchange is admin-istered by company Baltpool, which also runs Power Exchange since 2010. Opening Gas Ex-change is essential but not sufficient in order to ensure healthier competition and more trans-parent pricing in gas market. One of the greatest advantages of Gas Exchange is the present day trade. It enables fast sale of surplus or purchase of wantage of natural gas on the exchange when unplanned changes occur in daily business activity. Therefore now companies have more flexibility and face lower risk of “take-or-pay” sanctions. During the first year of Gas Exchange operation, its participants are exempt from membership fee.
Turnover of wholesale, retail trade and trade of transport vehicles and their maintenance in-creased by 20.8 per cent at constant prices in 2011 as compared with 2010. In the fourth quar-ter of 2011, growth rate made up 18.9 per cent and marked quite solid recovery.
Just as before, retail trade expansion was helped by sales and repair of transport vehicles, which skyrocketed by 60.0 per cent in 2011 as compared with 2010. Excluding transport ve-hicles, growth of retail turnover made up 8.8 per cent. Trade of food products, alcoholic drinks and tobacco finally stepped on the recovery path as its turnover increased by 2.5 per cent in 2011 (in 2010, annual decrease made up 9.0 per cent).
The growth of trade of non-food products was more rapid, posting a 14.6 per cent annual in-crease at constant prices. The sales of video- and audio- equipment, household appliances, metal articles, paint, glass and furniture increased even more by 20.6 per cent. On the one hand, quite impressive increase might be related to firmer construction market last year. On the other hand, low statistical base of 2010 also contributed a lot. In any case, households started feeling financially more secure and began buying more of non-necessity and even luxury goods.
Due to tough local competition and relatively small market size, Lithuanian retail chains con-tinue their expansion in foreign countries. Spanish retail operator DinoSol sold its retail chain Supersol with more than 200 shops and 4500 employees to Lithuanian retailer Maxima.
In the fourth quarter of 2011, value added of agriculture, forestry and fishing grew by 7.6 per cent on an annual basis. The growth figure for the entire 2011 was less impressive and made up 3.2 per cent.
Mining and quarryingMining and quarrying
Energy sectorEnergy sector
Retail tradeRetail trade
AgricultureAgriculture
No. 47, March 2012
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The situation in the agriculture sector is well reflected by purchasing indicators of different agricultural production. In 2011 as compared with 2010, purchasing of potatoes decreased by 16 per cent, vegetables by 15 per cent, grain by 14 per cent and leguminous grains by 2 per cent. However purchased amount of fruit increased by 65 per cent. According to preliminary data from Statistics Lithuania, in 2011 as compared with 2010, harvest of field vegetables increased by 75.4 per cent to 287.6 thousand tonnes, potatoes by 23.2 per cent to 587.7 thousand tonnes, and grain harvest by 15.2 per cent to 3303.9 thousand tonnes.
In 2011 as compared with 2010, purchasing of milk increased by 3 per cent and animals and birds (live weight) by 1 per cent. Nonetheless, purchasing of eggs declined by 8 per cent.
In the fourth quarter of 2011, agriculture prices increased by 1.9 per cent on an annual basis. Plant production went down in price by 7.8 per cent but animal production was by 9.4 per cent more expensive. In January 2012, plant production cheapened further by 5.9 per cent year-on-year.
Agricultural cooperatives and large farmers acquire increasingly more land from state and pri-vate owners, thus expanding their own fields. Cooperatives and farmers cultivate 2.5 million hectares of land, of which only a half is their own land and the other half is leased from pri-vate owners and state. Farmers may buy land from the state on preferential terms, paying LTL 2000–4000 per hectare. New applications to buy land from state have been terminated since autumn of 2011 because applications already twice exceeded the amount of land on sale. In 2011, farmers acquired around 50 thousand hectares of land from the state, and the amount sold in 2012 is expected to be much higher. According to experts, demand for land is rising, but a lot of private owners wait until they can sell the land to foreigners. Therefore the main source for expansion of farming fields is state-owned land.
Transport sector growth slowed down over the course of 2011 but the figures for the full 2011 were quite good. Cargo loaded and unloaded at Klaipėda seaport and Būtingė terminal in-creased by 13 per cent to 45.5 million tonnes, while cargo loaded and unloaded at Klaipėda seaport alone went up by 17 per cent to 36.6 million tonnes.
In 2011, cargo transportation by railways increased by 8.9 per cent on an annual basis to 52.3 million tonnes. Transportation of international cargo by railways went up by 9.8 per cent to 37.3 million tonnes while domestic cargo increased by 6.6 per cent to 15.0 million tonnes.
The number of passengers carried by planes of Lithuanian airlines dropped by 46.3 per cent to 444.6 thousand passengers in 2011, as compared with 2010. The majority of passengers (86.4 per cent) that travelled with Lithuanian airlines took charter flights. The number of pas-sengers of charter flights decreased by 41.4 per cent while those travelling with regular flights decreased by 64.9 per cent. The number of taking-offs and landings of airplanes at Lithuanian airports made up 39.5 thousand and increased by 4.8 per cent as compared with 2010.
According to the latest data from Statistics Lithuania, transport indicators in January 2012 moved in different directions. Cargo loading and unloading at Klaipėda seaport and Būtingė ter-minal decreased by 7.4 per cent, transportation of cargo by railways went down by 14.5 per cent while the number of passengers of Lithuanian airlines increased by 24.4 per cent.
Starting from April 27, a direct flight between Vilnius and Almaty, the largest city of Kazakhstan, will be launched. Regular flights should attract more tourists and make business trips between the two countries much easier. Apart from businessmen, cooperation is quite close between Kazakh and Lithuanian healthcare, IT and education sectors. Kazakhstan Tourism Association estimates that around 3000 of Kazakh tourists should visit Lithuania until autumn of 2012 and spend up to LTL 10 million.
Value added of construction sector increased by 33.8 per cent in the fourth quarter of 2011 as compared with the same period of 2010. However, statistical base effect still was a primary reason behind an impressive growth rate.
TransportTransport
Construction and real estate marketConstruction and real estate market
No. 47, March 2012
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Construction companies carried out works worth LTL 2.2 billion over the fourth quarter of 2011, which was by 40.1 per cent more on an annual basis. Civil engineering works made up 57 per cent of total construction works and increased by 37.3 per cent year-on-year. Construc-tion of non-residential buildings upped by 49.5 per cent and construction of residential build-ings increased by 19.5 per cent. It should be noted that residential buildings made up only 6.5 per cent of total construction works carried out in the country. During the entire 2011, the volume of construction works made up LTL 6.553 billion and was by 27.4 per cent higher on an annual basis.
The number of residential apartments completed in 2011 made up 5066, which was by 38.2 per cent more as compared with 2010. The increase indicated a certain recovery in construction sector. The useful space of residential buildings built in 2011 was 699.4 thou-sand square meters, which was by 36.5 per cent higher as compared with 2010. However, the number of building permissions issued for construction of residential buildings decreased by 17.9 per cent to 4824 in 2011.
In 2012, the situation in residential property market will depend on general economic environ-ment, availability of credits and expectations of market participants. The possibility of tighter lending standards should not ruled out, having in mind euro zone debt crisis. However, at the end of 2011, new housing credits and residential property deals were on the rise, while state company Centre of Registers recorded a small upward movement in housing prices.
According to real estate agency Inreal, in 2011 residential property market showed some posi-tive signs in Vilnius market only, which dominated in the whole market by the volume of deals and the number of new projects. Meanwhile, residential property market remained sleepy in other cities and towns.
Thus far we do not see any arguments to alter our previous real GDP growth forecast, 2 per cent in 2012 and 3 per cent in 2013 (see Diagram 1 and Table 1 in the Appendix). There would be more reasons to revise the forecasts up if there are clear decisions about Greece and other problematic euro zone countries that would appease the financial market. It would be highly desirable that institutions of European Union and national governments would spend more time not only for solving extraordinary situations but also for planning and encouraging long-term economic development. Such a scenario would also have a positive effect on Lithuania’s exports. Re-election of Vladimir Putin as Russia’s president is an important factor but it will hardly bring any essential changes. Regarding expectations of trade liberalisation, more hopes should be attached to Russia’s membership in WTO. Russia will remain an attractive market to Lithuanian businessmen but the risk of surprise decisions and business obstacles will continue to be high.
Diagram 1. Annual change in real GDP (per cent)
6.810.3
7.4 7.8 7.89.8
2.9
-14.8
1.45.9 (3.0)*
3.0(2.0)*2.0
-20
-15
-10
-5
0
5
10
15
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast
* Previous forecast of SEB Bank given in parenthesis.
GDP forecast for 2012–2013GDP forecast
for 2012–2013
No. 47, March 2012
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Public finance will be under pressure this year. Firstly, parliamentary election is pending in October and macroeconomic forecasts behind the budget plan are quite optimistic (especially 3.0 per cent growth of wages and salaries). Secondly, national budget revenue fell short of plan even in 2011, when GDP growth was quite robust, unemployment was shrinking and wages and salaries rising. Revenue of two out of four main taxes exceeded the plan but the other two were under-collected. Both VAT and personal income tax revenue made up 102.9 per cent of the plan, but revenue from excise duties made up 91.4 per cent, profit tax – 74.1 per cent of the plan. National budget tax revenue made up LTL 17.615 billion, which was by LTL 220 million, or by 1.2 per cent less than planned.
In January–February of 2012, collection of personal income tax revenue posted quite a pleas-ant surprise as it exceeded the plan by 10.2 per cent. Solid collection of PIT is hard to explain, as the number of the registered unemployed was on the rise during the first months of 2012, and a sudden increase in wages and salaries did not occur. VAT was over-collected by 0.1 per cent, but excise duties fell short of plan by 0.8 per cent and profit tax by 13.7 per cent over the above-mentioned period.
The efforts of the Lithuanian government to improve public finance indicators were positively approved on the international financial market. In November 2011, USD 750 million global bond issue had 6.125 per cent coupon, meanwhile USD 1.5 billion issue in January 2012 was sold at 6.625 per cent coupon. Having in mind the failure of Snoras bank in November, increased fi-nancial pressure due to timely compensation of deposits and increased uncertainty about the euro zone debt crisis in late 2011, an increase in the bond coupon by 50 basis points should be treated as absolutely satisfactory result.
We do not change our previous forecast for public deficit for 2012 which stands at 3.5 per cent of GDP and cut the forecast for 2013 to 2.9 per cent of GDP in 2013 (see Diagram 2). There is also a small chance that the country will pass the 3 per cent of GDP limit already in 2012, which would provide an opportunity to introduce euro already in 2014.
Diagram 2. Public balance (ESA’95, per cent of GDP)
-1.9 -1.3 -1.5-0.5 -0.4 -1.0
-3.3
-9.5
-7.0
-4.5-6.0(-6.0)*
-3.5(-3.5)*
-2.9(-4.0)*
-10-9-8-7-6-5-4-3-2-10
2002 2003 2004 2005 2006 2007 2008 2009 2010 1–3Q2011
2011 2012 2013
forecast
* Previous forecast of SEB Bank given in parenthesis.
Consumer price inflation started decelerating at the end of 2011, but it is still too early to claim this trend as permanent. In February 2012, as compared with January, prices of consumer goods and services increased by 0.4 per cent. Annual inflation made up 3.7 per cent, of which prices of utility services went up by 9.5 per cent, transport goods and services by 5.4 per cent, food and non-alcoholic beverages by 4.4 per cent. Meanwhile, clothing and footwear decreased in price by 1.0 per cent, communication services by 2.8 per cent. Average annual inflation made up 4.2 per cent.
Administered prices continue increasing quite threateningly. In February 2012 as compared with February 2011, administered prices increased by 8.4 per cent, while market prices went up by 2.8 per cent. In Lithuania, most of administered prices are those of energy resources and utilities, which were notably raised over the recent months.
Public financePublic finance
InflationInflation
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Despite the fact that recent rally of global oil prices makes an upward pressure to prices, there is number of factors that will tame inflation in 2012. Therefore we stick to our previous view that inflationary pressure this year will somewhat weaken. For instance, in November 2011, annual increase in prices of food and non-alcoholic beverages made up 6.5 per cent and until February 2012 it decreased to 4.4 per cent. This is quite good news, having in mind that food products make up 26.3 per cent of total consumer basket in Lithuania. Global prices of agri-cultural commodities are not expected to rise markedly this year. Global wheat inventories are higher than sufficient and record harvest is expected in Australia. In February 2012, coffee was among the fastest cheapening agricultural commodities.
Over the recent months, weak Polish zloty contributed to lower inflation, as it encouraged purchasing cheaper Polish goods and forced Lithuanian retailers to lower their prices as well. However, lately zloty started to appreciate and regained a share of its lost value. Demand-pull inflation will have little room to rage this year. Due to tough situation on the labour market, em-ployees will have weak negotiating power to demand compensation of purchasing power loss.
Taking into account previously mentioned circumstances, we leave our previous average an-nual HICP inflation forecasts unchanged at 2.5 per cent in 2012 and 3.0 per cent in 2013 (see Diagram 3).
Diagram 3. Annual average HICP inflation (per cent)
0.3
-1.1
1.22.7
3.85.8
11.1
4.2
1.2
4.2 (2.5)*2.5
3.04.1
-2024681012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Feb2012
2012 2013
forecast
(3.0)*
* Previous forecast of SEB Bank given in parenthesis.
According to data from Bank of Lithuania, current account deficit made up 1.6 per cent of GDP in 2011. While this was the highest current account deficit since 2008, it still does not raise doubts about its sustainability. Foreign trade deficit remained quite low and export of services (especially transport, travel and construction) increased quite robustly. However, in line with better financial stance of foreign-owned companies, higher reinvestment had its negative ef-fect on current account.
Export boom which started in 2010 continued in 2011 as well. According to Statistics Lithuania, last year exports of goods were by 28.9 higher year-on-year and imports by 28.2 per cent. At constant prices, the increase made up 13.5 per cent and 12.6 per cent, respectively. Impressive export expansion lost its momentum only at the end of 2011. Foreign trade deficit somewhat increased, as compared with 2009–2010, but still remained relatively low.
In 2011, exports of chemical products, refined oil products, metals and metal articles, ma-chinery and equipment, transport vehicles were among the fastest growing (see Table 3 in the Appendix). Meanwhile exporters of furniture, rubber and plastics continue posting the most stable growth since the autumn of 2009. In 2011, price competitiveness of Lithuanian exports improved as its real effective exchange rate decreased by 2.1 per cent as compared with 2010. In addition, exporting companies are very active in seeking new markets in Asia, Africa, South America, which is particularly characteristic to producers of refined oil products, fertilizers, pharmaceuticals and milk products.
Balance of paymentsBalance of payments
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After a couple of years of calm stability, gross external debt started rising in 2011. At the end of 2011, gross external debt made up LTL 85.7 billion (80.8 per cent of GDP), which was by LTL 2.9 billion higher than at the beginning of the year. The main factors behind the increase were larger government liabilities, increased debt of central bank and trade credits of private com-panies. External debt of monetary and financial institutions continued shrinking. Gross external debt should rise only marginally in 2012. Public budget deficit financing need will be lower and outbreak of banks’ lending, which would require for imported financial funds, is unlikely.
Taking into regard that economic development will be balanced between domestic and ex-ternal demand, we do not change our forecasts of current account deficit, leaving them at 3 per cent of GDP in 2012 and 4 per cent of GDP in 2013 (see Diagram 4).
Diagram 4. Current account balance (per cent of GDP)
-5.1-6.7 -7.6 -7.1
-10.6-14.4 -12.9
4.41.5
-1.6-4.0(-4.0)*
-3.0(-3.0)*
-20
-15
-10
-5
0
5
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast
* Previous forecast of SEB Bank given in parenthesis.
According to survey data, unemployment level in Lithuania made up 13.9 per cent in the fourth quarter of 2011 and was by 0.9 percentage points lower quarter-on-quarter and by 3.2 percent-age points lower year-on-year. In 2011, average unemployment rate stood at 15.4 per cent and was by 2.4 percentage points lower as compared with 2010.
In the nearest future, unemployment rate will decrease somewhat less speedily while in the first quarter of 2012 joblessness may even slightly go up. On the one hand, its increase may be justified by seasonal factors, but economic growth was also more sluggish at the beginning of 2012 as compared with 2011. Weekly registered unemployment indicators from Labour Ex-change also suggest that employment weakened at the start of 2012.
Most likely, employers will further remain cautious and try to do the job with the same number of employees as at the end of 2011. According to survey of Confederation of Lithuanian In-dustrialists, in the first quarter of 2012, 70 per cent (75 per cent in the fourth quarter of 2011) of manufacturing industry managers planned to keep the number of employees unchanged, 16 per cent (15 per cent) intended to increase it while 13 per cent (10 per cent) planned to fire some employees. Cautiousness of business managers is absolutely understandable as uncer-tainty remains rather high, demand growth is quite modest and inventories are on the rise. 44 per cent of managers expect seasonal decrease in demand what will encourage the compa-nies to fire temporary workers firstly.
Statistics of vacant job places is not brilliant as well. At the end of 2011, there were 7.1 thousand vacant job places which was by 5.2 thousand less on a quarterly basis. Over the quarter, the number of vacant positions decreased in all the economic sectors, but retail trade, construc-tion, industry and transport suffered the largest decrease by 1.1 thousand, 1 thousand and 0.6 thousand, respectively. The largest number of vacant job places was in industry (1.9 thousand or 26.9 per cent of total places), in transport and storage (1 thousand or 14 per cent), public administration, defence and compulsory social security (0.9 thousand or 13.3 per cent).
UnemploymentUnemployment
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One more piece of poor news from labour market is high long-term (1 year and more) unem-ployment. Despite the fact that general unemployment level in 2011 decreased as compared with 2010, long-term unemployment increased by 0.6 percentage points to 8 per cent. Possibly, more and more of the unemployed take on illegal jobs and just declare that they do not have a job.
Statistics of youth unemployment started improving. In 2011, unemployment rate of people aged 15–24 made up 32.9 per cent and was by 2.2 percentage points lower as compared with 2010. A couple of years ago, the government approved social security system privileges for young people entering the labour market for the first time, which naturally had their positive effect. However, the main problem remains in place as companies avoid hiring young and inex-perienced staff, offer them just temporary contracts or sack them after probation period.
In our view, labour market will continue moving into positive direction both in 2012 and 2013, however at a slower pace than in 2011. We decided to leave average annual unemployment rate forecasts unchanged at 14 per cent in 2012 and 12 per cent in 2013 (see Diagram 5).
Diagram �. Unemployment level (survey data, average, per cent)
13.812.4 11.4
8.3
5.64.3
5.8
13.7
17.815.4
(12.0)*12.0
(14.0)*14.0
02468101214161820
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast
* Previous forecast of SEB Bank given in parenthesis.
In the fourth quarter of 2011, gross average wages and salaries made up LTL 2175 and were by 2.5 per cent higher on an annual basis. In the public sector, growth of wages and salaries made up 3.3 per cent while in the private sector it was 2.3 per cent. Growth slightly accelerated as compared with 1.6 per cent annual increase in the third quarter of 2011. Nevertheless, one should take into account that in the last quarter of 2011, various bonuses and add-ons were paid out which had been quite limited back in 2010. Therefore, more robust growth of wages should be treated as seasonal one-off factor which will not have positive effect in the nearest future anymore. In the first quarter of 2012, growth of wages and salaries most probably slowed down, but remained in the positive territory.
In the fourth quarter of 2011, as compared with the same period of 2010, wages and salaries in-creased the most rapidly in IT and communications (11.2 per cent), healthcare and social work (6.8 per cent), financial and insurance activities (5.4 per cent), agriculture, forestry and fishery (4.9 per cent). Labour earnings decreased in administration and other services and artistic and leisure services (both by 0.8 per cent). Growth of wages and salaries exceeded inflation only in the above-mentioned four sectors which recorded the fastest growth. Meanwhile in all other sectors real wages declined.
Thus far, employers adopt wait-and-see tactics instead of at least compensating for the loss of purchasing power of their employees. For instance, survey of Confederation of Lithuanian Industrialists shows that 78 per cent of managers of largest industrial companies intended to leave the wages unchanged in the first quarter of 2012 (76 per cent in the fourth quarter of 2011), 21 per cent (21 per cent) planned a slight increase while 1 per cent (0 per cent) estimat-ed reduction.
Wages and salariesWages and salaries
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The most business cycle-sensitive sectors, e.g. construction or services, lately have even low-ered their wages and salaries, but this was due to shorter working hours rather than to decrease in contracted wages and salaries. This was indirectly reflected by changes in average number of employees, which decreased by 0.4 per cent in the fourth quarter of 2011 as compared with the preceding quarter (public sector recorded a 0.7 per cent increase while private sector a decrease of 1.0 per cent).
In 2011, growth of wages and salaries was largely driven forth by increase in public sector wages and salaries. However, fiscal consolidation should put pressure on public wages and salaries in 2012. Minimum monthly wages will have minimal effect on the growth of average earnings as its growth by more than LTL 50 is unlikely.
Having in mind the abovementioned circumstances, we leave our forecasts for growth of wag-es and salaries unchanged at 2.0 per cent in 2012 and 2.5 per cent in 2013 (see Table 1 in the Appendix). Higher than expected growth of exports to European Union, improved business and consumer sentiment would give a reason to stronger growth of wages and salaries than envisaged in our forecasts.
Failure of bank Snoras will have material effect on loan portfolio indicators in the nearest fu-ture. Migration of clients to other banks is natural but is not always smooth. Some of Snoras customers have experienced financial problems so hard, that they will not be able to carry on the projects that need borrowed funds. This will limit borrowing need in general. Furthermore, statistical base of 2011 which includes Snoras, will make a large negative effect. For instance, at the end of 2011 as compared with the end of 2010, loan portfolio decreased by 7.6 per cent while until Snoras closure credit portfolio was more or less stable. Excluding Snoras, loan port-folio decreased by 0.3 per cent only.
More remarkable lending recovery is out of sight due to cautiousness of customers. House-hold sentiment deteriorated quite markedly in autumn and winter while companies also re-acted to changing environment and worsening export prospects. Investment growth notably slowed down towards the end of 2011, with annual changes in gross fixed capital making up 45.7 per cent in the first quarter, 20.7 per cent in the second quarter, 7.9 per cent in the third quarter and 10.4 per cent in the fourth quarter. Businesses face quite limited domestic and ex-ternal demand, and therefore refrain from production expansion. Some companies would like to wait and see what is the course of economic and tax policy and investment strategy after the parliamentary election in October.
Taking into regard the effect of Snoras failure on statistical base in credit market, we decided to cut the forecast for loan portfolio growth to 0 per cent in 2012 and 2 per cent in 2013 (see Diagram 6).
Diagram �. Annual change in stock of loans and deposits
22.0
52.5
39.7
53.6
48.9
46.9
18.8
-13.
8 -5.2
-7.6
12.1 16
.2
31.6 40
.7
20.5
22.6
-4.7
7.4 10
.6
-5.0
2.0
(5.0
)*
0.0
(2.0
)*
5.0
(5.0
)*
5.0
(5.0
)*
-30-20-10
0102030405060
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Annual change in loan portfolio (per cent)Annual change in portfolio of deposits and letters of credit (per cent)
forecast
* Previous forecast of SEB Bank given in parenthesis.
Loan portfolioLoan portfolio
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Snoras has also played its important role in deposit market as it was an active participant in deposit sector and used to attract depositors with higher-than-average interest rates. There-fore, eliminating Snoras from the system at the end of 2011 brought a decrease in deposit port-folio by 5 per cent as compared with 2010, although deposit stock at other banks increased by 10 per cent over the same period. 90 per cent of Snoras’ deposits were compensated according to state insurance scheme in a month after nationalization of the bank.
Despite the negative effect of the bankrupt bank on the deposit market, we suppose that de-posit portfolio will increase both in 2012 and 2013. Due to economic and financial uncertainty, companies and households switch from consumption and investment to saving. In addition, they look for safer saving measures, which is quite similar to saving for a rainy day after the col-lapse of Lehman Brothers. However, economic difficulties in 2012 will be much smaller than in 2009–2010 and therefore propensity to save will be lower than a couple of years ago.
Snoras has hit confidence in bank deposits only partially but on the other hand, speedy and smooth compensation of deposits up to EUR 100 thousand has shown that state guarantees are actually working. Depositors, who kept more than EUR 100 thousand at Snoras, suffered the largest losses as they ignored financial diversification and safety rules. Overall, government managed Snoras’ case quite skilfully, what allowed avoiding negative systemic consequences and contagion effect in the banking sector.
Based on the above-mentioned insights we do not change our deposit growth forecasts, i.e. 5.0 per cent annual increase in both 2012 and 2013 (see Diagram 6).
Interest rates on loans in litas are heavily affected by excess liquidity in the banking system af-ter compensation of Snoras deposits in litas and recent government global bond issues which temporarily boosted government funds at the banks.
At the end of 2011, Bank of Lithuania started absorbing liquidity through newly initiated open market operations (time deposits, repos and securities auctions). These measures were re-launched after a break of 10 years. From December 2011 to March 2012, the Bank of Lithu-ania has absorbed LTL 7.585 billion from commercial banks through deposit auctions while interest rate dropped from 0.45 per cent to 0.19 per cent. Meanwhile, commercial banks bor-rowed only LTL 16.4 million from the central bank through repos with average interest rate of 1.51 per cent.
Interbank interest rates have been decreasing over the respective period. For instance, over-night VILIBOR rate made up 0.88 per cent on December 1, 2011, 0.46 per cent on January 2, 2012, 0.39 per cent on February 1 and 0.40 per cent on March 1. 6-month VILIBOR made up 2.23 per cent, 2.03 per cent, 1.82 per cent and 1.85 per cent, accordingly. 1-year VILIBOR made up 2.66 per cent, 2.51 per cent, 2.42 per cent and 2.38 per cent, respectively.
Interest rates on loans in litas to companies and households did not decrease in line with in-terbank rates. For instance, in October 2011 the respective indicator made up 5.39 per cent, in November – 4.95 per cent, in December – 5.26 per cent and January 2012 – 5.29 per cent. Average interest rates on loans in euro made up 4.44 per cent, 4.26 per cent, 4.47 per cent and 4.14 per cent, respectively.
Taking into regard recent trends on the Lithuanian interbank market, we reduce our forecast for average interest rates on loans in litas to 5.50 per cent at the end of 2012 and to 5.75 per cent at the end of 2013 (see Diagram 7). Possible reduction of ECB refinancing rate by 25 or 50 basis points will be of only secondary importance as compared with local factors.
Deposit portfolioDeposit portfolio
Credit interest ratesCredit interest rates
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Diagram �. Average interest rate on loans in litas (end of year, per cent)
6.085.07 5.67
4.705.37
8.6110.08
8.14
5.62 5.26(6.50)*5.75
(6.50)*5.505.29
0
2
4
6
8
10
12
2002 2003 2004 2005 2006 2007 2008 2009 2009 2011 Jan2012
2012 2013
forecast
* Previous forecast of SEB Bank given in parenthesis.
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APPENDIX
Table 1. Main Macroeconomic and Financial Indicators in 2002–201�
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(a
ctua
l)
2011
(fo
reca
st)
2012
(fo
reca
st)
2013
(fo
reca
st)
Annual change in real GDP (%)
6.8 10.3 7.4 7.8 7.8 9.8 2.9 –14.8 1.4 5.9 – 2.0 3.0
Nominal GDP (LTL billion) 52.351 57.232 62.997 72.402 83.227 99.229 112.084 91.914 95.074 106.006 – 110.776 117.423
Public sector balance (ESA’95, % of GDP)
–1.9 –1.3 –1.5 –0.5 –0.4 –1.0 –3.3 –9.5 –7.0–4.5
(1–3Q)–6.0 –3.5 –2.9
Annual average HICP inflation (%)
0.3 –1.1 1.2 2.7 3.8 5.8 11.1 4.2 1.2 4.1 – 2.5 3.0
Current account balance (% of GDP)
–5.1 –6.7 –7.6 –7.1 –10.6 –14.4 –12.9 4.4 1.5 1.6 – –3.0 –4.0
Average gross monthly wages and salaries (excl. entrepreneurships, 4Q, LTL)
1145.1 1207.9 1310.2 1453.4 1731.7 2052.0 2319.1 2118.3 2121.5 2175.0 – 2218.5 2274.0
Annual change in average gross monthly wages and salaries (excl. entrepre-neurships, 4Q, %)
5.3 5.5 8.5 10.9 19.1 18.5 13.0 –8.7 0.2 2.5 – 2.0 2.5
Unemployment level (survey data, average, %)
13.8 12.4 11.4 8.3 5.6 4.3 5.8 13.7 17.8 15.4 – 14.0 12.0
Loan porftolio of commer-cial banks (end of period, LTL billion)*
7.933 12.099 16.898 25.957 38.641 60.114 71.441 61.558 58.338 53.933 – 53.933 55.012
Annual change in loan portfolio (%)*
22.0 52.5 39.7 53.6 48.9 43.9 18.8 –13.8 –5.2 –7.6 – 0.0 2.0
Portfolio of deposits and letters of credit (end of period, LTL billion)*
11.677 13.574 17.860 25.133 30.293 40.109 38.232 41.073 45.443 43.174 – 45.333 47.599
Annual change in portfolio of deposits and letters of credit (%)*
12.1 16.2 31.6 40.7 20.5 23.4 –4.7 7.4 10.6 –5.0 – 5.0 5.0
Average interest rate on loans in litas (end of period, %)
6.08 5.07 5.67 4.70 5.37 8.61 10.08 8.14 5.62 5.26 – 5.50 5.75
* Data of loans and deposits is not strictly comparable in 2002–2006 and 2007–2013 due to changes in methodology.
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Table 2. Breakdown and Development Rates of Value Added by Economic Activity
Share of total value added (%) Annual change at chain-linked volume (%)
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Gross value added* 100.0 100.0 100.0 100.0 100.0 9.8 2.9 –14.8 1.4 5.9
Agriculture, hunting and forestry 3.9 3.6 2.8 3.3 3.5 12.0 2.5 1.4 –7.1 3.2
Mining and energy 4.1 3.9 4.6 4.6 4.1 1.5 –1.3 –6.1 –2.9 –10.7
Manufacturing industry 17.8 17.6 16.8 18.8 20.4 4.5 2.2 –16.0 9.9 10.1
Construction 11.2 11.2 6.6 6.0 6.5 27.8 1.9 –45.6 –6.2 19.2
Domestic trade; transport; accomodation & food service
28.1 28.2 29.6 31.3 31.4 12.7 3.6 –17.0 3.8 7.2
Information and communication 3.7 3.4 3.9 3.5 3.1 12.0 1.8 0.1 –0.6 1.9
Financial & insurance activities 3.3 3.3 2.2 2.4 2.6 5.8 3.7 –8.6 8.4 9.8
Real estate activities 6.5 6.9 7.4 6.5 6.1 –1.5 13.0 –3.8 –2.6 3.0
Professional, scientific & technical activities 5.9 5.7 6.4 5.9 5.8 25.7 2.7 –15.6 –1.3 3.3
Public administration and defence; education; compulsory social security
13.7 14.6 17.6 15.7 14.6 2.3 1.3 –2.0 –2.5 0.9
Arts & entertainment; household services 1.8 1.7 2.1 1.9 1.8 –0.5 –6.8 –12.8 –6.9 1.3
* GDP equals the sum of all values added (total value added) plus taxes on products minus subsidies.
Table �. Exports by Commodity Groups (LTL million)
ExportsForeign trade
balance at f.o.b. prices (%)*
2007 2008 2009 2010 2011 Relative share in 2011 (%)
Annual change in 2011 (%)
2010 2011
Total 43 192 55 511 40 732 54 039 69 643 100.0 28.9 –3.5 –3.2
Mineral products 5902 13 825 8746 12 733 17 804 25.6 39.8 –20.4 –18.8
Agricultural and food products 7346 8893 7979 9710 11 565 16.6 19.1 12.3 12.0
Machinery and equipment 5589 5915 4078 5643 7184 10.3 27.3 –12.8 –11.4
Chemical products 3477 5354 3695 4397 6384 9.2 45.2 –18.3 –9.4
Transport vehicles 4557 4757 2956 4196 5331 7.7 27.0 –2.3 –8.0
Plastics, rubber and their products 3430 3304 2751 3677 4323 6.2 17.6 17.1 15.1
Textile and textile articles 3263 3059 2625 3225 3666 5.3 13.7 10.4 10.3
Wood, paper and their products 2660 2465 2004 2900 3585 5.1 23.6 14.7 16.2
Furniture 2665 2646 2404 2875 3562 5.1 23.9 71.6 71.9
Metals and their products 2262 2647 1817 2421 3259 4.7 34.6 –8.4 –8.0
Other goods 2041 2646 1676 2259 2980 4.3 31.9 –0.4 0.2
* As a percentage of the turnover of trade in a certain commodity group.
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Table 4. Main Foreign Trade Partners of Lithuania in 2011
Exports ImportsForeign trade balance
at f.o.b. prices (%)*
LTL million Share (%) Annual change (%)
LTL million Share (%) Annual change (%)
2010 2011
Total 69 642.5 100.0 28.9 78 159.9 100.0 28.2 –3.5 –3.2
European Union 42 766.3 61.4 29.7 43 668.4 55.9 26.6 0.3 1.5
CIS** 19 309.5 27.7 32.3 28 632.1 36.6 31.6 –17.2 –17.0
Other countries 7566.7 10.9 17.0 5859.4 7.5 24.6 18.5 15.4
Russia 11 537.1 16.6 36.4 25 649.8 32.8 29.0 –38.1 –35.7
Latvia 7118.3 10.2 40.7 5187.4 6.6 34.6 16.0 18.2
Germany 6474.6 9.3 21.2 7616.5 9.7 18.5 –6.7 –5.6
Poland 4863.7 7.0 16.4 7136.9 9.1 31.8 –10.4 –16.5
Estonia 4624.2 6.6 69.6 2193.0 2.8 25.8 24.4 37.9
Netherlands 4266.3 6.1 42.1 3861.7 4.9 42.0 7.5 7.5
Belarus 3606.6 5.2 27.0 1919.7 2.5 85.1 48.5 32.8
UK 2886.8 4.1 8.6 1213.1 1.6 24.8 48.4 42.9
France 2875.5 4.1 60.5 1899.4 2.4 20.3 8.9 22.9
Sweden 2484.3 3.6 27.2 2611.7 3.3 30.6 1.4 0.1
Ukraine 2306.6 3.3 18.0 769.4 1.0 27.8 54.7 51.9
US 1811.6 2.6 23.2 917.5 1.2 46.0 42.3 35.0
Denmark 1475.2 2.1 –9.0 1274.4 1.6 22.0 24.1 9.8
Norway 1406.7 2.0 13.2 294.6 0.4 43.0 72.8 66.8
Italy 1249.5 1.8 19.5 2470.1 3.2 22.6 –29.3 –30.5
Kazakhstan 1102.1 1.6 35.4 203.9 0.3 14.6 65.6 70.1
Finland 933.3 1.3 24.2 1628.2 2.1 49.0 –16.0 –24.7
Spain 847.1 1.2 49.8 838.7 1.1 11.0 –11.8 3.1
Belgium 795.1 1.1 7.9 2449.0 3.1 23.0 –43.9 –49.1
Canada 783.0 1.1 –18.3 86.1 0.1 37.9 88.3 81.1
Czech Rep. 446.5 0.6 24.6 992.2 1.3 13.2 –39.8 –35.7
Turkey 429.2 0.6 38.1 348.2 0.4 24.7 7.9 12.9
India 409.5 0.6 8.8 112.8 0.1 49.7 68.0 58.5
Kyrgyztan 307.7 0.4 3.2 times 6.9 0.0 98.9 93.4 95.9
Hungary 270.4 0.4 36.8 585.8 0.7 18.7 –40.7 –34.6
Saudi Arabia 210.8 0.3 15.3 59.8 0.1 2.4 times 76.8 57.6
Nigeria 206.7 0.3 –17.5 0.1 0.0 0.2 99.9 99.9
Austria 203.6 0.3 10.5 559.4 0.7 26.1 –39.2 –44.6
Ireland 200.9 0.3 2.4 181.5 0.2 55.5 27.8 7.6
China 199.4 0.3 2.1 times 1559.1 2.0 4.9 –87.3 –76.3
Portugal 175.3 0.3 28.7 58.4 0.1 23.8 50.5 51.9
Romania 154.6 0.2 22.1 120.4 0.2 9.6 9.6 14.9
* As a percentage of the turnover of trade with a certain country or country group.** Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
