Lithuania: Economy Overview by Lithuanian Confederation of Industrialists

Meeting with Embassies of EU countries:overview of economic trends

in the light of the Russian sanctions.

Osvaldas Čiukšys

Deputy Director General, Lithuanian Confederation of Industrialists

2014-10-30

Main conclusions on effects of Russian sanctions

1. EU-Russian sanctions have limited impact on Lithuanian business.

Business expectations remain relatively high due to the flexibility of

Lithuanian companies and ability to quickly diversify export to other

markets.

2. Lithuanian companies have decreased dependency on Russian market

and have shifted exports into new markets outside EU and CIS regions

(China, Hong Kong, ASEAN and MENA regions) as well as other CIS

countries.

3. These changes in exports have a long-term trend and will require

additional attention from responsible Lithuanian authorities in order to

achieve sustainable and balanced export diversification.

2014: Lithuania is among leaders in GDP growth in EU

Source: Eurostat

3.5 3.4 3.33.1 3.1

2.8

2.3 2.31.9

1.61.4 1.3

1.1 1.0 0.9 0.80.6 0.4

-0.3

-3.2

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Hun

gary

Pola

nd

Malta

Lithuan

ia

United K

ingd

om

Czech R

ep

ublic

Slo

va

kia

Latv

ia

Sw

ed

en

Esto

nia

Bulg

aria

EU

-28

Belg

ium

Euro

are

a

Austr

ia

Spain

De

nm

ark

Fra

nce

Italy

Cypru

s

Change in real GDP in 2014 Q1-Q2 compared to corresponding period of previous year, %

2014: Lithuanian GDP has reached its pre-crisis level

Source: Eurostat

17.9

10.4

8.37.4

1.9 1.7 1.4 1.40.4 0.2

0.0 -0.2-1.1 -1.4

-3.2 -4.0

-6.6

-8.7 -9.5

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Pola

nd

Malta

Slo

va

kia

Sw

ed

en

Esto

nia

Austr

ia

Fra

nce

Belg

ium

Lithuan

ia

United K

ingd

om

Bulg

aria

Czech R

ep

ublic

EU

-28

Eu

ro a

rea

Hun

gary

Den

mark

Spa

in

Italy

Cyp

rus

Change in real GDP in 2014 Q1-Q2 compared to corresponding period of 2008, %

Lithuanian economy: main trend is the shift

from export to domestic consumption

Source: Eurostat

3.6

3.0

2.3

6.7

18

.1

10

.9

3.8

5.1

2.0

11.2

14.1 1

5.4

2.4

5.7

2.2

16

.9

7.2

9.5

3.6

4.9

1.0

14

.2

4.1

6.4

3.2

5.0

1.6

12

.1

-4.3 -3

.2

3.3

5.4

0.6

8.1

3.2

5.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

GDP Consumptionexpenditure of

households

Consumptionexpenditure of

general government

Gross fixed capitalformation

Exports of goodsand services

Imports of goodsand services

Change in real GDP, compared to corresponding period of previous year, %

2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2

Worsening consumer expectationspose a threat to growth in consumption

Source: Lithuanian Statistics Department

-60

-50

-40

-30

-20

-10

0

200

8M

01

200

8M

05

200

8M

09

200

9M

01

200

9M

05

200

9M

09

201

0M

01

201

0M

05

201

0M

09

201

1M

01

20

11

M0

5

201

1M

09

201

2M

01

201

2M

05

201

2M

09

201

3M

01

201

3M

05

201

3M

09

201

4M

01

201

4M

05

201

4M

09

Consumer Confidence Index

-70

-60

-50

-40

-30

-20

-10

0

10

20

200

8M

01

200

8M

05

200

8M

09

200

9M

01

200

9M

05

200

9M

09

201

0M

01

201

0M

05

201

0M

09

201

1M

01

201

1M

05

201

1M

09

20

12

M0

1

201

2M

05

201

2M

09

201

3M

01

201

3M

05

201

3M

09

201

4M

01

201

4M

05

201

4M

09

Economic projections

-40

-20

0

20

40

60

80

100

200

8M

01

200

8M

05

20

08

M0

9

200

9M

01

200

9M

05

20

09

M0

9

201

0M

01

201

0M

05

20

10

M0

9

201

1M

01

201

1M

05

20

11

M0

9

201

2M

01

201

2M

05

201

2M

09

201

3M

01

201

3M

05

201

3M

09

201

4M

01

201

4M

05

201

4M

09

Labor market projections

Level of productive investment must be increased

Source: Eurostat

10.7 10.7

9

7.5 7.4 7.37 7 6.9 6.9 6.7

6.2 6.1 5.95.6 5.4

5 4.9

0

2

4

6

8

10

12

Cze

ch

Re

pu

blic

Esto

nia

Slo

va

kia

Austr

ia

Luxem

bu

rg

Slo

ve

nia

Italy

Sw

ed

en

Den

mark

Malta

Lithuan

ia

Euro

zo

ne

Spain

EU

-28

Latv

ia

Ne

the

rla

nd

s

Fin

land

Fra

nce

Share of investments into machinery and equipment to GDP, 2014, %

Export will continue to grow, but export geography will change:Business Expectations - Purchasing Managers Index by LPK for Q4, 2014

Source: Lithuanian Confederation of Industrialists

79

53

58

36

0

10

20

30

40

50

60

70

80

90

2014 Q3 (2014 first half) 2014 Q4 (2014 second half)

Export projections

Manufacturing Transport

76

55

62

47

0

10

20

30

40

50

60

70

80


Business expectations index

2014 Q3 2014 Q4

Export is shifting towards other markets


8.7

15.7

7

1

3.6

-13.7

6.2

3

-20

-15

-10

-5

0

5

10

15

20

Whole Export CIS EU (without Latvia and Estonia) Latvia and Estonia

Changes in Lithuanian exports (without oil products) %

2013 2014

Export to Russia is affected by sanctions andearlier long term negative economic trends in Russia


21.2%

11.8%20.3%

64.8%

-5.0%-1.4%

3.0%

13.6%

-14.00% -12.60%-6.20%

-30.30%

13.90%

-55.80%

-0.10%

-11.60%

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Foodproduction

Chemicalproduction,

plastics

Wood Textile andleather

Metals,machinery

Vehicle Other products Total Export

Change in export of goods of Lithuanian origin to Russia in 2014, compared to corresponding period of previous year, %

2013 2014

Impact of EU-Russia sanctions will be felt more in transport sector due to the influence of re-export


39%

65%

61%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Will Russian sanctions and general economic situation in CIS region have

an impact on your company’s business? %

YES NO

17.70%

46.90%

82.30%

53.10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Do EU sanctions against Russia have an impact on your company?

YES NO

2014 EU-Russia sanctions: effect on business


41.4%

31.0%

20.7%

3.4%3.4%

How sanctions and general situation in CIS region have affected your company?

Decrease in turnover

Decrease in turnover through third countries

Comodity prices and final prices scissors

Contract termination

Devaluation of Russian Ruble

• Revenue not received till the end of the

year 2014: ~ 200 mln EUR

• Profit not received till the end of the

year 2014: ~10 mln EUR

• Profit/Revenue not received means

money that would have been received

under normal trade conditions between

Lithuania and Russia

• Business will remain profitable despite

sanctions but with less profit margins

Lithuanian business is diversifying geography of exports:other CIS markets and new markets outside EU and CIS


62.5%12.5%

12.5%

12.5%

What actions does your company take to reduce the effect of sanctions?

Search for new markets outside CISand EU bordersSearch for new markets in CISregionLimit investments

Increase in efficiency, reduction incosts

Lithuanian business rediscovers new markets in other CIS countries


153.63

136.29

27.8 26.0219.29

1.610

20

40

60

80

100

120

140

160

180

Arm

enia

Kir

ghiz

ia

Azerb

aija

n

Ta

dzh

ikis

tan

Tu

rkm

enia

Uzbekis

tan

Change in export of Lithuanian origin (excl. oil products) in 2014, compared to corresponding

period of previous year, %

Armenia: beginning of wooden products

exports, increasing exports of food and

chemical products

Kirghizia: promising beginning of sugar

exports

-13.9-15.1

17.9

-20

-15

-10

-5

0

5

10

15

20

CIS Traditional CIS New CIS markets

Change in export of Lithuanian origin (excl. oil products) in 2014, compared to corresponding period of previous

year, %

New export markets for diary products: Hong Kong, China, ASEAN region, MENA region, Kazakhstan, Azerbaijan


11.5% 12.7%

-9.5%

153.2%

20.8%

41.2%

16.0% 17.3%

-11.3%

49.3%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

To

tal m

ilk e

xp

ort

EU

-28

CIS

Re

st of th

e w

orl

d

Cen

tral E

uro

pe

Scandin

avia

n m

ark

et

Peri

ph

ery

EU

cou

ntr

ies

Latv

ia a

nd E

sto

nia

Tra

ditio

nal C

IS m

ark

ets

New

CIS

mark

ets

Changes in export of diary products in 2014, compared to corresponding period of previous year, %

New export markets for meat producers: Hong Kong, China, ASEAN region, MENA region, Kazakhstan


3%

16%

-27%

165%

17%22%

40%

2% -27%

49%

-50%

0%

50%

100%

150%

200%

To

tal m

eat e

xport

EU

-28

CIS

Rest of th

e w

orl

d

Cen

tral E

uro

pe

Scandin

avia

n m

ark

et

Peri

phe

ry E

U c

ountr

ies

Latv

ia a

nd E

sto

nia

Tra

ditio

nal C

IS m

ark

ets

New

CIS

mark

ets

Changes in export of meat products in 2014, compared to 2013, %

Export diversification: business recommendations to Lithuanian authorities


36

21

13

13

8

8

3

What actions are expected from the Government?

Export promotion to markets outside EUand CIS

Reduce costs of energy

Take steps to stabilise geopolitical andbusiness environment in CIS

Improve Lithuanian business environment(taxation, beurocrasy, labor relations)

Implement responsible social policy

Faster utilisation of 2014-2020 EU structuralfunds

Support from Lithuanian embasies

Export diversification and Economic Diplomacy Council:joint effort of Government and Business

1. 27 priority markets identified;

2. Focus must shift to new markets outside EU and CIS regions in order to

achieve smooth and sustainable export diversification: up to 5-7 further

priority markets selected;

3. Export strategy and exact recommendations how to develop priority markets

should be developed;

4. Lithuanian diplomatic representation outside EU and CIS regions will be

strengthened;

5. Financial schemes on export promotion and export insurance must be

introduced and expanded;

6. LPK-DI and LPK-Business Sweden initiative. The goal is creating a platform

and synergy for deeper cooperation between Lithuanian as well as Danish

and Swedish companies, use DI and Business Sweden network and

services abroad to develop new and emerging markets.

Lithuanian economy: main challenges and recommendations (1)

1. Demographic challenges (declining workforce, low fertility rates, rising dependency

ratio, aging population)

• It is time to start implementing smart immigration policy.

2. Education: current education system is not reflecting the needs of business and

challenges of global economy.

3. :Export structure: dominated by EU (60% of Lithuanian export) and CIS (30% of

Lithuanian export) regions, while export to emerging markets outside EU and CIS

regions remains relatively very low:

• Lithuanian diplomatic representation in emerging markets (China, ASEAN,

MENA) must be strengthened and expanded;

• Export promotion schemes must be expanded in order to achieve sustainable

export diversification.


4. Chronic problems of business environment (taxation, bureaucracy, labor relations).

Taxation:

• Labor taxation is too high – unemployment trap in Lithuania has reached 70%;

• Tax administration in Lithuania is too difficult. Number of tax payments a year

– Lithuania: 11; Latvia: 7; Estonia: 7. In Lithuania it takes 170 hours a year to

declare taxes and make tax payments;

• Lithuania must climb into top 25 countries based on paying taxes criteria

(Latvia occupies 24th place, Lithuania – 44th place, Estonia – 28th place;

• Taxation system must be competitive and stimulate FDI and domestic

investment growth. Amount of tax payments and time required to pay taxes

must be decreased;

• Labor taxation must be decreased.


4. Chronic problems of business environment (taxation, bureaucracy, labor relations).

Bureaucracy:

• Bureaucratic burden in Lithuania is the biggest among Baltic states - World

Economic Forum’s Competitiveness index places Lithuania in 105th place on

bureaucratic burden criteria. Latvia and Estonia – 79th and 19th place

respectively among 144 countries;

• World Economic Forum’s Competitiveness index places Lithuania in 101th

place on bureaucratic burden impact on FDI criteria. Latvia and Estonia – 36th

and 17th place respectively among 144 countries;

• Lithuania must climb into top 20 countries based on bureaucracy burden

criteria.


4. Chronic problems of business climate (taxation, bureaucracy, labor relations). Labor

relations:

• Lithuanian labor market relations are not flexible enough, and make it more

difficult for business to react to changing economic conditions;

• World Economic Forum’s Competitiveness index places Lithuania in 125th

place on hiring and firing criteria. Latvia and Estonia – 50th and 12th place

respectively among 144 countries;

• Unemployment trap in Lithuania has reached 70%;

• Regulations on working hours, hiring and firing rules must be relaxed and

simplified. Labor taxation must be decreased;

• Lithuania must climb into top 15 countries based on hiring and firing practice

criteria – flexibility of labor market


4. High level of shadow economy:

• Implement smart and sensible taxation policies – unproportionally high

consumption taxation (e.g. alcohol, fuel excise duties) stimulate consumers to

move into illegal consumption

5. Trends in energy costs pose a threat to overall competitiveness of economy:

• Energy price must not be higher compared to neighboring countries;

• Business must be further included into development and analysis of energy

strategies;

• Integration of Lithuanian energy system into European must be completed.

Ačiū už dėmesį!Thank you for the attention!

Additional information

Domestic consumption is the main driver of GDP growth


3.8

-19.1

-10

5.1

3.4

4.96.2

-25

-20

-15

-10

-5

0

5

10

2008K2 2009K2 2010K2 2011K2 2012K2 2013K2 2014K2

Change in retail trade compared to corresponding period of previous year, %

6.2

5.1

3.6

10.9

4.1 4

5.6

3.6

0

2

4

6

8

10

12

201

4M

01

201

4M

02

201

4M

03

201

4M

04

201

4M

05

20

14

M0

6

201

4M

07

201

4M

08

Change in retail trade compared to corresponding period of previous year, %

Sanctions will have small impact on employment

Source: Lithuanian Statistics Department, Lithuanian Confederation of Industrialists

5% 5%4%

14%

17%

11%

18%

22%

14%16%

19%

13%13%

16%

11%12%

13%

10%11%

13%

9%

0

0.05

0.1

0.15

0.2

0.25

Totalunemployment

Male Female

Unemployment rate

2008Q2 2009Q2 2010Q2 2011Q2

2012Q2 2013Q2 2014Q217

59

49

100

22

40

0

20

40

60

80

100

120

Railroadsinfrastructure

Roadinfrastructure

Portinfrastructure

Air transportinfrastructure

Other transportservices

Transport

Transport: employment projections

65

56

7076

52

6459

26

58

87

6469 70

59

0

10

20

30

40

50

60

70

80

90

100

Food andbeverageindustry

Textile andclothingindustry

Wood andfurnitureindustry

Metal andmachinery

industry

Chemicalindustry

Electricsindustry

Manufacturing

Manufacturing: employment projections

2014 Q3 2014 Q4

Rising uncertainty has impacted investment


2.5

10.1

12.1

17.116

18.2

15.1

16.8

23.4

27.4

5.2

2.1

0

5

10

15

20

25

30

Total investments Acquisition of equipment, machinery, transport vehicles

Change in investment, compared to corresponding period of previous year, %

2013K1 2013K2 2013K3 2013K4 2014K1 2014K2

Wages continue to increase

Source: Lithuanian Statistics Department, Lithuanian Confederation of Industrialists

93

66

58

78

65

7572

44

53

100

30

60

0

20

40

60

80

100

120

Railroadsinfrastructure

Roadinfrastructure

Port infrastructure Air transportinfrastructure

Other transportservices

Transport

Transport: wage projections

2014 m. Q1Q2 2013 m. Q3Q4

76

67

8882

79

68

78

45

7075

5754

67

55

0

10

20

30

40

50

60

70

80

90

100

Food andbeverageindustry

Textile andclothingindustry

Wood andfurnitureindustry

Metal andmachinery

industry

Chemicalindustry

Electricsindustry

Manufacturing

Manufacturing: wage projections

2014 Q3 2014 Q4

5.4

2.9

5.4

3.8

7.46.66.2

5.5

4.2 4.54.9 5.2

0

2

4

6

8

Nominal Real

Change in wages, compared to corresponding period of previous year, %

(total economy)

2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2

4.8

2.4

3.9

2.4

6.25.4

54.3

3.9 4.25 5.3

0

1

2

3

4

5

6

7

Nominal Real

Change in wages, compared to corresponding period of previous year, %

(manufacturing)

2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2

Lithuania: Economy Overview by Lithuanian Confederation of Industrialists

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