In its annual report on Lithuania, Moody's Investors Service said the Baltic nation's A3 country-ceiling credit rating for foreign currency debt, foreign bank deposits, and government bonds is based on advanced economic and financial integration with Western Europe -- an integration that has been further enhanced, moreover, by entry into both NATO and the European Union earlier this year.
Lithuania's investment-grade credit rating and its positive outlook are also supported by the continued strengthening of public sector finances, which are underpinned by steady reforms in the tax system, municipal finances, and pension and health sectors.
"In addition," says Senior Vice President Nina Ramondelli, "our ratings incorporate Lithuania's economic reforms, which have been accelerated; and the regulatory framework of the financial system has also been strengthened." "The enhanced business environment has contributed to an economic expansion that has proven to be significantly better than the average for other Central European countries, despite European growth that has been lackluster," the analyst explains.
"However," Ms. Ramondelli says, "Moody's recognizes that the country remains vulnerable to external shocks, and to further fiscal consolidation in the context of growing local government spending, and EU- and NATO-related investments."
Other pressures on the rating come from rapidly growing internal demand, which could place stress on external accounts, as well as the rapid widening of the external current account deficit since 2002. "In contrast to the previous two years," the analyst notes, "this has been primarily financed through short-term external borrowing."
"Nevertheless," she adds, "the fact that banks are now virtually entirely foreign- owned and that the bulk of the borrowing derives from parent institutions lessens some of our concerns about refinancing risks."
" Moreover, entry into the European Monetary Union, which could occur as early as 2007 now that the country is in the ERM2, lessens concerns about possible external payments disruptions -- but it does not guarantee a smooth transition," Ramondelli states.
The ratings are also supported by the prospects for further production, trade, financial and institutional linkages with the EU that are expected as a result of entry into the Union.
The pace of economic activity remains brisk, fueled by EU-related government spending and rapid credit expansion. Strong economic growth, in the context of a slower pace of currency appreciation and some higher administrative costs associated with entry into the EU, has been leading to higher inflation, the analyst says.
The report is titled, Global Credit Outlook: Lithuania. Moody's emphasizes that this report is the annual evaluation of the country's credit strength and not a rating action of any kind.