Political Risk Of Lithuania 07 Apr 2014

Long-Term Political Outlook - Convergence By No Means Assured Lithuania - Political Ris k - 07 Apr 2014 BMI View: While Lithuania's long-term political outlook remains among the most stable in the emerging Europe region, we nevertheless caution that the country's convergence with Western political and economic institutions through 2023 is by no means assured. In particular, we highlight the aftermath of 2009's financial crisis as putting the country at a critical juncture. Indeed, dealing with an economy which is set to post significantly lower trend growth over the long term (compared to pre-crisis levels), while balancing the need to pursue a more pragmatic foreign policy with Russia and the demands of an increasingly nationalist electorate, will pose significant challenges for Lithuanian governments to 2023. Having been among the firs t s tates to declare its independence from the Soviet Union, Lithuania's political ins titutions are relatively well developed, particularly when compared to s ome of its regional peers in the emerging Europe region. Indeed, although concerns s urrounding endemic corruption are s till prevalent (Lithuania ranked 43th globally in Trans parency International's 2013 Corruption Perceptions Index), we maintain a relatively s anguine outlook on the country's political s tability over the long term, which s hould bode well for foreign inves tors ' ris k perceptions towards the Baltic s tate through 2023. Challenges And Threats To Stability Lower Trend Growth Over Long Term: We maintain our view that Lithuania's 2009 macroeconomic cris is is s et to have a profound impact upon the s tate's long-term growth trajectory. With capital inflows unlikely to return to pre-cris is levels , we caution that the Baltic economy's growth model will be forced to adjus t to one dependent more on exports as oppos ed to credit-fuelled private cons umption. Combined with the government's decis ion to maintain the litas ' peg to the euro (thus opting for a potentially prolonged 'internal devaluation' s trategy in a bid to res tore competitivenes s ), the electorate will be forced to accept a lower s tandard of living through the end of our 10-year forecas t period (GDP per capita is not forecas t to return to pre-cris is levels until 2015). This has the potential to s ignificantly alter domes tic political dynamics through 2023 in our view, particularly as it increas es the appeal for politicians to purs ue populis t economic policies , thereby s ignificantly undermining the country's attractivenes s as a des tination for foreign inves tment. Rapidly Ageing Population: Similar to other s tates throughout emerging Europe, Lithuania is s et to experience a demographic time bomb over the long term. According to the United Nations , the population is s et to decline to 3.1mn by 2020, compared to 3.3mn in 2010 and 3.7mn at the s tart of the country's pos t-Soviet trans ition in 1990. More importantly, perhaps , are projections which s how a s teadily increas ing dependency ratio (the proportion of the population under 15 and over 64, divided by the number of individuals between 15-64). According to the European Union Public Health Information Sys tem (EUPHIX), by 2020 26.0% of the population will fall into this category, compared to 23.4% in 2010. As increas ing numbers of Lithuanians leave the workforce, the taxable bas e will only s hrink further, putting s ignificant s train on an already s tretched s ocial s ecurity s ys tem. As a res ult, s ucces s ive governments