S&P Raises Lithuania's Debt Rating Two Notches on Euro

Lithuania’s credit rating was raised two notches by Standard & Poor’s on a stronger-than-expected fiscal performance and higher prospects the Baltic nation will qualify for euro adoption next year.

The rating was raised to A-, the fourth-lowest investment grade, from BBB, with a stable outlook, the S&P said in a statement from London. That puts Lithuania’s rating on par with Poland, Slovenia and Malaysia.

Lithuania is making a second attempt to adopt the euro after a failed bid in 2006, when it became the only candidate rejected by the European Union because inflation topped the bloc’s ceiling by 0.1 percentage point. Lithuania’s entry in 2015 would put the entire Baltic region in the euro area, after Estonia joined in 2011 and Latvia entered in January.

“Lithuania’s external and fiscal performances have exceeded our 2013 expectations, and we forecast continued strong and sustainable economic growth averaging 4 percent over 2014-2017,” analysts including Maxim Rybnikov said in the statement.

Lithuania last had its credit rating raised by S&P to A- in January 2008. S&P’s rating increase follows a similar move by Fitch Ratings, which raised the outlook on Lithuania’s BBB+, the third-lowest investment grade, last week.

“We believe that Lithuania fulfills all quantitative euro-accession criteria and will be invited to join the euro zone in 2015,” S&P said.

Euro adoption will improve Lithuania’s monetary flexibility as the central bank “has no meaningful flexibility to steer monetary conditions” under its current currency board policy, S&P said.

‘Residual Risks’

“We believe that accession will eliminate any residual exchange rate risks in the heavily euroized economy,” the rating company said. “It will also facilitate Lithuania’s access to a deep international capital market and grant domestic banks direct access to the European Central Bank’s liquidity facilities.”

“An increase in the credit rating creates grounds for lower borrowing costs for the country,” Finance Minister Rimantas Sadzius said in a statement today. “That’s a high assessment of our efforts and our chances to adopt the euro.”

S&P expects “growth in Lithuania should remain sustainable and broad-based,” with an expansion “fueled by domestic demand, including investments, with net exports making a negative contribution.” The economy is now operating close to full capacity, it said.

The share of exports is likely to increase to 89 percent of gross domestic product this year from 54 percent in 2007, increasing some risks to growth outlook should growth in trading partners falter, S&P said.

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