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					Dr. Gitanas Nausėda
Chief Economist
SEB Lithuania
October 14, 2010




                      Outlook and Prospects of
                           Lithuanian Economy
Consequences of economic crisis in
Baltic States

 Output dramatically fell

 Unemployment grew up sharply

 Inflation contracted due to shrinking purchasing power

 Large budget tensions appeared

 Substantial current account deficit turned to surplus




                                                           2
      Baltic economies start recovering after
      severe contraction last year


                                                               Annual change in real GDP (%)

15                                                      12.2
                                            10.6                  10.0
                    10.2                                 10.6
       8.0                        8.7
10
                   7.2                         9.4                9.8
                                    7.2
      6.9                                                                                                                   4.0   5.0
      6.5         7.1             7.4        7.8         7.8      6.9                                        3.5            4.0
 5                                                                                                                                  4.5
                                                                         2.9                                         2.3    4.0   4.0
                                                                                                             1.3
 0                                                                                                  -2.0              1.0                 Lithuania
                                                                               -4.6
                                                                                                     -2.8            -1.5                 Estonia
 -5                                                                                                          -3.0
                                                                          -5.1
                                                                                                    -6.0
                                                                                                                                          Latvia

-10

                                                                                           -13.9
-15
                                                                                      -14.7

-20                                                                                   -18.0

        2002        2003        2004        2005        2006      2007     2008       2009          1Q       2Q     2010F 2011F 2012F
                                                                                                   2010     2010



      Source: national statistical bureaus, SEB forecasts.




                                                                                                                                                      3
        The recovery is driven by exports while
        construction remains under squeeze

                          Real value added in 1H 2010 by production approach (y-o-y, %)

               Lithuania                                                          Latvia                                              Estonia

                                    Industry and                                                  Industry and                                     Industry and
                          1.6                                                              11.9                                             11.1
                                       energy                                                        energy                                           energy

                                    Retail, hotels,                                               Retail, hotels,                                  Retail, hotels,
                         0.8        transport and                                 -1.6            transport and               -3.1                 transport and
                                       comms                                                         comms                                            comms
                                        Financial                                                     Financial                                        Financial
                                    intermediation,                                               intermediation,                                  intermediation,
                         0.0                                                  -4.5                                                    1.7
                                    real estate and                                               real estate and                                  real estate and
                                     other business                                                other business                                   other business

                  -0.2              Agriculture                                          6.5      Agriculture                               10.3   Agriculture

                                         Public                                                        Public                                           Public
                                    administration,                                               administration,                                  administration,
                  -0.2                                                    -10.9                                                -1.6
                                      utilities and                                                 utilities and                                    utilities and
                                    social activities                                             social activities                                social activities

-25.4                               Construction                  -38.6                           Construction        -16.8                        Construction




        Source: national statistical bureaus, calculations of SEB Bank.



                                                                                                                                                                       4
Recovery is much more pronounced in
manufacturing than in retail trade

                                     Annual change in turnover (constant prices, 3-month moving
                                                            average, %)

 30


 20


 10

                                                                                                                                                                                                      Manufacturing
  0
                                                                                                                                                                                                      industry
                                                                                                                                                                                                      Retail trade
-10


-20


-30


-40
       2006M01

                 2006M04

                           2006M07

                                      2006M10

                                                2007M01

                                                          2007M04

                                                                    2007M07

                                                                              2007M10

                                                                                        2008M01

                                                                                                  2008M04

                                                                                                            2008M07

                                                                                                                      2008M10

                                                                                                                                2009M01

                                                                                                                                          2009M04

                                                                                                                                                    2009M07

                                                                                                                                                              2009M10

                                                                                                                                                                        2010M01

                                                                                                                                                                                  2010M04

                                                                                                                                                                                            2010M07
      Source: Statistics Lithuania.



                                                                                                                                                                                                                      5
Breakdown of Lithuanian
merchandise exports

                                 Breakdown of merchandise exports in
                                       January-August 2010 (%)


                                                                Other
                                                   Metals
                                                                 4%
                                       Wood and paper 4%                      Mineral products
                                            5%                                      25%

                                     Furniture
                                        6%
                                 Textiles
                                   6%

                                 Plastics and
                                    rubber
                                      7%                                                Agricultural and
                                                                                         food products
                                            Transport                                         17%
                                             vehicles
                                               8% Chemical
                                                                        Machinery and
                                                     products            equipment
                                                        8%                  10%




 Source: Statistics Lithuania.




                                                                                                           6
                                                                                                                                                   53
                                                                     Transport vehicles




                                                                                                                                              47
                                                                      Wood and paper




                                                                                                                                             44
                                                                      Mineral products




                                                                                                                                   33
                                                                    Plastics and rubber




                                                                                                                                  32
                                                              Machinery and equipment




                                                                                                                              30
                                                                                Metals




                                                                                                                             28
                                                                                  Total




                                                                                                                18
                                                                              Furniture




    Source: Statistics Lithuania, calculations of SEB Bank.
                                                                                                          15
                                                                               Textiles
                                                                                                                                                            as compared to Jan-August 2009




                                                                  Agricultural and food

                                                                                                    11
                                                                        products

                                                                    Chemical products           6
                                                                                                                                                                                                                                                     compared to pre-crisis level


                                                                                                                                                        6




                                                                      Wood and paper
                                                                                                                                                       4




                                                                    Plastics and rubber
                                                                                                                                                   2




                                                                              Furniture

                                                                  Agricultural and food
                                                                                                                                        -1
                                                                                                                                                                                                          Change in exports in Jan-August 2010 (%)




                                                                        products
                                                                                                                                                                                                                                                     Recovery of exports is broad-based as




                                                                                                                                        -1




                                                                               Textiles
                                                                                                                       -12




                                                                                  Total
                                                                                                                                                                                                                                                     compared to 2009 but much weaker when




                                                                                                                     -14




                                                              Machinery and equipment
                                                                                                                -16




                                                                     Transport vehicles
                                                                                                          -19




                                                                      Mineral products
                                                                                                                                                                         as compared to Jan-August 2008




                                                                                                    -22




                                                                                 Metals
                                                                                          -28




                                                                     Chemical products
7
  Exports are increasing, but not
  everywhere
      Main exports markets of Lithuania in
      Jan-August 2010 (% of total exports)                      Change in exports in Jan-August 2010 (y-o-y,
                                                                                     %)
                                                                62
    Russia                                         15


  Germany                                     10                           48   47
                                                                                         43
                                                                                                   41            39
     Latvia                                  10                                                                           34
                                                        28
    Poland                               8                                                                                          25
                                                                                                                                             20

Netherlands                          5


    Estonia                          5


         UK                          5
                                                                                                                                                      -7
   Belarus                           5




                                                                                Russia




                                                                                                                                                      Estonia
                                                                           UK




                                                                                         Belarus




                                                                                                                 Poland
                                                        Total


                                                                 Ukraine




                                                                                                                          Germany




                                                                                                                                             Latvia
                                                                                                   Netherlands




                                                                                                                                    Sweden
   Ukraine                   4


   Sweden                    4



     Source: Statistics Lithuania.



                                                                                                                                                                8
The main concern about inflation is not
its size but its cost-push origin

 In the nearest months, deflation of some goods will not
  outweigh appreciation of energy resources anymore

 Cost-push inflation will put a pressure on profit margin of
  Lithuanian producers and their competitiveness in domestic and
  external markets

 Depreciation of euro and litas against US dollar (which would be
  increasingly likely if threat of double-recession increases) would
  contribute a lot to recovery of exports in Eastern markets




                                                                       9
 In Lithuania, cost-push type inflation
 keeps up while demand pressures
 remain subdued
                                               Average annual HICP inflation (%)

18

16

14

12

10
                                                                                                              Lithuania
 8
                                                                                                              Latvia
 6                                                                                                            Estonia

 4                                                                                                    3.0
                                                                                     3.0     2.0
                                                                                              2.0
 2                                                                           0.8      1.0               2.0
                                                                                               1.3    1.5
 0                                                                           0.5
                                                                                      -1.2
-2
                                                                            -2.0
-4
      2002        2003        2004      2005   2006   2007   2008   2009   August   2010F    2011F   2012F
                                                                            2010


     Source: Eurostat, SEB forecasts.



                                                                                                                          10
Internal devaluation approaches its end

                         Change in gross average wages and salaries (in 4Q, y-o-y, %)



                                                             19.1   18.5



                                                                           13.0
                                                      10.9
                                               8.5

                         5.3          5.5                                                                         5.0
                                                                                                          3.5
            1.3


-0.5                                                                                              -1.0


                                                                                           -5.4

                                                                                  -8.7


2000       2001        2002         2003       2004   2005   2006   2007   2008   2009   2Q 2010 2010F   2011F   2012F



Source: Statistics Lithuania, SEB forecasts.



                                                                                                                         11
 Wage push-ups are increasingly
 widespread in manufacturing industry

                             Change in average gross wages and salaries in 2Q 2010 (y-o-y, %)


                         Energy sector                                           1.1
                                                                                       Pharmaceuticals                                                  13.8

                                                                                           Computer,
              IT and communications                                              0.7                                                                 12.2
                                                                                         electronic and

              Manufacturing industry                                      -0.9                 Funiture                                        5.3

             Financial intermediation                              -2.9
                                                                                         Machinery and
                                                                                                                                         3.5
                                                                                          equipment
              Hotels and restaurants                              -3.6                 Wood and paper                                   2.6

                                     Total                 -5.4                              Electric
                                                                                                                                   1.5
                                                                                            equipment
               Real estate operations                      -5.5
                                                                                               Textiles                           0.8

         Transportation and storage                    -5.9                                  Transport
                                                                                                                           -0.4
                                                                                              vehicles
                        Domestic trade              -7.3                                     Food and
                                                                                                                          -0.8
                                                                                            beverages
                              Education             -7.4
                                                                                                Metals                  -1.8
  Public administration and defence             -8.1
                                                                                           Rubber and
                                                                                                                 -4.3
                           Construction         -8.1                                         plastics,
                                                                                            Chemicals
                                                                                                          -7.6
Administration and service activities        -9.9                                            products


     Source: Statistics Lithuania.



                                                                                                                                                               12
Lithuanian government has strongly
committed to prudent public finances in
order to introduce euro ASAP

                                                         Public balance (% of GDP, ESA'95)


                                                              -0.5   -0.4
                                                                            -1.0
                                        -1.3
                                                       -1.5
                           -1.9


  -3.2                                                                             -3.3
               -3.6
                                                                                                                            -4.0

                                                                                                                    -5.0




                                                                                                   -8.0     -8.0


                                                                                          -9.2

  2000        2001         2002        2003            2004   2005   2006   2007   2008   2009   1H 2010   2010F   2011F   2012F



Source: national statistical bureaus, SEB forecasts.




                                                                                                                                   13
 VAT collection is notably better than
 planned while revenues of other taxes stay
 close to plan and are clearly lower than in
 2009
         Tax revenues of national budget in the       Change in tax revenue in 1H 2010
              first half of 2010 (LTL million)  compared to plan (%) compared to 1H 2009 (%)

                                                          8836
       Total
                                                       8153         +8.4       -4.2


                                         3794
        VAT
                                      3068                          +23.7      +8.1


  Personal                 1618
 income tax                                     Actual collection   +5.7       -17.4
                           1531
                                                Plan


                          1414
Excise duties                                                       -9.0       -12.6
                           1550



                   314
   Profit tax                                                       +3.8       -54.1
                   302



       Source: Ministry of Finance.



                                                                                               14
      State debt continues increasing…

                                                     State debt (% of GDP)

60

                                                                                                                     52.0
                                         Latvia                                                                                     53.0
50                                                                                                       49.0
                                         Lithuania
                                         Estonia                                                                     44.0           45.0
                                                                                                             37.8
40
                                                                                               36.6



30                                                                                                    29.6



20                                                                                                                           17.0
                                                                                                                     14.0


10                                                                                                            9.0
                                                                                                  7.2



 0
     1998     1999        2000       2001     2002   2003   2004   2005   2006   2007   2008    2009         2010F   2011F   2012F



      Source: Eurostat, SEB forecasts.




                                                                                                                                           15
                                                                                   0
                                                                                           20
                                                                                                  40
                                                                                                                60
                                                                                                                                               80
                                                                                                                                                             100
                                                                                                                                                                    120
                                                                                                                                                                            140
                                                                        Estonia        9
                                                                       Bulgaria             17
                                                                    Luxembourg              19
                                                                       Romania                   31
                                                                     LITHUANIA                        38
                                                                    Czech Rep.                         40




                                                                                                                     Maastricht limit - 60%
                                                                       Slovakia                        41
                                                                       Slovenia                        42
                                                                       Sweden                          43
                                                                       Denmark                             46




     Source: European Commission, Lithuanian Ministry of Finance.
                                                                         Latvia                             49
                                                                                                                                                                                                                                             the European Union




                                                                        Finland                             51
                                                                        Poland                                  54
                                                                        Cyprus                                       62
                                                                         Spain                                             65
                                                                    Netherlands                                                  66
                                                                        Austria                                                               70
                                                                          Malta                                                               72
                                                                        Ireland                                                                    77
                                                                      Germany                                                                      79
                                                                       Hungary                                                                     79
                                                                            UK                                                                     79
                                                                            EU                                                                     80
                                                                        France                                                                      84
                                                                                                                                                                                  Forecasted state debt in EU countries in 2010 (% of GDP)




                                                                     Euro zone                                                                          85
                                                                                                                                                                                                                                             … but still remains among the lowest in




                                                                       Portugal                                                                         86
                                                                      Belgiuam                                                                                 99
                                                                           Italy                                                                                      118
                                                                        Greece                                                                                            125
16
Estonia will join euro zone in 2011, while
Lithuania and Latvia are striving to make it
in 2014
             Earliest possible date of
                euro introduction
                                         Astonishing progress with fiscal consolidation
Estonia                2011              in 2009

Lithuania              2014              High budget deficit


Latvia                 2014              High budget deficit

                                         Pushing for euro entry in 2013, but political
Bulgaria               2015              resistance from Brussels is likely to delay the
                                         process

Romania                2015              High budget deficit


Hungary                2015              High state debt and budget deficit

                                         Little political appetite for euro; high budget
Czech Rep.             2015              deficit

                                         Little political appetite for euro; high budget
Poland                 2015              deficit



                                                                                           17
Rising inflation may weigh on real interest
rates and therefore curb savings

                                               Annual change in loan and deposit portfolio (%)

                                     53                      54
                                                                          49
                                                                                      47

                                                                  41                                                   Loans            Deposits
                                                  40

                                                       32

     24                                                                                    23
                 21      22
                                                                               21
                                                                                                19
            17                            16
                              12                                                                                           12
                                                                                                                                                   10
                                                                                                                7                   7                   8
                                                                                                                                          5 5
                                                                                                                                0

-1
                                                                                                     -5

                                                                                                                     -11
                                                                                                          -14

2000        2001         2002        2003         2004       2005         2006        2007      2008      2009      1H 2010     2010F    2011F     2012F


Data in 2000-2006 and in 2007-2012 is not strictly comparable due to changes in methodology.
Source: Bank of Lithuania, SEB forecasts.




                                                                                                                                                            18
Interest risk premium has sharply
decreased

                                      6-month EURIBOR and VILIBOR (%)
25




20



                                                                                              VILIBOR
15
                                                                                              EURIBOR


10




 5




 0
 1999       2000       2001    2002   2003   2004   2005   2006   2007   2008   2009   2010




     Source: Reuters Ecowin.



                                                                                                        19
Summer of 2010 saw the bottom of
residential property prices but there is a
long way to go to the next peak

                                     OHBI apartment price index (January 1994 = 100)
900

800

700

600

500

400

300

200

100

  0
      1994


               1995


                       1996


                              1997


                                       1998


                                              1999


                                                     2000


                                                            2001


                                                                   2002


                                                                          2003


                                                                                 2004


                                                                                        2005


                                                                                               2006


                                                                                                      2007


                                                                                                             2008


                                                                                                                    2009


                                                                                                                           2010
       Source: Ober-Haus.



                                                                                                                                  20
Housing affordability has adjusted to
2001-2002 level

                                             Housing affordability index* (years)

18

16

14

12

10

 8

 6

 4

 2

 0
       1998        1999        2000        2001        2002        2003        2004        2005        2006           2007   2008   2009   2010



 * Ratio of price of old construction 2-room apartment in dormitory areas in Vilnius to average annual gross wages.
 Source: Ober-Haus.




                                                                                                                                                  21
Thank you for your attention!

				
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