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Monday 18.03.2019 | Name days: Ilona, Adelīna

Analysts: a new economic crunch is probable but Lithuania can handle it

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Lithuanian Finance Minister Vilius Šapoka

Linas Jegelevičius for the BNN

There are still no clear reasons to send calls of distress, but media, that one in the Baltics too, is abuzz – pundits say is a new economic downturn might not be far. Yet when it comes to assessing the scope of it, the predictions vary as much as the garden-variety experts.

According to analysts from investment bank JP Morgan, for example, the recession in two years’ time will be less damaging than the 2008 crash, yet U.S. shares could drop by 20 per cent, well below the 54 per cent tumble in the S&P 500 index a decade ago.

With the Baltic financial sector executives’ ears tuned to the more or less gloomier forecasts, Vilius Šapoka, the Lithuanian Minister of Finance, insists that one should be ready for anything, and for recession too, but as much important is «not to talk an illness into the body which is still pretty healthy».

«We always ought to get ready for hard times. In Lithuania, we have learnt good lessons from the 2008 economic meltdown and, for the third consecutive year, we are accumulating financial reserves. This is the first time in our history that we see it happening for three years in a row,» Šapoka said last week. «Equally important is not to talk an illness into yourself,» he added.

Mantas Zalatorius, president of Lithuania’s Association of Banks (LAB), is also confident that Lithuanian banks are very well prepared for any financial shake-ups ahead.

«Indeed, we are hearing these talks of a looming economic crunch for quite bit now. The good news is that our banks are ready for it 100 per cent. Our bank reserves are twice larger than the law requires,» he told BNN.

According to him, no economy is recession-proof. Moreover, the cyclical edging, upwards and then downwards, is a normal thing.

«Now we can say that it is peaking and we are on the cusp of the peak. We just do not now when the flipping over will start and we will go sliding down the hill,» he spoke illustratively.

«The population should always be ready for economic uncertainties. I mean to save and not to commit to financial obligations that can be hard met under stress,» the LAB head emphasised.

Nerijus Mačiulis, Swedbank’s chief economist since 2010, says that a new crisis in Lithuania might be sparked by an external shock.

«Just like all previous crises in Lithuania, the next one will probably be sparked by an external shock,» he said in the parliamentary Committee on Budget and Finance, looking into the circumstances of the crisis in Lithuania a decade ago. The Committee is analysing how right-wing and left-wing political forces managed the country’s finances and is due to finish its investigation by April 15, 2019.

The economist, however, sees no major internal economic and financial problems that might spark a new crisis.

«Looking into Lithuania’s economic structural indicators, for example, both housing affordability and foreign trade are in surplus. We have no current account deficit, we have no structural budget deficit, state finances are balanced, the credit portfolio’s growth is no different from the growth of national income. There’s no such a gap we had a decade ago,» Mačiulis said.

Nevertheless, he said, talks of a new crisis are taking place for a reason, and there are many causes for a potential shock, for example, the United States’ protectionist trade policy.

«It might affect not only the Sino-American trade relations, as it does now, but the European Union can also find itself in that context, and also Lithuania which is very vulnerable to any global trade restrictions due to being one of the most open economies in the word,» the economist said.

Italy is another risk, the economist says, as it doesn’t want to cut its fiscal deficit and is too optimistic about its future. The economist says Italy’s failure to adhere to the EU fiscal treaty «is not only leading to a conflict with the European Commission but is also bringing the country closer to lower credit ratings and higher borrowing costs».

Mačiulis sees no threat from developing markets where debts levels have risen sharply over a decade of record-low interest rates. In his words, Argentina, Brazil and Turkey are the most vulnerable as they borrow in US dollars and do not receive income in that currency.

Žygimantas Mauricas, chief economist at Luminor Lietuva Bank, also shook off the claims that a new crisis can hit soon.

«I believe it’s too early to speak of it. I think we’ll be ok more or less in the new year. The inertia from previous years should carry us through the entire new year…Speaking of things to watch is the burgeoning market of cryptocurrencies, the situation in China and especially in Italy, for example. The major European economies, like that of Germany and France, are doing pretty good so far. With the excessive budget we have in Lithuania this year, we ought to think how to properly use the money and, sure, accumulate monetary reserves,» the analyst said.

Economist Jekaterina Rojaka, who advises to Economy minister Virginijus Sinkevičius, says that although all three Baltic economies in 2018 grew solidly in the context of the European Union, it is Lithuania which growth has been the slowest in the Baltics.

«We see major shifts occurring in economy…The technological advancements require a lot of time and we just do not have it enough (to carry out the changes). If we continue to lag behind with our structural reforms, investments and, if we do not ratchet up our productivity, we risk of being among mediocre economies,» she warned.

SEB Lithuania Bank stated in its forecast for 2019 that the Lithuanian economy will be growing slower than in 2018, thence the more modest growth in the population’s income.

«It is plausible that the people’s trust in the future will be gloomier in the new year. The increasing interest rates of mortgages will also have a negative impact on real estate market,» the bank said in a press release.

Meanwhile, Vitas Vasiliauskas, the governor of Lithuania’s Central bank, the chief watchdog of Lithuanian financial sector, says he sees no clear signs of an upcoming new economic crisis but warns about slowing growth.

«I could not say yet that a crisis is here around the corner, but we see, with no doubts, certain slowdown aspects,» he said in the sitting of the parliamentary Committee on Budget and Finance.

Speaking about 2008 crisis, Vasiliauskas argued that the Central Bank of Lithuania could have tightened supervision rules for the banking sector before the last crisis but failed to do so.

He acknowledged that the central bank was not cautious enough before the crisis.

In his words, the credit market’s pre-crisis expansion was fast and subsequent events showed that it was not sustainable. According to him, parent banks transferred around 12 billion euros to their subsidiaries in Lithuania in 2008, which made 30-40 per cent of GDP.

«It’s not easy to manage such a financial flow,» the central banker concluded in the hearing.

Speaking of national budget for 2019, Vasiliauskas underlined that the Bank of Lithuania’s assessment of economic assumptions and the Ministry of Finance’s view, «based on which the 2019 budget is being done,» differ.

«Now we see that Lithuania’s economy is growing and even exceeding its potential, and this is where our assessment slightly differs from the Ministry of Finance, as we are more cautious and the Finance Ministry is slightly more optimistic. With no doubt, we will face slowdown at some point. The question is how much we are prepared for that,» the banker said.

The Bank of Lithuania is due to submit its conclusion on the 2019 budget next week.

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