FINANCIAL AND REAL ECONOMY CRISIS AND

STATE AID

The case of Lithuania

Jurgita RatkeviciuteHead of State Aid Division

Competition Council

Summary

• Lithuanian economy and the impact of the global crisis

• EU structural assistance (existing State aid): Tackling the crisis

• Financial crisis and the banking sector

• National Economic Recovery Plan

Projections

GDP (EUR million)

2009 2010 2011

10/2008 33236 33355 34785

03/2009 29079 26989 27737

2009 2010 2011

GDP -10.5% -2.6% +4.3%

Unemployment 13.5% 15.4% 11.5%

Wage -4.4% -5% -0.3%

Lithuanian economy

• Lithuania: small country, therefore its economy is comparatively more dependent on export;

• Thus, the economic situation is highly dependent on the demand in export markets;

• At the same time, import is rather inflexible: Lithuania imports almost 90% of primary energy;

• Import flexibility will be further reduced due to the closure of Ignalina Nuclear Power Plant, generating up to 70% of electricity, at the end of 2009.

Public Finance in the context of global crisis

• The State had a financial reserve of only ca. EUR 380 million and faces high borrowing costs;

• To date, the State reduced its expenditure (wages for the public sector, investment) by ca. EUR 1,5 billion, further reductions possible in June;

• VAT (18%->19%) and excise duties increased, VAT reductions abolished, Personal Income Tax (24%->21%) reduced, Corporate Income Tax (15%->20%) increased.

EU structural assistance: foundation for the recovery

• Lithuania is a 87(3)(a) region, therefore relies mostly on the EU structural assistance to help tackle the crisis;

• So far: “traditional” State aid measures are used, not the ones foreseen in the Temporary Framework;

• Some measures already in force before the crisis, others foreseen or adopted under the National Economic Recovery Plan (amendments and additions to the Operational Programmes made).

EU structural assistance: foundation for the recovery (2)Main measures in force (for the period 2007-2013) most likely to become the biggest incentives for the recovery:

• Regional aid measure for energy (ca. EUR 260 million; modernisation and development of the following systems: power transmission, power distribution, heating supply, gas; enhancement of energy generation efficiency; using of renewable energy resources for energy generation);

• Regional aid (to date: ca. EUR 300 million);

• State aid for R&D (to date: ca. EUR 300 million).

Financial crisis and the banking sector in Lithuania

• 85% of the registered share capital in the Lithuanian banking sector is non-resident capital (mainly Scandinavian)

• No signs of threats to viability within the banking sector

• The problem of credit squeeze is dealt with under National Economic Recovery Plan

• Draft Law on Financial Stability (guarantees, recapitalisation, asset relief, nationalisation) notified to the EC

Reference rates as a sign of more difficult access to finance

6,1

9,53

4,59 2,74

0

2

4

6

8

10

12

LithuaniaEurozone

National Economic Recovery Plan

Main points:

• Improve access to financing for business (SMEs);

• Improve energy performance in buildings;

• Accelerate the use of EU structural assistance;

• Improve business environment;

• Investment and export.

Sources of financing

Expected amount: ca. EUR 1,5 billion

• EU Structural Funds• European Investment Bank (loan; provided as

national co-financing)• Private banks (expected)• National budget

State aid instruments in the Plan

To date:

• De minimis Regulation No. 1998/2006 (loans, guarantees, interest subsidies: SMEs)

• General Block Exemption Regulation No. 800/2008 (risk capital: SMEs)

• Temporary Framework (Section 4.2.2. (EUR 500 000), guarantees: large companies)

Improve access to financing for business

Budget: ca. EUR 430 million.

Measures: • Loans (ca. EUR 340 million);• Interest rate subsidies (ca. EUR 30 million);• Guarantees (ca. EUR 30 million);• Risk Capital Fund (ca. EUR 24 million);• Business Angels (ca. EUR 6 million).

Credit institutions are expected to provide further ca. EUR 170 million as co-financing and thereby, sharing the risk, ensure that appropriate procedures for the risk assessment will be followed.

Improve access to financing for business (2)

Main vehicles:

• Business Fund (managed by the European Investment Fund: risk capital, loans, portfolio guarantees): ca. EUR 290 million

• INVEGA (founded by the Government: individual guarantees, interest subsidies, loans): ca. EUR 140 million

Business Fund

Resources:• EU Structural Funds;• European Investment Bank (loan).

Resources will be allocated to financial intermediaries according to procedures of EIF.

State aid instruments:• General Block Exemption Regulation No. 800/2008• De minimis

Business Angels: considered not to constitute State aid

INVEGA

Resources:• EU Structural Funds;• National financing.

Resources will be allocated to financial intermediaries following a tender procedure.

Resources will be used to finance SMEs, with the only exception of individual guarantees where large companies could also be financed (ca. EUR 20 million).

INVEGA

State aid forms:• individual guarantees, • interest subsidies, • loans.

Both investment and working capital loans may be granted or guaranteed.

State Aid instruments:• De minimis;• Measure 4.2.2 of the Temporary Framework (to

be accepted by the EC)

Enhancing energy performance in buildings

• Public buildings (main priority: schools): ca. EUR 230 million of EU structural assistance for the period 2009-2010; started in March

• Residential buildings: ca. EUR 200 million of EU structural assistance and EUR 90 million of European Investment Bank loan; starting date not yet set, model not yet confirmed by the Government (subsidized interest rate?); State aid possible

Objectives pursued:- Investment and employment;- Reduced dependence on import of energy

resources.

Accelerating the use of EU structural assistance

• ‘Old’ plan: ca. EUR 1 billion paid in 2009• ‘New’ plan: ca. EUR 1,5 billion paid in 2009

Means:• wider use of advance payments (up to 30%) and

invoice payment instead of reimbursement;• higher intensity where possible;• shorter period for making payments etc.

Improving business environment

• Objective: to reduce the red-tape by 30% until 2011• Main directions:

– Improving legal environment (e.g. by simplifying procedures for restructuring and liquidation, lending between undertakings etc.);

– Improving labour market regulation (e.g. by offering more flexibility to negotiate the labour hours etc.);

– Improving financial relations between the State and business (e.g. by improving procedures for the refund of tax overpayment, by simplifying tax instalment agreements etc.);

– Improving competitive environment (e.g. by analysing the regulated activities for possible (partial) liberalisation etc.);

– Other measures to reduce the red-tape (e.g. by reducing the number of activities under licence obligation, improving public procurement procedures etc.).

Investment and export

• Export credit insurance to non-marketable risk countries (esp. to the Commonwealth of Independent States);

• Simplification of procedures for detailed territory planning and land use change (both seen as a major burden for investment);

• Individual incentive packages for investors etc.

• State aid possible

Thank you for your attention