Boston, MA -- (SBWIRE) -- 09/10/2013 -- The recent dip in approval ratings for Lithuania's ruling centre-left coalition government indicates the continued disillusionment of the electorate with the political elite. However, we believe that the country's current presidency of the EU Council offers an unparalleled opportunity to win international approval for its reform and convergence drive of recent years, which the administration of Prime Minister Algirdas Butkevicius could convert into greater political capital at home.

Lithuania's export sector has been able to brush off the eurozone recession, but while we do not anticipate a major acceleration of the Lithuanian economy over the next few years, a continued expansion in private consumption and gross fixed investment will support growth.

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Lithuania remains on track to see its fiscal deficit drop below the EUprescribed 3.0% of GDP deficit ceiling this year, paving the way for euro adoption in 2015. Despite rising interest payments as a result of a growing public debt burden, we believe that improving fiscal dynamics and a favourable maturity profile will keep debt financing costs at historically low levels.

Major Forecast Changes

We have raised our 2013 real GDP growth projection for Lithuania from 1.8% to 2.6% on account of an improving labour market and rising industrial output.

Key Risks To Outlook

We believe that near-term risks are stacked to the upside, amid a robust expansion in industrial output in recent months and the jump in average wages. What is more, higher export growth than import growth this year would further raise headline GDP growth above the 2.6% we currently forecast for this year.

Still-depressed business investment into traditional sectors of the economy, such as construction, do not bode well for a continuation of the ongoing trend in GFCF growth. Indeed, recent years have shown that this expenditure component of GDP has struggled to stay in positive growth territory, and we cannot rule out an erratic recovery in fixed investment going forward.

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