Lithuanian Economic Outlook

Photo by Kęstutis Petronis Photo by

2009

Lithuanian Economic Outlook 2009

Foreword

Throughout the year the shifting winds of the economy put the Baltic countries, and Lithuania among them, into sharper focus than ever before. Economic recession has clearly become a key topic in business and in everyday life. Therefore, I am pleased to present the latest publication by DnB NORD Bankas’ Economic research team, Lithuanian Economic Out- look, that embraces a thorough economic sectoral analysis and in-depth examination of the Lithuanian economy. The publication is an important part of DnB NORD Bankas’ strategic initiative to become a financial guide to our customers. We firmly believe that namely during periods of economic downturn both individuals and corporate clients need financial advice and are looking for open and professional dialogue more than ever. Considering the fact that Lithuanian businesses have proved robust and resilient to all kinds of rigour, I expect the analysis will be a helpful instrument to leaders and managers to manoeuvre through the economic turmoil and emerge with stronger and more efficient business.

Werner Schilli President DnB NORD Bankas Lithuanian Economic Outlook was prepared by:

Assoc. Prof., Dr. Vadimas Titarenko Chief Economist of the DnB NORD Group In memoriam

Prof. Rimantas Rudzkis Chief Analyst Tel. +370 5 2393402, +370 686 59638 e-mail: [email protected]

Jekaterina Rojaka Senior Analyst Tel. +370 5 2393590, +370 685 47578 e-mail: [email protected]

Indrė Genytė Senior Analyst Tel. +370 5 2393678, faks. +370 5 2139056 e-mail: [email protected] Content

1. Macroeconomic overview ...... 7 2. Business and consumer confidence indicators...... 13 3. Gross domestic product ...... 19 4. Prices ...... 23 5. Labour market and income ...... 29 6. Foreign trade and balance of payments ...... 35 7. Investments ...... 41 8. Financial indicators of enterprises ...... 47 9. Government finance ...... 51 10. Financial market ...... 57 11. Real estate market ...... 65 12. Agriculture ...... 71 13. Mining and quarrying ...... 75 14. Manufacturing ...... 79 Food products and beverages ...... 83 Textiles and wearing apparel ...... 88 Wood, wood and paper products and furniture ...... 91 Refined petroleum products ...... 95 Chemicals and chemical products ...... 96 Rubber and plastic products ...... 99 Other non-metallic mineral products ...... 101 Basic metals and metal products ...... 104 Machinery and equipment ...... 107 Electrical and optical equipment ...... 110 Transport equipment ...... 113 15. Electricity, gas and water supply ...... 117 16. Construction ...... 123 17. Domestic trade ...... 129 18. Transport ...... 135 19. Information and communication technologies ...... 143 20. Hotels and restaurants ...... 149 21. Annex ...... 155 Comments ...... 178

1. Macroeconomic overview 1. Macroeconomic overview

Last year, the nature of economic develop- these threats. The latest statistics on produc- ment in Lithuania changed dramatically. A tion, foreign trade, tax collection and labour strong growth of the last couple of years was market “dispelled the fog”. It is enough to replaced by a downturn in autumn. It was not mention the staggering Lithuanian unemploy- hard to foresee these changes as indicated ment rate published by Eurostat for March in the previous publications of the Lithuanian 2009: the latter estimate is above 15%, while Economic Outlook. The investment climate it lingered around 4% just a year ago. So it is in the country has been recently deteriorat- no accident that the Ministry of Finance dras- ing: red tape barriers of business regulation, tically cut its previous estimate of GDP growth widespread corruption, inflexible labour mar- in 2009 to –10.5, but it is believed that the ket, unfavourable business environment for new projection is too optimistic as well. small and mid-sized companies, unreformed vocational training and higher education sys- Before discussing the immediate prospects of tem were negatively affecting the competi- the national economy, we will briefly review tiveness of Lithuanian companies. A huge the main macroeconomic indicators of 2008, foreign trade deficit clearly showed that the even though last year’s statistics hardly re- country was consuming much more than it flect the current situation since the deterio- should be according to the income level. Rat- ration of the economic environment acceler- ing agencies and analysts were downgrad- ated in the last few months only. In recent ing the outlook for Lithuania, expectations years, economic development in Lithuania of business and households were worsen- has been similar to that in Estonia and Lat- ing due to overheating of the economy and via, although compared to the neighbours the banks tightened their lending policy, which relevant trends in our country reversed with pushed the real estate market into a stand- some delay. Indicators of the Baltic States still and weakened the domestic demand. Al- presented in Table 1.1 show that economic though the portfolio of banking loans granted growth in Lithuania slowed down consider- to business and households still kept growing ably during last year but still remained posi- last year, net credit flows continued to shrink tive, while Estonian and Latvian economies and at the end of 2008 fell to a level of 4–5 were contracting. In the fourth quarter of years ago. Some companies failed to adapt last year, the annual change of the real GDP to the nature of rapidly changing environ- in Lithuania became negative as well. Stall- ment and accusations were being thrown at ing domestic consumption and falling invest- the banks that they were ruining business. ments last year slowed down the growth of However, the problem lied in higher business imports and significantly reduced the current risks and the shortage of available financial account deficit (CAD) in all the Baltic States, resources entailed by the ongoing crisis on but the CAD to GDP ratio in these countries global financial markets rather than a lack of remained very high. Lithuania’s indicator fell goodwill. In the second half of the year, the by 3 percentage points to 11.6%, while the first signs of a downturn were obvious in the latter of Latvia was even higher although it majority of economic activities. went down by nearly a half in a year. As the economic development fell short of expecta- Nevertheless, the scope of negative changes tions, budget revenue of these countries was was much wider than expected. The global well below the target. Therefore, preliminary economy stasis made our main export mar- estimates indicated that the fiscal deficits of kets contract so the national economy re- Lithuania and Latvia even slightly exceeded ceived a double blow and faced a real threat the Maastricht criterion (3.2% and 4% of of a deep recession. As a result of a “short- GDP respectively), while Estonia’s indicator sighted” fiscal policy of the previous Cabinet, was marginally better. All this compounds the the country teetered on the brink of default. efforts of these countries to join the eurozone Although the cabinet of ministers led by as soon as possible. Kubilius reviewed the national budget in De- cember and urgently reformed the tax system Having reached its peak last summer, inflation in an attempt to broaden the fiscal framework finally began to go down in the Baltic States. and boost treasury revenue (see Government In Lithuania, the annual change in the con- finance), politicians, analysts and internation- sumer price index (CPI) went up to 12.5% in al institutions failed to see the full extent of June 2008 but then began its steady decline

Lithuanian Economic Outlook Table 1.1 Key macroeconomic indicators of the Baltic countries

Lithuania Latvia Estonia 2007 2008 2007 2008 2007 2008

Real GDP, annual change, % 8.9 3.0 10.0 –4.6 6.3 –3.6 Current account deficit, ratio to GDP, % –14.6 –11.6 –22.5 –12.7 –18.1 –9.2 Annual inflation (HICP), %1) 8.2 8.5 14.0 10.4 9.7 7.5 Average gross monthly earnings, annual change, % 1) 18.5 13.0 29.7 12.1 20.1 6.9 Unemployment rate, % 1) 2) 4.2 7.9 5.3 9.9 4.1 7.6 General government budget balance, ratio to GDP, % –1.0 –3.2 –0.4 –4.0 2.7 –3.0

1) End of period 2) Labour Force Survey

Source: Eurostat, national statistics offices reaching 8.5% in December. Growing labour the economic downturn would be short-lived. costs, which have outpaced labour productiv- Last year, expenditure on gross fixed capi- ity in the Baltic States for several consecu- tal formation fell by more than 3 percentage tive years, continued to be one of the major points to just below 25% of GDP. Although sources of inflation. Last year, the average the indicator was claimed to be not that bad, wage increased by about a fifth from the pre- the majority of spending went into construc- vious year but its growth rate decelerated in tion, while the ratio between the expendi- autumn. ture on productive capital goods and GDP was merely 6.5% in Lithuania. Once again Average income of households rose by about it was much lower than in Latvia or Estonia 15% in Lithuania last year and the social and went well below the EU average. These divide narrowed down after an interval of figures correlate with the volume of imports several years. Results of statistical surveys of investment goods which fell by about 12% showed that the expenditure by the top ten in 2008 compared to the previous year, while percent of biggest spenders exceeded the ex- the rate of contraction reached 33% in the penditure of the poorest decile 8 times, while last quarter of the year. Indicators of foreign the indicator stood at 9.3 two years ago (see direct investment slightly improved last year Tables 8 and 9 in the Annex). Despite the as the net flow of FDI into the share capital growing purchasing power, expectations of became positive albeit remained quite mod- the population deteriorated considerably in est (see Investments). Therefore, no break- 2008. A sharp increase in the unemployment through in labour productivity should be ex- rate and high inflation pushed the consumer pected this year. confidence index to record lows as the indicator fell to –51 in December, the lowest level As the domestic consumption eases off, ex- on record (since 2001). ports should re-emerge as the main driving force of the economy. At first glance, last The situation in the Lithuanian labour mar- year’s foreign trade figures look encouraging ket began deteriorating in the second quarter as the volume of exports of goods and servic- of 2008 when the economy was still growing es increased by a quarter in 2008 compared quite strongly. By the end of the year, the to the previous year. Although the result was unemployment rate rose to just below 8%, mainly held up by the improved performance nearly doubling compared to last year. Unem- of Mažeikių Nafta oil refinery, Lithuanian ex- ployment is once again becoming the most ports, even if petroleum products are exclud- pressing social issue. At the end of last year ed, look fairly respectable within the context and during the first months of this year, the of other Baltic States (up by 12% from the unemployment rate was growing at a record previous year). The EU was still the main ex- pace. The labour exchange estimates that 7 port market for Lithuanian products account- to 8 thousand people were joining the ranks ing for 60% of visible exports, but the impor- of the unemployed every week. tance of Russia and other CIS countries was Recently, investment processes have lost mo- gradually growing as the purchasing power of mentum and there was little if any hope that the population kept improving in that region.

Macroeconomic overview In recent years, eastbound exports were be boosting such activities which could 'drive growing at a much faster rate than exports to out' imports within the country and could Western and Central Europe. This once again compete on foreign markets. In this era of proves that our entrepreneurs know how to globalisation, local capital will not be enough, work on CIS markets which are important for therefore Lithuania needs to attract the rele- Lithuanian producers both as the suppliers vant flows of FDI competing for them fiercely of commodities and importers of production. with the neighbouring countries. The fact that However, the Russian economy is expected to Lithuania has been losing out to the Czech contract this year which does not bode well Republic, Slovakia, Estonia and even Latvia in for our exports. this respect is one of the main reasons for the current sharp decline of production. It seems Sadly, latest statistics indicate bleak pros- that the current Cabinet holds the same view pects for the national economy in the coming so some positive changes could be expected months. According to preliminary estimates, in this area. GDP at constant prices fell by nearly 14% year-on-year in the first quarter of this year, Any considerable improvement of the invest- and the figure is most likely to be revised ment climate requires immediate elimination downward. From January to March, visible of the existing red tape barriers. The govern- exports declined by more than a fifth year-on- ment also needs to raise the effectiveness of year, invisible exports went down by almost a public administration and law enforcement, third and imports of investment goods shrank undertake major reforms of higher education by half year-on-year. Indicators of foreign in- and vocational training. The current reform vestment were very poor, while sales of the of this system is insufficient and is unlikely to manufacturing industry (excluding petroleum improve the quality of education by much, it products, at constant prices) were below the may even intensify the brain drain, while the level of 2006 for the relevant period. In April, lack of adequately trained workforce has long the number of unemployed people registered been indicated as one of the major disincen- by the labour exchange was close to 190,000, tives to invest in Lithuania. Another impor- well above the indicator of 2003, not to men- tant problem is the dismal situation in the air tion that many Lithuanians emigrated in the transport sector, and the government needs last five years. to focus more on this industry. It seems that the current global economic The time needed for the economy to recover crisis will drag on, and Lithuania should not will also depend on the fiscal policy which foster any hope that its economy will recover should now be aimed at strengthening the quickly and easily. We predict that the eco- above-mentioned competitive production nomic downturn in the country is most like- and raising capital. Politicians should make ly to continue into the next year (see Table up their mind: do they want to mitigate the 1.2). If we want to speed up the economic re- social consequences of the crisis or overcome covery, we need a clear action plan based on the downturn as soon as possible. The de- the experience of other countries and knowl- sire to boost treasury revenue prompted the edge of the specific nature of our economy. Seimas to impose excessive taxes on small In recent years, Lithuania has seen exces- businesses, adopt the excise rates which are sive consumption so the first priority should too high given the current situation and raise

Table 1.2 Forecasts for Lithuania

2009 2010

Real GDP, annual change, % –12.0 –2.0 Current account deficit, ratio to GDP, % –6.0 –6.0 Annual inflation, %1) 3.0 2.0 Average gross monthly earnings, annual change, % 1) –10.0 –3.0 Unemployment rate, % 1) 15.0 15.0 General government budget balance, ratio to GDP, % –6.0 –5.0

1) End of period

Source: DnB NORD Bankas

10 Lithuanian Economic Outlook the corporate income tax above the rate ex- also expand borrowing on foreign markets. isting in Latvia. This straightforward policy Although they say that bankruptcies clean up worsened the business environment and its the market, it may not be reasonable to let indirect effect (which was underestimated) the almost completed construction projects probably increased the budget deficit. These or companies with strong positions on foreign errors should be corrected swiftly. Now is the markets to fail. During the crisis, the govern- worst possible time to introduce progressive ment should provide guarantees for business taxes, yet another option considered at the loans and make tax deferrals more accessible moment. The country needs to boost inno- thereby protecting the companies from tem- vations, i.e. promote the initiative of highly porary shortages of working capital, contin- skilled employees and try to retain them in ue the investment projects and cut budget Lithuania rather than push away. spending in conjunction with more decisive It is obvious that the tax revenue will fall short actions of the sunset commission. The gov- of its target level so the precise budget plan- ernment cannot hang around because a very ning is not reasonable at this moment. The deep and long economic downturn may trig- important thing is to stimulate businesses ger a new massive wave of emigration which (see Manufacturing industry for the comment would have disastrous and long-term effects on the economic stimulus plan). Plans to ad- and would most likely deprive Lithuania of vance and facilitate payments of EU support any chance to ever catch up with the most are very welcome, but the Cabinet should advanced countries.

Macroeconomic overview 11

2. Business and consumer confidence indicators 2. Business and consumer confidence indicators

The deterioration of expectations among busi- The fall in the retail trade, construction and nesses and households, which started at the services sector confidence indicators was the beginning of the second quarter of 2007, con- major contributor to this decline. tinued in 2008 as well, and the economic sen- In April 2009, the industrial confidence indi- timent indicator (ESI) which reflects expec- cator fell by 27 points compared to April 2008 tations posted one record after another with (see Diagram 2.2). The mood of industrial each passing month (see Diagram 2.1). The companies deteriorated considerably in the situation has been even gloomier this year. second half of last year. It is hardly surprising A survey of consumers and business lead- since value added generated by this econom- ers conducted by Statistics Lithuania showed ic sector was still growing in the first half of that the overall economic sentiment of major the year, while the second half brought about economic players in Lithuania dropped by 43 a rather sharp fall (see Mining industry and points year-on-year in April (see Table 2.1). Manufacturing industry).

Diagram 2.1 Economic sentiment indicator

-10

-20

-30

-40 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania

Table 2.1 Economic sentiment indicator and its components

2008 2009 Period IV V VI VII VIII IX X XI XII I II III IV

Economic sentiment indicator 6 6 1 –3 –4 –5 –12 –22 –35 –37 –36 –37 –37 Industrial confidence indicator –6 –2 –3 –7 –7 –9 –15 –30 –38 –36 –30 –29 –33 Construction confidence indicator –5 –11 –16 –20 –33 –35 –47 –58 –69 –74 –76 –82 –84 Retail trade confidence indicator 17 19 10 14 12 4 –12 –24 –38 –55 –58 –53 –55 Services confidence indicator 34 31 24 18 19 17 15 7 –19 –18 –24 –27 –23 Consumer confidence indicator –10 –16 –21 –24 –27 –26 –35 –41 –51 –56 –51 –51 –50

Source: Statistics Lithuania

14 Lithuanian Economic Outlook Diagram 2.2 Industrial confidence indicator

-10

-20

-30

-40 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania

Therefore, it is only natural that the number work shrank in the preceding 2–3 months (only of business leaders indicating a decline in 24% a year ago). Nearly all the respondents their activities almost doubled compared to (95%) stated that the number of orders for a year ago. They specified falling production construction work was insufficient (32%) and volumes and demand for production as well 60% of company managers predicted the de- as the rising level of inventories in the pre- cline in construction work orders to continue. ceding 2–3 months. The respondents were Three quarters of the respondents specified even more pessimistic about the current and that the financial situation of their companies expected export demand for their production. worsened and the same percentage planed This perception is also hardly surprising given to cut their workforce (23% and 11% of the the situation on the neighbouring markets. respondents respectively one year ago). Of An increasing number of industrial companies the business leaders surveyed, 63% said that (37% of the respondents, up by 16 percent- they expected the prices of construction work age points year-on-year) expect their produc- to go down (just 7% last April). Similarly to tion volumes to shrink in the coming months. managers of industrial companies, represen- The percentage of business leaders planning tatives of the construction industry identified to lay off some of their workforce in the im- flat demand (80% of companies) and finan- mediate future increased from 15% to 40%, cial difficulties (48%) as the main factors ob- i.e. more than 2.5 times. Flat demand for pro- structing their operations. duction and rising level of inventories force an increasing number of the respondents to Representatives of retail trade followed close- believe that prices will go down in the coming ly in the footsteps of construction companies months. Business leaders referred to insuffi- as the retail trade confidence indicator lost 72 cient demand (75% of companies) and finan- points during the year (see Diagram 2.4). Its cial difficulties (31%) as major obstacles to movements strongly correlate with the sec- future development of production. tor's performance in the last and this year. In the first half of 2008, results were simply ex- A standstill on the real estate market and cellent: turnover of retail companies grew at dried up credit flows from commercial banks a double-digit pace but growth decelerated by contributed to very gloomy moods among the the middle of the year and became negative construction companies. In a year, the con- in the fourth quarter. This year, the downward struction confidence indicator dropped by a slide got even steeper. massive 79 points. In surveys of construction companies, 80% of company managers indi- According to the survey, just 2% of the re- cated in April that the volume of construction spondents indicated in April that their busi-

Business and consumer confidence indicators 15 Diagram 2.3 Construction confidence indicator

-20

-40

-60

-80

-100 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania

ness situation had improved in the preced- inventories. A year ago, just 5% of the re- ing 2–3 months. The percentage of optimists spondents held the same view. The same per- was much higher last year (36%). This April, centage of the respondents planned to reduce a mere 4% of the respondents believed that their workforce last April. This year, 57% of the economic situation would improve in the managers surveyed indicated that they would coming months. The sentiments about the make some redundancies. There was a sharp level of inventories also deteriorated consid- increase (3% to 39%) in the number of re- erably. More than a half of managers of retail spondents expecting prices to drop in retail companies indicated that they had excessive trade. Managers of retail companies indicat-

Diagram 2.4 Retail trade confidence indicator

-20

-40

-60 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania

16 Lithuanian Economic Outlook Diagram 2.5 Services confidence indicator

-10

-20

-30 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania ed that the main barriers to developing their a year ago). The opinion of the respondents activities were insufficient demand (27% of on the existing and future demand changed companies), competition (25%), imperfect in a similar manner. Just 2% of the respond- laws (23%) and financial difficulties (21%). ents expected prices to go up and planned to It should be noted that a factor of ‘insufficient increase the number of employees (13% and demand’ was not even on the list last year and 21% respectively last year). leaders of retail companies, just like the rep- In a year, the consumer confidence indica- resentatives of all other industries, believed tor fell by 40 points (see Diagram 2.6). The that the shortage of labour force was one the general pessimism of households was caused main problems obstructing their business. by the worsening economic situation in the The paths of retail trade and services con- country. The biggest change in household ex- fidence indicators have been very similar. It pectations was related to the labour market is natural as the results of both sectors de- situation. In a year, the percentage of peo- pend strongly on the purchasing power of the ple expecting the unemployment rate to go population. On the other hand, the transport up rose from 16% to 93%. Moreover, there and warehousing industry accounts for some were a lot more people (up to 69% from part of the services sector. Its growth trends 39%) believing that the economic situation have been very similar to those of the retail in the country would deteriorate in the next industry. Excellent results of the entire trans- 12 months. Therefore, there were hardly any port sector in the first half of the year turned households expecting their financial situation into negative indicators at the end of the year, to improve, while the possibility to save at while road transport companies began facing least something in the coming 12 months was problems even earlier (see Transport). The chosen by fewer households compared to a deteriorating situation of the services compa- year earlier. nies is reflected in the sector’s confidence in- It should be noted that the consumer mood dicator which dropped by 57 points in a year has somewhat improved since the beginning (see Diagram 2.5). Surveys showed that rep- of the year. One of the potential reasons for resentatives of the sector were much more that could be lower inflation as prices of a pessimistic about the economic situation of number of basic goods and services have their company compared to a year ago, and gone down. even 54% of the respondents indicated that the situation has worsened in the preceding Therefore, the above indicators reflect that 2–3 months (only 9% of company managers expectations of all economic players deterio-

Business and consumer confidence indicators 17 Diagram 2.6 Consumer confidence indicator

-10

-20

-30

-40

-50

-60 2003 2004 2005 2006 2007 2008 2009

Source: Statistics Lithuania

rated considerably in the previous year. It is been getting increasingly gloomier recently necessary to point out that the same trends suggests that it will be impossible to dispel prevail in other Baltic states and across the this pessimism in the nearest future. In its European Union, and the relevant indicators turn, this will delay the recovery of markets move along nearly the same paths as pre- since expectations weigh heavily on the eco- sented here. A deep downturn of the global nomic activity of both business operators and economy and the fact that the outlook for households. the Lithuanian and neighbouring markets has

18 Lithuanian Economic Outlook 3. Gross domestic product 3. Gross domestic product

Last year, GDP at the then prices stood at by nearly 16% compared to the previous year. LTL 111.5 billion, up by 13.6% from 2007. More active provision of digital television, In- Higher producer prices accounted for the ma- ternet and data transmission services ensured jority of the nominal growth of GDP (see Dia- that the rate of growth in the telecommuni- gram 3.1). The GDP per capita rose by LTL cations sector reached its peak in the fourth 4,000 to over LTL 33,000. Measured at pur- quarter of last year, even though the entire chasing power standards, the indicator stood economy began to contract. Last year, major at 60.6% of the EU average preliminary and economic sectors focusing on the domestic grew marginally during the year. market began loosing momentum: the annual change in the real added value generated Last year, the Lithuanian economy grew at the by domestic trade stood at about 3%, down slowest pace since 2000. The annual change nearly four-fold compared to 2007, while the in gross domestic product was a mere 3% at growth of construction plummeted to about constant prices. The growth indicator of the 1%. Quite unexpectedly, the growth indicator economy was deteriorating quarter by quar- of real estate operations rose to above 6% ter in 2008 falling into a negative territory last year, but the deepening downturn of the (–2.2%) in the last quarter from 7% in the real estate market will make living extremely first quarter. There were no longer any doubts difficult for companies in this industry. that the economic growth will be replaced by a deep, most likely double-digit, downturn in In 2008, the growth of the manufacturing in- 2009, as reflected by preliminary estimates dustry, the largest sector of the economy, fell for the first quarter. GDP at constant prices to 2%, and the production results of the ma- contracted by 13.6% compared to the previ- jority of companies, either exporting or sell- ous year. ing on the domestic market, deteriorated. The overall industrial indicator would have even None of the major economic sectors, except been negative if not for an excellent perfor- communications, was dynamic last year (see mance by Mažeikių Nafta oil refinery. After Table 1 in the Annex). The communications a spurt of 2007, agriculture nearly came to industry picked up speed considerably in 2008 a standstill last year, and the sector’s situa- as its value added at constant prices increased tion was compounded by a sharp increase in

Diagram 3.1 GDP annual change, %

20 17.7

15.0 14.6 15 13.7 11.2 8.8 10.2 7.2 6.8 8.9 10 3.8 10.7

5 10.2 8.9 8.5 7.4 7.8 7.8 3.0 0 -0.1 0.4

-5 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

20 Lithuanian Economic Outlook Diagram 3.2 Shares of economic activities in Lithuania’s GDP structure, compared to those in the EU, in 2008*, times

3.0 2.4 2.5

2.0 1.8 1.6 1.5 1.4 1.5 1.1 1.0 0.9 1.0 0.6 0.6 0.5 0.5 0.5 0.5 0.5

0.0 Other Public Health gas and Financial business Education Transport, quarrying Electricity, Hotels and Mining and Agriculture Real estate, renting and restaurants storage and Construction water supply and defence Manufacturing Domestic trade administration intermediation communication

* In EU estimate based on the GDP indicator in 2006

Source: Eurostat fertiliser and fuel prices in spring. In the last prised 3.5%, while the energy sector stood couple of years, the growth of the public sec- at over 3% and was closely followed by com- tor industries such as public administration, munications. education and health care was rather sluggish. Last year was no exception as all these Among the industries financed from the bud- three industries grew at a similar pace in the get, the largest one was public administra- range of 2–4%. tion, defence and compulsory social security with a relative weight of 6.4%, education Diagram 3.2 shows differences in the GDP (4.8%) as well as human health and social structure in Lithuania and the EU for the pre- work (3.2%). Of the latter industries, the vious year. There was no change in the per- only change was in the indicator of educa- centage of agriculture and forestry in value tion which went up by about a tenth during added generated nation-wide, which stood at the year. 4.4% in 2008 exceeding the relevant EU indicator by roughly 2.5 times. Such industries Analysis of GDP components using the expen- as transport, electricity, gas and water supply, diture approach shows that the percentage of construction, domestic trade and manufactur- expenditure for gross capital formation, which ing industry also had a much higher relative was on the up since 2001, shrank by nearly weight in Lithuania compared to the European 4 percentage points last year to 26.6%. A Union. Meanwhile, health care and financial sharp decline in the relative weight of invest- intermediation were at the opposite side of ments supports the concern that the ongo- the spectrum as their relevant shares of the ing economic recession may be protracted. Lithuanian GDP were about 2.5 times smaller Despite a considerable growth in the nominal than EU averages in 2008 (same as in the GDP, the scope of this expenditure in 2008 preceding year). The manufacturing industry was slightly smaller than a year ago (see Dia- remained the largest sector of the economy gram 3.3) and even fell by about 13% in the last year accounting for almost 19% of value second half of this year. Last year, the gov- added generated nation-wide, and was fol- ernment sector expenditure grew faster than lowed by domestic trade (almost 17%), while household expenditure, and the relevant an- real estate, renting and other business ac- nual indicators went up by 19.3% and 15% tivities contributed over 12%. Transport and partly due to co-financing of EU support. The construction industries accounted for about foreign trade deficit to GDP ratio went down 10% of GDP, financial intermediation com- by more than two percentage points last year

Gross domestic product 21 Diagram 3.3 GDP components by expenditure approach, LTL million

140

120 29.7 100 29.9 21.6 80 21.8 17.2 18.1 60 14.2 16.1 12.5 13.6 16.2 14.0 12.3 11.5 11.7 40 72.7 9.8 63.2 46.3 53.3 20 36.4 40.6 34.0 37.1

0 -3.3 -4.4 -5.1 -4.4 -8.4 -13.2 -12.5 -6.5 -20 2003 2004 2005 2006 2007 2008 2007 2008 II H II H

Gross capital formation Government consumption expenditure Households consumption expenditure Exports of goods and services

Source: Statistics Lithuania

as a result of a strong decline in imports of tighter bank lending policies. Stifling domes- investment goods and stalling domestic con- tic demand and government policies aimed sumption in the second half of the year. at ‘belt-tightening’ will inevitably result in a considerable drop of GDP and all its compo- This year, the volume of exports is likely to nents analysed above using the expenditure drop considerably because the neighbour- approach. The only comfort is in knowing that ing markets have contracted, while imports the foreign trade balance will improve. will decline by an even larger margin due to

22 Lithuanian Economic Outlook ) Verslo žinios Photo by Judita Grigelytė ( Photo by

4. Prices 4. Prices

Having reached its peak in the middle of last in January went up after the excise rate for year, the inflation rate began to slide down as petrol was raised (prices of services within economic activity came to a standstill. How- the transport group leaped up by a fifth). A ever, despite a steep decline in the prices, an- higher VAT rate contributed to the increase in nual inflation in December 2008 was slightly prices of some foodstuffs and pharmaceuti- higher in Lithuania than a year ago. This an- cal products. Prices of housing, water, elec- nual result was mainly caused by the most tricity and other fuels soared. The consumer expensive heating season in the country’s price index rose slightly in February but the history. Consumer prices in the housing, wa- inflation rate began to slow down in March as ter, electricity and other fuels group jumped the consumption started to subside offsetting by 23.3% (see Diagram 4.1). Among other the impact of administrative measures on the categories of consumer goods and services, prices. Despite a raised excise for tobacco the hotels and restaurants sector was a ma- products and higher public transport fares, jor contributor to rising inflation, and prices the monthly inflation rate was zero in March, of alcoholic beverages and tobacco increased while prices dropped by 0.1% year-on-year due to raised excise rates. in April. The annual change in the consumer price index (CPI) was 6.3% in April, i.e. al- However, in 2009 the ‘tightening of belts’, most twice as low as a year ago. weakening flows of consumer loans and uncertainty about the future has dramatically Interestingly, annual changes in core infla- eased off the desire of Lithuanians to spend tion1 have nearly matched the fluctuations and curbed further price hikes. Inflation of the general consumption index for some showed some signs of a ‘renaissance’ at the time in Lithuania (see Diagram 4.2). It would beginning of the year as the consumer prices seem to indicate that the price reduction in

Diagram 4.1 Consumer prices indices, end of period, annual change, %

15 3 5 1 10 23. 2 5 3 19. 19. 1 4 8 7 16. 9 15. 15. 14. 5 6 4 4 1 5 12. 4 1

5 11. 11. 10. 9. 9. 5 9. 9. 3 9. 8. 5 8. 1 8. 6 6. 6 5 6. 9 4 5. 5. 3. 1. 1. 0 2. 2. 5 9 8 9 8 4 3 5 -0. -1. -3. -3. -5. -6. -7. -5 -7.

-10 CPI Health Alcohlic tobacco footwear Transport Education Recreation household and hotels equipment beverages, Restaurants Furnishings, and culture Clothing and Food products electricity, gas Communication and other fuels Housing, water,

2007 2008 2009 April

Source: Statistics Lithuania

1 The Harmonised Index of Consumer Prices (calculated according to the EU methodology) excluding energy and unprocessed food prices.

24 Lithuanian Economic Outlook Diagram 4.2 HICP and core inflation*, annual change, %

-2

2004 2005 2006 2007 2008 2009

EU HICP Lithuanian HICP EU core inflation Lithuanian core inflation

*HICP excluding energy and unprocessed food

Source: Eurostat the country is ‘imported’ and relies strongly According to Eurostat, annual inflation within on inflationary trends worldwide. The situa- the eurozone stood at 0.6% in March. The tion is also rather unorthodox in the Euro- stalling demand, falling consumer prices and pean Union: it is clear that competitive pres- costs were conducive to ‘loosening’ the mon- sures and stalling demand drove core inflation ey market again. To stimulate the economy, above the HICP indicator. Less flexible labour European central banks were actively snip- costs is one of the contributing factors since snapping: the ECB cut its benchmark inter- the employers, despite the current downturn, est rate to the lowest level ever (1%) and are trying to observe their long-term agree- the Bank of England lowered its basic interest ments on wage rises and governments are rate to a record low (see Financial market). making every effort to promote consump- Two years ago, the price stability criterion was tion. Therefore, despite falling prices for ma- the only barrier left on Lithuania’s way to the jor commodities, prices for other goods and eurozone. The country has failed to overcome especially services remain more stable. By this obstacle: Lithuania’s indicator was triple the way, inflation of services in Lithuania has the relevant Maastricht criterion both last De- also been higher than the so-called consum- cember and at the end of the first quarter of er price inflation since the latter category is this year. According to Eurostat, the change in more sensitive to foreign competition. the 12-month Harmonised Index of Consumer Prices have also been falling sharply in the Prices (HICP) was 10.5% in March, while the neighbouring countries struggling with reces- maximum permissible inflation rate was 3.6% sion. In Estonia, prices of consumer goods (see Diagram 4.3). It has to be said though and services have been on the downward that other EU countries also find it difficult to slide since last November, while the annual 'squeeze into' the narrow interval. In March, inflation measured a mere 0.3% in April (the twelve EU member states failed to meet the lowest rate since the country’s EU member- criterion. Slovakia, the newest member of the ship), and the middle of the year is likely to eurozone, was also unable to keep its inflation bring about deflation. Prices have also been below the required price stability level. Just tumbling down in Latvia. The inflationary six months after joining the euro club, Slove- pressure in EU countries has also receded. nia also failed to follow the rules.

Prices 25 Diagram 4.3 Average annual HICP inflation, %

15 Latvia 12 Lithuania 9 Estonia

6 Slovenia

Slovakia 3 € € Maastricht 0 criterion

-3 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat, DnB Bankas

It seems that prices will no longer threaten since March prices of industrial output have the adoption of the euro in the nearest future. been below the level of last year (see Dia- Other criteria such as long-term interest rates gram 4.4). and budget deficit are much more likely to The deteriorating outlook of the global econ- shut the door to the club. Some already doubt omy dragged down the prices of main com- that electricity prices could double after de- modities. For instance, the price of Brent oil commissioning of the Ignalina nuclear power contracted almost 4.5 times on global com- plant. It is likely that global markets will see a modity exchanges in the first half of 2008 significant surplus of generated electricity by plummeting from 143 USD/barrel in July to the end of the year which will set the ‘caps’ just 32 USD/barrel in December. This year, for energy prices, unless the economic situ- oil prices lingered around 40 USD/barrel and ation in the world changes dramatically dur- rose slightly above USD 60 in May. Analysts ing the year. However, major economies are do not expect oil prices to recover before the showing no signs of recovery and the arsenal beginning of next year and estimate that oil of economic stimulus tools is depleting. may cost around 60–80 USD/barrel in the Changes of consumer prices can be partially second half of the year. explained by looking at the trends of produc- It should be noted that prices of industrial er prices. Last year, producer prices reached products sold outside the Lithuanian market record highs fuelled by steeply rising costs of were falling relatively faster than prices of energy products. In July, prices of industrial locally-sold production. Last year, many pro- output sold went up by more than a quarter ducers faced rather serious challenges due year-on-year. The annual change in the pro- to the steep downfall of output prices as the duction price of refined petroleum products costs of production were much higher than and gas alone was over 66% in June. Prices the final price. Competition on the -domes of chemical products also rose sharply. In tic and foreign markets was melting selling September 2008, their prices doubled year- prices like ice and a number of producers in- on-year. This hike in output prices was partly curred considerable losses (see Financial in- fuelled by a sharp rise of wages. However, dicators of enterprises). in autumn the producer price index of industrial output began moving in an opposite di- Construction input prices were also not sur- rection and by December its annual change prising: they rose by a mere 0.5% in 2008 was negative. This trend also prevailed in the (compared to a 15.5% rise in 2007). After first months of this year. Even excluding the seven consecutive years, the annual growth impact of refined petroleum products (whose of construction input prices has returned to a prices plummeted by the largest margin), negative territory since the beginning of this

26 Lithuanian Economic Outlook Diagram 4.4 Producer price indices, annual change, %

-5

-10

-15 2004 2005 2006 2007 2008 2009

Manufacturing Manufacturing excluded refined petroleum products

Source: Statistics Lithuania year. The overall decline of construction input Although it would seem that the falling prices prices was mainly caused by lower wages and should infuse some optimism and encourage overheads as well as falling prices of building consumption, the reality is quite different, materials. sadly. The prolonged price decline process impedes production which causes further in- In December 2008, price indexes of products creases in the unemployment rate as well as exported by Lithuania dropped by about 6% the reduction of the purchasing power and year-on-year, and in the first months of this consumption. In terms of public finance, the year the decline of export prices was mea- problem is that falling consumer and producer sured in double digits. A much flatter domes- prices result in lower tax revenue. Therefore, tic demand, fierce competition in the Europe- it is obvious that Lithuania will have to ‘tight- an Union and neighbouring countries affected en the belt’ even further to come closer to negatively Lithuania’s export indicators (for the threshold budget deficit level. The exces- more see Foreign trade) and, at the same sive budget deficit procedure launched by the time, pushed down the prices of exported European Commission against Lithuania will products. also contribute to deflationary processes. As the economic indicators continued to de- However, price movements may get in full teriorate, the decline in prices accelerated swing again and a combination of growing across the EU. The competitive battle be- budget deficits of major economies, quantita- tween producers and retailers will probably tive easing and lower inflation base may give intensify in the future. Therefore, many EU rise to a new worldwide wave of inflation in countries are likely to face deflation this year. the future. Then Lithuania, the importer of The same scenario applies to the Baltic states relatively large quantities of raw materials as well. It has to be said though that the which will definitely become more expensive, specific nature of price level formation (de- will again have to face serious challenges in commissioning of the Ignalina nuclear power trying to curb price hikes. This may delay the plant in 2010 and compulsory excise raises, adoption of the euro even further. Therefore, it etc.) will slow down the downward slide of is necessary to define the guidelines and spe- prices. However, if these factors are eliminat- cific measures detailing how and when Lithua- ed, Lithuania is very likely to join the ranks of nia could fully comply with the Maastricht cri- countries struggling with deflation sometime teria and set the accession to the eurozone as during next year. a national priority for the benefit of economic stability and welfare of the population.

Prices 27

5. Labour market and income 5. Labour market and income

The labour market was one of the first ones on-year, and went up to 11.9% in the first to be hit by destructive forces of the eco- quarter of this year. The latest monthly indi- nomic crisis. Having grown gradually since cators are also less than encouraging. Euro- the very first day of accession to the EU and stat estimates that the seasonally adjusted peaked spring last year, the employment rate unemployment rate in Lithuania was among began to decline thereafter. The pessimistic the highest in the European Union this April trends on the labour market came to the fore and stood as high as 16.8% (see Diagram worldwide last year. The International Labour 5.1). In this respect, Lithuania was overtaken Organisation predicts that the number of em- by Latvia (17.4%) and Spain (18.1%) only. ployed people will fall by about 1% this year In other EU member states, unemployment following a 1.4% drop in 2008. It is believed has also been rising. In a year, the unem- that the crisis will deliver a more severe ‘blow’ ployment rate jumped 3.7 times in Estonia to the labour market in the developed coun- (to 13.9%) and almost doubled in Denmark tries and Europe than in developing econo- (5.5%), while the EU average increased by mies. Experts worry that this unprecedented 1.8 percentage points to 8.6%. economic downturn may push Europe to the The economic crisis has hit young people the brink of a social disaster if countries fail to most. In the group of people aged below 24, take additional economic stimulus measures. the unemployment rate almost tripled during So far, all attempts to restore confidence in the year in Lithuania and stood above 28% the market and promote job creation have in the first quarter of this year. Similar trends fallen short of the desired effect. were seen in other EU countries as well. In According to a population employment sur- April 2009, this unemployment indicator vey conducted by Statistics Lithuania, the stood at 36.2% in Spain and around 29% in unemployment rate began to rise sharply in Latvia, while the average youth unemploy- the second half of 2008. In the fourth quar- ment rate in EU-27 gradually rose to 18.6%. ter of 2008, the unemployment rate stood Negative trends in the rise of unemployment at 7.9%, up by two percentage points from are also supported by the information of the the previous quarter and almost double year- Lithuanian Labour Exchange indicating that

Diagram 5.1 Harmonized unemployment rates, seasonally adjusted, end of period, %

20 18.1 17.4 18 16.8 16 13.9 14 12 11.1 9.6 10 8.6 7.8 7.8 7.7 8 6.2 5.7 5.5 5.5 6 4 2 0 Spain Latvia Czech EU-27 Poland Estonia Ireland Finland Bulgaria Hungary Slovenia Germany Lithuania Denmark Republic

2007 2008 2009 April

Source: Eurostat

30 Lithuanian Economic Outlook the number of registered unemployed people It is not surprising that changes in the num- more than doubled in the four months of this ber of workers1 correlate strongly with the year. Last year, there was a 30% increase in bankruptcy trends: the biggest fall in the the number of people applying to the labour headcount (more than 20%) was posted by exchange compared to 2007, while the num- apparel and textile companies in the second ber of people looking for work was 1.5 times half of 2008. In general, only two branches higher in December than in the previous three of industry, namely the chemical industry quarters on average. and transport equipment industry, boasted positive changes in the number of workers Regional disparities in the unemployment last year, while the majority of sectors dem- rate became more obvious in the Lithuanian onstrated the gloomy aftermath of slumping labour market. At the end of the year, the business. Having made considerable cuts to gap between the highest and lowest rate was its headcount, the manufacturing industry 6.6% and rose further to 10.4% at the end was for the first time overtaken by domestic of the first quarter of this year. As summer trade which became the leading industry by approaches, the labour market is set to enjoy the number of workers. a temporary reprieve but it is likely that we will see yet another rise of unemployment in The army of workers in the construction in- autumn. dustry was still growing in 2008 due to inertia, The Lithuanian labour market was affected although the industry’s headcount fell by 5% quite strongly by a ‘barrage’ of bankruptcies in year-on-year in the second half of the year. the national economy. Last year, the number The situation followed a similar pattern in the of reported bankruptcies reached the highest domestic trade, hotels and restaurants, edu- level since 1993 (957 companies or 1.5 times cation industries. Although the total annual more than in 2007) and there is little doubt number of workers increased marginally, the that this year will see yet another anti-record. indicator contracted in the second half of the According to the Enterprise Bankruptcy Man- year (–2.3%). agement Department under the Ministry of The services sector was slightly more resis- Economy, the number of companies subject tant to the downturn. Both in the first and to bankruptcy proceedings doubled year-on- the second half of the year, the headcount year from January to March of this year alone was rising in the transport and warehousing and comprised 446. Most proceedings (over industry, postal and telecommunications in- 90%) were started against private limited li- dustry, financial intermediation and real- es ability companies and usually at the request tate as well as in two public sectors (health of management (41%) or creditors (20%) of care and public administration). the companies. The harshest business conditions were en- Responding to changes on the labour market, countered by domestic trade and industrial employers were forced to reverse the trajec- companies as their percentage in the total tory of wage growth. Although the annual number of bankruptcies stood at 29% and increase in wages (excluding sole proprietor- 23.4% respectively last year. However, con- ships) remained quite high and the growth struction companies have dominated the rate decelerated by just a couple of tenths bankruptcy statistics this year as their num- compared to 2007, growth was more moder- ber tripled in a year and comprised almost a ate in the second half of the year and stood quarter of all economic entities going out of at 15.9% (see Table 2 in the Annex). Wages business. It has to be said though that the grew at a much slower pace than before in respective percentages of domestic trade and some industries, for instance, construction industrial companies have also been impres- (4%) and basic metals and metal products sive (22.2% and 17.7%). In the manufactur- (1.9%), but the trends of wage movements in ing industry, manufacturers of wood, textile most sectors followed the same pattern as in and food products as well as dressmaking the entire economy. The average wage grew companies faced the most serious challenges a bit faster than across the entire economy in last year. This year, furniture makers (16.5%) the second half of the year in the hotels and and manufacturers of metal products (13.9%) restaurants industry (17.5%), real estate and have encountered financial difficulties and -be other business activities (19.4%) and public gun joining the ranks of bankrupt companies. sector (20–27%).

1 Statistics of the labour market are provided on the basis of the relative number of workers, i.e. the sum of the number of people working full month and full time and the number of workers working part-time during a month or a week converted to full-time units.

Labour market and income 31 Diagram 5.2 Annual change of labour productivity* and wages, %

19.6 20 19.2

16.8 16.3

15 14.1 13.3 13.4 12.6 11.5 9.7 10 8.0

6.0 4.3 5 3.7 3.1 2.5

0 2001 2002 2003 2004 2005 2006 2007 2008

Wages Labour productivity

* Value added per employee at current prices

Source: Statistics Lithuania, authors’ calculations

Despite a slightly slower growth of wages, compared to the previous year. However, the the increase in value added per worker was overall labour productivity indicator of this even smaller and the disproportion between industry remains very low compared to the these two indicators widened last year (see national average (see Table 2 in the Annex). Diagram 5.2). This year, we are likely to see According to Statistics Lithuania, earnings of some sort of a ‘breaking point’: the amount of the population have grown at a double-digit value added will fall but a smaller number of rate since 2005. It has to be said though that workers will most probably result in a positive earnings rose by 20% on average every year increase of labour productivity. At the same until 2008 and then the growth slowed down time, the annual growth of wages will be neg- to 14.8% last year. Due to the high inflation ative. It means that the increase in labour rate, real earnings grew at the slowest pace productivity will be larger than the growth of since accession to the EU. wages for the first time since 2005. Last year, disposable income of households Last year, labour productivity rose at a slight- was by a quarter higher than consumption ly slower pace. Although value added per expenditure (see Diagram 5.3). Among all worker increased in nearly every sector of the types of income, social benefits grew at the economy in 2008, the growth of labour pro- fastest pace (27.8%). Income of employed ductivity decelerated markedly in the second people rose by 14.2%, while earnings from half of the year. In the financial intermedia- agriculture declined by a tenth as a result of tion sector, it even fell 1.5 times year-on-year. high prices and growing costs. Negative indicators were also posted by three branches of the manufacturing industry: rub- As regards consumption expenditure, smok- ber and plastics (–11.9%), basic metals and ers had ‘to dig deepest into their pockets’ as metal products (–3.5%) and other non-me- spending on tobacco products increased by tallic mineral products (–12.2%). Agriculture a fifth on average compared to 2007. The achieved an exceptionally high indicator of cost of utilities and other services as well as labour productivity: value added per worker prices in hotels and cafes rose by about 12%. rose 1.5 times on average in the industry Expenditure on food products and alcoholic

32 Lithuanian Economic Outlook Diagram 5.3 Average disposable income and consumption expenditure per capita per month, LTL

1200

986.8 1000 859.3 793.9 800 748.8 680.8 651.5 579.7 578.1 600 495.8 512.3

400

200

0 2004 2005 2006 2007 2008

Disposable income Consumption expenditure

Source: Statistics Lithuania beverages went up by a similar margin (up the pension system is not even questionable. by 11.3% and 11.8% respectively). By the EU member states are seriously considering way, the percentage of expenditure on food the possibility of attracting immigrants from products, which was contracting for several other countries. This alternative is the cheap- years, increased by 1.7 percentage points est one but may fundamentally change the last year to 34.8%. current social and immigration policies. How- ever, the economic crisis and sharply rising It should be said with regard to the mid- unemployment make it more difficult to roll term outlook of disposable household income out new immigration programmes and the that both household earnings and purchas- popular support for these programs is weak- ing power of the population is very likely to ening. In an attempt to regulate the flows of contract considerably. Average disposable in- migrants more efficiently and lure in skilled come per household member will decline by a labour, the European Union has adopted a de- larger margin than wages due to a very high cision to introduce the immigration card from likelihood of unemployment; when at least 2011 onwards. The blue card will be valid in one family member loses his or her job, in- all EU member states, except Great Britain, come of a household decreases significantly. Ireland and Denmark, and will entitle to work Moreover, social benefits will, in all probabil- temporarily in the EU, bring in the family and ity, follow in the footsteps of declining wag- receive social guarantees until the card ex- es. Therefore, despite decelerating inflation, pires. Therefore, Lithuanians planning to emi- the purchasing power of the population will grate to other EU countries in future may face weaken in the coming years. stronger competition from skilled labour from The severity of the global crisis has forced pol- third countries. icy-makers to fight against the possible worst- case scenario in the pension system. Unfortu- The Lithuanian labour market is also ripe for nately, no measures have been put in place in changes. In May 2009, the Cabinet approved advance. Experts of the United Nations esti- the proposal put forward by the Sunrise Com- mate that the number of people of retirement mission to liberalise work time. The proposed age may increase by two-thirds in the next 50 changes include a plan to slash out compul- years and reach about 100 million in the Euro- sory limitation of the work day length for pean Union. About one quarter of them will be many occupations, introduce a more flexible older than 80. Therefore, the need to reform work schedule which will only regulate the

Labour market and income 33 average weekly number of hours, differenti- World Bank, this category must be improved ate overtime pay, not to shorten ‘more ex- (Lithuania ranks 131st out of 181 countries, pensive’ work hours at nigh, and scrap forced Latvia is 103rd, while Estonia is 163rd) as it is allotment of additional vacation time. How- the biggest obstacle for business. We have no ever, so far all the proposals of the said com- doubts that further liberalisation of the labour mission have aimed to facilitate work time market is the only viable option today as the organisation and excluded one issue signifi- removal of some red tape barriers would en- cant for business people, i.e. the procedure courage the business community to be more of staff hire and dismissal. According to the efficient in creating new jobs. study of business conditions conducted by the

34 Lithuanian Economic Outlook 6. Foreign trade and balance of payments 6. Foreign trade and balance of payments

The Lithuanian economy should brace itself ices increased by a fifth in 2007, their growth for a difficult period ahead and it is not clear in 2008 stood at only 12% and the annual when the national economy will begin grow- increase was meagre in the last quarter. It ing again. To a large extent, it depends on ex- means that a downward trend emerged which ports: if the Lithuanian companies succeed in signals that the volume of exports is set to boosting their sales abroad, the downturn will shrink this year. be short-lived. In recent years, foreign trade Last year, imports of goods and services (at has developed erratically, as it grew strongly fob prices) were worth LTL 78.6 billion, up by in 2005–2006 and then slowed down consid- 18.3% from two years ago, while the rele- erably. The overall result of last year seems vant deficit to GDP ratio finally began to fall, excellent. According to the Bank of Lithuania, losing almost three percentage points until it turnover rose by 21.5%. Exports of goods reached 10.5% of GDP (see Diagram 6.1). In and services stood at LTL 66.9 billion, up by the first half of 2008, the indicator even ex- 25.4% from 2007. Since the annual increase ceeded 14% but began to drop subsequently. in exports was almost three times as low two The negative balance of foreign trade should years ago, it seems that the growth of ex- decrease considerably this year due to the ports accelerated last year. However, a more weakening consumption and evaporating detailed analysis of available data is less than capital investments. encouraging. An impressive indicator of total growth of exports in the period concerned General indicators of exports and imports of was mainly held up by excellent performance goods, as reported by Statistics Lithuania, of Mažeikių nafta last year and its misfor- are presented in Diagram 6.2, and may differ tunes two years ago, when the company was slightly from the relevant figures derived by unable to operate at full throttle, which cre- the Bank of Lithuania because of the differ- ated a low reference basis. If the mineral fuel ences in the methodologies used. We can see (MF) is excluded, the picture is completely that imports of goods (at cif prices) increased different. While exports of goods and serv- by 18% last year to LTL 72.6 billion, while ex-

Diagram 6.1 Current account and foreign trade (goods and services) deficits, ratio to GDP, %

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2007 2008 II H II H

FTD 6.3 5.4 5.5 5.7 7.0 7.2 10.3 13.4 10.5 12.1 7.3 CAD 5.9 4.7 5.1 6.8 7.7 7.1 10.6 14.6 11.6 13.3 6.8

Source: Statistics Lithuania

36 Lithuanian Economic Outlook Diagram 6.2 Exports and imports of goods, LTL Mio

80000

70000

60000

50000

40000

30000

20000

10000

0 2003 2004 2005 2006 2007 2008 2007 2008 II H II H

Exports of mineral products 4304 6458 8859 9193 5791 13704 2870 6718

Exports of other goods 16958 19361 23908 29696 37402 41773 19725 21291

Imports 29438 34384 43152 53275 61504 72593 31920 35189

Source: Statistics Lithuania ports stood at LTL 55.5 billion, up by 28.4% ed, and the annual growth of exports of food from 2007. If the MF is excluded, imports products and metal products slowed down by rose by less than 2% and export volumes in- almost a third (see Table 11 in the Annex). creased by almost 12%. Moreover, exports of locally produced goods grew much more A breakdown of last year’s exports of goods slowly than re-exports, which approached by region is given in Table 13 in the Annex. 40% of total exports excluding MF last year. As in the previous years, most products were exported to the EU. The only exception was Exports broken down by product group are transport equipment as more than a half of presented in Diagram 6.3 and Table 10 in the exports went to the CIS as a result of east- Annex. Exports of food products grew strong- bound re-export of second-hand cars. Com- ly for a sixth year in a row and went up by a pared to 2007, the regional structure of ex- fifth last year. The indicator of metal products ports slightly changed. Except the MF, the was very similar, while the value of exports of EU share declined in exports of all product the chemical industry was 1.5 times higher groups reviewed, the percentage of goods than in the previous year due to the steep exported to the CIS increased relatively, while increase in product prices. At the same time, other countries gained in importance as ex- the annual increase in the exports of plas- port markets for food products, furniture and tics, wood products and furniture, which grew chemical products. It means that the geogra- quite strongly for a couple of years, became phy of Lithuanian exports is expanding. negative in 2008. Exports of textiles also contracted. Despite the worsening export results, In general, the EU accounted for about 60% only these three product groups plus food of total exports of Lithuanian goods and 57% products enjoyed a positive balance last year, of imports last year (see Table 12 in the An- while the balance of foreign trade in other nex). On an annual basis, these indicators fell product groups reviewed here was negative. by 4.5 and 11 percentage points respective- Analysis of changes in last year’s exports of ly. Meanwhile, Russia’s share in Lithuania’s products originating in Lithuania and com- foreign trade has been growing for several parison with the relevant general indicators consecutive years: it accounted for 16% of reveals considerable differences. Following exported goods and over 30% of imported the previous growth, exports of machinery goods in 2008, well above the share of other and equipment fell sharply; export indicators countries. If the MF is excluded, exports of of textiles, wood products and plastics erod- goods to this country rose by 38% and its rel-

Foreign trade and balance of payments 37 Diagram 6.3 Exports by commodity groups (mineral products excluded), LTL Mio

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2003 2004 2005 2006 2007 2008

Machinery and equipment 2346 3287 4079 4886 5589 5895 Food stuff and beverages 2355 2956 4209 5417 7346 8876 Textile and textiles articles 2970 3022 3043 3228 3263 3046 Wood and furniture 2470 2859 3304 3792 4650 4381 Transport vehicles 3178 2339 2707 3948 4557 4758 Products of the chemical industry 1406 1793 2390 2515 3477 5359 Plastics and rubber 557 779 1186 2000 3430 3303 Other goods 1675 2325 2990 3910 5089 6155

Source: Statistics Lithuania

ative weight was above 21%, while exports to stood at as high as 60% in the first quarter of the EU contracted marginally and the region’s this year. Imports of goods for final consump- share went down to 57%. As the competition tion have also declined considerably this year, gets increasingly tighter on this market and although last year they only decelerated and the situation in Western European economies still rose by almost 17% compared to 2007. continues to deteriorate, no breakthroughs in The volume of total imports of goods shrank exports to the EU should be expected in the 1.7 times year-on-year in the first quarter coming years. Sadly, the volume of goods of 2009, exports contracted by a third and exported to Russia and other CIS countries is trade deficit (at fob prices) fell to less than also unlikely to increase this year. In most of 3% of the relevant turnover. All this supports these countries, imports began to shrink and the misgivings that foreign trade will plunge the national currencies of countries impor- deeply this year, although its balance should tant to the Lithuanian exports depreciated. effectively improve. The share of other markets in the structure of Lithuanian exports (excluding the MF) should Last year, exports of services were worth continue to grow. Last year, it increased by LTL 11.4 billion, almost five times as little as over two percentage points to 11.4% and revenue earned from exports of goods (this rose further in the first quarter of this year. ratio would be much lower if we compared the exported value added rather than turno- As the investment processes continued to sub- ver). In terms of the level of invisible exports, side (see Investments), the share of invest- Lithuania lags far behind the other two Bal- ment goods began to plunge last year in the tic states. Last year, its invisible exports to structure of imports of goods by macroeco- GDP ratio dropped slightly to 10.2%, while nomic category. In 2008, imports of invest- Estonia’s indicator was more than double that ment goods fell by 11.5% compared to 2007 of Lithuania. Lately, exports of services have (see Diagram 6.4), and the negative growth grown quite slowly. However, instead of slow-

38 Lithuanian Economic Outlook Diagram 6.4 Imports by broad economic categories, LTL Mio

75000

65000

55000

45000

35000

25000

15000

5000

-5000 2003 2004 2005 2006 2007 2008

Other goods 423 256 225 262 215 239 Passenger cars 1646 1709 2259 3463 4731 4133 Intermediate goods 16442 20096 26332 31084 33137 44050 Capital goods 5895 6172 6896 8974 11225 9933 Consumption goods 5032 6150 7439 9492 12196 14237

Source: Statistics Lithuania ing down in the fourth quarter of last year, and lifts red tape barriers. Sadly, the poten- the growth rate accelerated quite surprisingly tial of this industry has not been fully tapped. and the annual increase in invisible exports Although the growth of tourism services ex- was quite respectable last year standing at port accelerated last year to 7.5% following 12.7% (only 2% two years ago, see Dia- a standstill of 2007, its share in invisible ex- gram 6.5). For a third year in a row, imports ports fell by more than a percentage point of services outpaced exports. Last year, they to 27.3%. This year, Vilnius is the European grew by almost a fifth pushing down the bal- capital of culture but it seems that this ad- ance of services by a quarter to LTL 1.2 bil- vantage will not be used to attract more tour- lion. According to preliminary estimates, both ists: Vilnius became more difficult to reach exports and imports of services fell by about by air, higher VAT rate forced hotels to raise a third year-on-year in the first quarter of this their prices, and preparation for the events year, while trade surplus almost halved. has been accompanied by various problems.

In 2008, exports of transport services were As the domestic demand keeps contracting, worth LTL 6.8 billion, up by 15% from two construction companies carry out an increas- years ago, and raised their share in invisible ing amount of work abroad. Last year, ex- exports by a percentage point to over 59%. ports of their services were worth LTL 227 However, transport companies are finding it million and rose by about a third. Although increasingly difficult to operate as the flows the construction market is stiff in a number of of goods weakened, fuel prices went up and countries, the provision of these services to competition from Bulgaria, Romania, etc., got Russia and the Kaliningrad Region in particu- stronger (see Transport). This year, exports of lar may increase. Exports of financial services transport services are expected to plummet. rose by 35% in 2008 to LTL 128 million, while Exports of tourism services have excellent the indicator of information services leaped long-term prospects (beautiful nature, small 1.6 times and came close to LTL 100 million. population density, favourable geographical Nevertheless, the exported volume of the lat- location, etc.), especially if the national gov- ter services is still meagre. ernment pays more attention to the sector

Foreign trade and balance of payments 39 Diagram 6.5 Exports and imports of services, LTL Mio

12000

10000

8000

6000

4000

2000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2007 2008 II H II H

Exports of other services 703 967 1133 940 873 1667 1763 1320 1511 689 820 Exports of travel services 1565 1532 1870 1944 2164 2562 2844 2899 3115 1699 1807 Exports of transport services 1967 2127 2395 2852 3760 4413 5333 5902 6777 3122 3549 Imports of services 2715 2801 3411 3848 4535 5715 6969 8530 10215 4500 5251

Source: Statistics Lithuania

Further development of visible and invisible The financial account balance stood at LTL exports and the entire economy will strongly 11.5 billion last year, down by 9.3% from depend on the ability of the current Cabinet 2007. The net flow of foreign investment and the Seimas to promote investment into plummeted by almost 44% to LTL 8.8 bil- the exporting sectors of the national econ- lion as a result of changes in lending policies. omy. Having grown for several consecutive years, the net flow of loans rose to LTL 12.8 billion The current account deficit (CAD) to GDP two years ago, or 13.1% of GDP, but fell to ratio reached record highs in the first half of LTL 10.7 billion in 2008, or 9.6% of GDP. For last year, but the forecast outlined in our pre- a fourth year in a row, the net flow of portfo- vious publication came true and the annual lio investments was negative and small (LTL result was more moderate. After a two-year –262 million), while the indicator of direct period of strong growth, this indicator went investment fell by about 4% to LTL 3.4 bil- down by three percentage points last year to lion (for more information on FDI flows, see 11.6% and is expected to fall even further Investments). The CAD coverage by the capi- this year. As in 2008, the critical factor is like- tal account balance and net FDI flow should ly to be the improving foreign trade balance. be treated as insufficient although it rose by Last year, the negative balance of revenue more than five percentage points last year to shrank by about 10% to LTL 3.7 billion: the over 42%. balance of work-related income declined even further to just LTL 278 million but the overall Having grown strongly in the last five years, result depended on an improved indicator of gross foreign debt was above 72% of GDP at investment revenue as its negative balance the end of 2007 but fell by almost a percent- went down by more than 12% last year to LTL age point last year to 71.4% of GDP. 3.9 billion. Following a three-year period of growth, of- The contribution of current transfers to ficial reserves contracted by LTL 2.7 billion changes in the current account balance was in 2008 (excluding changes due to the ex- minor as their balance virtually did not change change rate fluctuations) and stood at LTL during the year and stood at LTL 5.1 billion. 15.8 billion at the end of last year. This figure More generous EU support to investment was equivalent to imports of goods and serv- projects is adding to the capital account sur- ices for a period of 2.4 months (the indicator plus which rose by 18% last year to over LTL comprised 3.2 months at the end of 2007). 2 billion.

40 Lithuanian Economic Outlook 7. Investments 7. Investments

Record high profits of companies in 2006– years ago, while investments into machinery, 2007 were conducive to an increase in invest- plant and transport accounted for just 29% of ments in tangible fixed assets. However, the total capital investments. The latter indicator deteriorating business expectations and tight- has been steadily declining since 2004 when it er bank lending policies triggered a downward stood at 36%, while the share of investments trend last year: the share of expenditure on into buildings has been growing accordingly. gross fixed capital formation in GDP fell by Among all industries, real estate operations, more than three percentage points to 24.8% as in several previous years, accounted for during the year (see Diagram 7.1). The rela- the largest percentage of total capital invest- tive decline of investments in buildings was ments. The sector attracted over 23% of total quite moderate, but investments in produc- capital investments into the national econo- tive capital goods (machinery, plant and vehi- my, up by four percentage points from two cles), which are of utmost importance for the years ago (see Table 3 in the Annex). How- competitiveness of the economy, fell by more ever, there is little doubt that the sector’s in- than a quarter in Lithuania and accounted for dicators will plummet this year since the real 6.5% of GDP last year, remaining much lower estate market has grounded to a halt and than in Latvia and Estonia and dropping well the manufacturing industry should regain its below the EU average (see Diagram 7.2). leading position, even though last year its rel- The worsening investment trends are reflect- ative weight shrank by two percentage points ed not only in the statistics of national ac- to about 13%. counts but also capital investments of compa- In 2008, the ratio between capital invest- nies. For several years in a row, the volume ments and value added generated by the lat- of this type of investment was growing quite ter industry fell to 15.4% and was well below rapidly: it went up by 23% at constant prices the economy’s average (21.6%), just like in in 2007 compared to the previous year. How- the previous years. The insufficient level of ever, the change was marginal last year. At investment signalled a slow production mod- the then prices, the annual increase in the ernisation process and raised doubts about volume of investments in tangible assets was the competitiveness of Lithuanian products around 6% in 2008, five times as little as two and prospects to boost sales on foreign mar-

Diagram 7.1 Gross fixed capital formation, ratio to GDP, %

30 28.0 25.2 24.8 25 22.3 22.8 21.1 20 19.0 16.5 13.5 14.2 18.3 15 13.2

5 8.8 8.6 8.7 9.0 7.9 6.5 0 2003 2004 2005 2006 2007 2008

Other investment Machinery, equipment and motor vehicles Total

Source: Eurostat

42 Lithuanian Economic Outlook Diagram 7.2 Gross fixed capital formation in 2008, ratio to GDP, %

30.2 29.4 30 28.4 28.0 25.9 24.8 24.0 25 22.4 22.0 21.5 20.9 21.1 20.8 20.6 16.8 20.5 19.6 19.2 19.3 20 17.0 17.2 15.1 21.9 16.2 13.8 18.3 15 11.8 13.4 13.9 11.3 13.6 13.6 11.6* 11.8 14.9 14.8 15.3 10.3 10

13.5 11.4 10.8 10.8 5 10.1 9.1 8.6 8.5 8.4 7.9 7.6* 7.5 7.5 7.5 6.5 5.9 5.9 5.7 5.3 0 Italy Malta Spain EU-27 Czech Latvia Poland Greece Austria Finland Estonia Norway Sweden Slovenia Slovakia Germany Lithuania Denmark Republic Netherlands Other investment Machinery, equipment and motor vehicles Total

* Estimate according to the data of the year 2007

Source: Eurostat kets. Among various branches of industry, the said ratio fell dramatically in the construction indicator continued to grow in manufacture of and domestic trade sectors last year declining food products, timber and furniture in recent from 7.5% to 4.7% and from 14.5% to 9.4% years, rose sharply in the plastic industry but respectively, while the indicator of hotels and fell significantly in the chemical industry since restaurants contracted almost by half to less 2007. Judging from the indicators reported than 10%. The communications industry also by Mažeikių Nafta, the petroleum products cut its investments into fixed tangible assets industry had the highest level of capital in- last year as they accounted for slightly more vestments among all branches of the manu- than 18% of value added. The transport sec- facturing industry in the last two years, but tor had a similar level of capital investments, Statistics Lithuania does not publish the offi- even though the indicator went up marginally cial figures of this sector for reasons of confi- during the year. dentiality. Meanwhile, the capital investments to value added ratio in the light industry went After a relative decline in 2007, the invest- down to below 6% last year as if highlighting ment level in agriculture recovered last year, rather poor prospects of this industry. But on while capital investments in the mining indus- the other hand, it was one of the few industry rose to almost 22% of value added. tries to enjoy a much better indicator in the The net flow of direct investments was slightly second half of the year compared to 2007. weaker last year compared to 2007 and com- Apart from the real estate operations and prised LTL 3.4 billion. Foreign investments of public administration sectors, the electric- Lithuanian companies almost halved during ity, gas and water supply industry remained the year falling to less than LTL 800 million, a clear leader in terms of the capital invest- while the FDI flow to our country fell by 17% ments to value added ratio. Although its in- in 2008 to LTL 4.2 billion, or 3.8% of GDP, the dicator fell by ten percentage points in 2008 lowest level since Lithuania’s accession to the to 50%, it was still 2.3 times higher than the EU. The good news, however, is that about LTL economy's average. Compared to 2007, the 1.7 billion of this amount went into the share

Investments 43 Diagram 7.3 Foreign direct investment flows, LTL Mio

6000

5000

4000 2099

3000 4081 2479

843 1653 2000 2048 1301 741 1277 2901 1744 1000 1823 1042 1199 1249 581 875 1004 810 0 -28

-1000 2001 2002 2003 2004 2005 2006 2007 2008 2007 2008 II H II H Other FDI FDI in equity capital Lithuanian DI abroad

Source: Bank of Lithuania

capital, up by 74% from 2007 (see Diagram 9%. These three countries were followed by 7.3), while the overall indicator was dragged Estonia (6), the Netherlands (9) and Latvia down by a sharp fall in reinvestment from LTL (8). Following a plunge in the stock price and 2.6 billion to just LTL 200 million. profit indicators ofPKN -owned Mažeikių Nafta, Poland fell from first to seventh and was then As can be seen from Diagram 7.4, other Bal- followed by Finland (7) and Russia (4), which tic states have managed to attract a much was the leading investor just three years ago stronger flow of foreign investments in re- (see Table 13 in the Annex). cent years. Although Latvia’s economy is in the worst shape out of the three neighbouring As seen from Table 3 in the Annex, over 23% countries, even this country is more appeal- of total accrued FDI was directed to the man- ing to investors than Lithuania. The Estonian ufacturing industry at the end of 2008 (the indicator was strongly affected by heavy for- highest indicator), about 16% to financial in- eign investments of Estonian companies, but termediation and 14% to domestic trade. The the country remained a clear leader among share of the communications sector was just the three Baltic states in terms of accrued FDI below 13%, a similar indicator was posted by per capita; it has accumulated more invest- real estate operations, while the electricity, ment than Lithuania despite having 2.5 times gas and water supply sector attracted 7.5% fewer people. of the total investment volume. Although the manufacturing industry remained a clear Last year, FDI accrued by Lithuania contracted leader, its share in the FDI structure declined by about LTL 4 billion and stood at LTL 31.5 by more than a third during last year. Since billion by the end of 2008. The indicator was this sector generates the majority of national affected by the fluctuating stock prices of for- exports, foreign investments in the manufac- eign-capital companies. In terms of the level turing industry are vitally important. Sadly, of investment in Lithuania, last year saw ma- the FDI flow to the manufacturing industry jor changes in the line of countries (the coun- was quite weak and comprised about LTL 450 try’s position in 2007 is given in brackets): million, of which only LTL 112 million was in- Sweden became the leading country (3) as its vested into the share capital. percentage in the accrued FDI was close to 17%, Germany’s (5) indicator stood at around In addition to the injection of money into the 10%, Denmark’s (2) share comprised almost national economy, foreign direct investment

44 Lithuanian Economic Outlook Diagram 7.4 Net FDI flow to GDP ratio in the Baltic countries, %

2.2 6 3.8 4 7.9 0.3 3.2 6.0 0.8 5.3 1.3 2 4.3 4.2 2.9 1.9 2.3 2.1 0 -0.7 -1.8 -2.5 -2

-4 2006 2007 2008 2006 2007 2008 2006 2007 2008

Lithuania Latvia Estonia

Other FDI in equity capital Total

Source: Eurostat brings know-how, brands, ensures easier ac- uania, the FDI flow would benefit mostly in cess to new markets and integration of the the short run from the eradication of red tape local economy into international value gen- barriers to business, development of indus- eration chains. Without the support of foreign trial parks, introduction of incentives for tar- capital, the high and medium-high technol- geted investments and more active relations ogy sector or applied research are unlikely with potential investors at the official level. It to see any breakthroughs. That is why the seems that the incumbent Government is on emerging economies pay particular attention the right track. to efforts to attract foreign investors. In Lith-

Investments 45

8. Financial indicators of enterprises 8. Financial indicators of enterprises

The accelerating borrowing and booming con- Just like two years ago, turnover of real es- sumption financed by bank loans in recent tate companies soared last year as their total years has subdued competition and created revenue was 1.5 times higher than in 2007, an excellent environment for profit margins although profits almost halved and the sec- to rise in the economy. However, the situation ond half of the year was no longer profitable on Lithuanian and global financial markets (see Table 4 in the Annex). The situation was changed last year and the average profitabil- similar in the industry. As a result of soaring ity ratio of non-financial companies shrank prices, turnover of electricity, gas and wa- by more than twice to 3.9% (see Diagram ter supply companies rose by about a third 8.1). It is expected to decline even further compared to the previous year, while profits this year due to the deteriorating economic shrank 2.4 times due to substantial rise in situation in Lithuania and the neighbouring costs and the second half of the year resulted countries. in a considerable loss. In 2008, sales of the manufacturing industry increased by almost Last year, revenue from products sold and a quarter and profits fell by half since the last services provided (turnover) grew by 16% six months of the year were loss-making. Out compared to 2007 to LTL 211 billion, but pre- of all branches of the manufacturing industry tax profits (hereinafter the ‘profits’) almost reviewed here, only two ended last year with halved to LTL 8.1 billion (see Table 8.1). In a loss. These were the light industry as well the second half of last year, financial indica- as wood, paper products and furniture indus- tors clearly signalled the deteriorating situ- try. For a second year in a row, the highest ation in the economy: inflation grew faster profitability was posted by the chemical- in than turnover and profits shrank by as many dustry, building materials industry and trans- as six times compared to the previous year. In port equipment industry. 2008, total equity of non-financial companies rose by about 17% and total liabilities, al- Having reached more than 40% in 2007, the though their growth decelerated substantial- annual growth of revenue of construction com- ly, went up by an even larger margin pushing panies shrank six-fold and their annual profit the total debt ratio from 0.443 to 0.447. In fell by almost a third. Nevertheless, contrary the middle of the year, it exceeded 0.47 but to concerns, the construction industry finished later on, as the banks began tightening their last year with a profit. Financial indicators of lending policies, the liabilities to equity ratio retailers were similar: all the quarters were began to decline. profitable in 2008 but the annual profit fell by

Diagram 8.1 Return on sales of non-financial enterprises, %

10 9.6 8.8

6.0 6.2 6 5.4 4.9 3.9 4 3.8

1.9 2 1.5 1.1

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2007 2008 II H II H

Source: Statistics Lithuania

48 Lithuanian Economic Outlook Table 8.1 Financial indicators of non-financial enterprises

2005 2006 2007 2008 2008 2008 II H Annual Semiannual change, % change, %

Balance, LTL Mio* Assets 110856 126903 161786 190771 17.9 –2.7 Current assets 42712 50196 64611 69291 7.2 –6.5 Equity 63858 71675 90074 105517 17.1 1.7 Liabilities 46999 55228 71712 85253 18.9 –7.7 Current liabilities 28297 33120 42721 48581 13.7 –7.2 Income and profit, LTL Mio Annual change, % Income from sales 122205 147175 181437 211106 16.4 8.0 Gross profit 25972 30147 38377 40320 5.1 –7.2 Profit before tax 7331 9163 15892 8130 –48.8 –83.2 Liquidity and profitability Debt ratio* 0.42 0.44 0.44 0.45 – – Return on sales, % 6.00 6.23 8.76 3.85 – – Return on assets, % 7.00 7.58 10.60 4.20 – – Return on equity, % 12.07 13.40 19.20 7.71 – –

* End of period

Source: Statistics Lithuania

43% compared to 2007. At the same time, relate strongly with the profitability ratio and their revenue continued growing, albeit at a support the above conclusions. much slower rate falling from 30% to 13%. Despite a 12% annual increase in turnover, Although the borrowing fever receded last the hotels and restaurants industry incurred year, the level of financial liabilities remained a small loss last year following a respectable high in many sectors of the economy (see profit earned two years ago. Total revenue Table 5 in the Annex) and even increased in of transport and warehousing companies in- 2008. The retail trade was the leading sec- creased by a similar margin but profits con- tor in this respect as its debt ratio rose 1.3 tracted more than three times and the indus- times to 0.69, and the debt burden of other try returned a notable loss in the last quarter. trade sectors was also very heavy. In 2008, As a result of fierce competition, the prices for the alarming indicator of hotels and restau- services of information and communication rants did not improve and stood at 0.67, while technology companies grew moderately and the debt ratio of construction and real estate the sectors’ revenue rose by a much smaller operations increased slightly to 0.58 and 0.55 margin last year compared to the majority of respectively. Moreover, the value and liquidity other industries. Profits were well below the of real estate is falling during the crisis, so the indicators of 2007, although the profitability actual debt ratio of these industries is prob- remained quite high. ably even higher. During the year, the relevant indicators of the communications and Generally speaking, profit margins of all re- transport industries went up considerably but viewed industries eroded last year because of still remained below the economy’s average, poorer results of the second half of the year while the debt ratio of the manufacturing in- in the aftermath of drying-up credits, weak- dustry, by contrast, improved slightly but was ening domestic consumption and stalling for- still above the critical level (0.5). Among the eign markets. This year, the profitability will branches of industry, the wood sector became decline even further and no economic sector an outsider as its indicator rose to 0.67, fol- is likely to avoid that. lowed by the previously ‘leading’ plastic in- The figures of return on assets and return on dustry which managed to drag down its debt capital presented in Table 6 in the Annex cor- ratio to 0.58. Having carried the heaviest

Financial indicators of enterprises 49 debt burden recently, the chemical industry entire economy’s indicator (0.85), and the enjoyed the relatively lowest volume of lia- indicator of real estate operations was just bilities (0.37) last year among all branches of marginally better, followed then by the elec- the manufacturing industry reviewed here. tricity, gas and water supply sector (1.82). In terms of the ratio between liabilities and As the flow of bank credits continues to dry value added generated during the year, the up, the debt level of the national economy worst indicator was posted by wholesale last should begin to decline for the first time in year (1.95) as it was more than double the the last seven years.

50 Lithuanian Economic Outlook www.kaunas.lt

9. Government finance 9. Government finance

Last year, the ratio of government sector rev- outpacing the increase in value added gen- enue to GDP grew for a fourth year in a row erated country-wide. Therefore, the NB rev- and reached 34% but remained by about 10 enue to GDP ratio went up slightly to 21.4% percentage points lower than the EU average (see Diagram 9.2). The relevant indicator of (see Diagram 9.1). Lithuania, having been at tax revenue rose by 0.5 percentage points to the bottom of the list of EU member states in 19.5% of GDP, the highest level in the last terms of this indicator for several years, rose nine years. However, tax revenue collection above Slovakia in 2007 and then overtook fell short of the overly optimistic target by Ireland and Romania in 2008. Total trea- 4.3%. VAT collection target was set too am- sury revenue reached almost LTL 38 billion, bitiously as the actual VAT proceeds fell 9% falling below the target, but exceeded the below the relevant target. indicator of 2007 by 14%. During the Sei- Last year, NB expenditure stood at LTL 28.7 mas election year, politicians tend to splash billion, up by 17.5% from the previous year, out. Therefore, general budget spending while the deficit to GDP ratio tripled to 1.2%. shot up by 21% last year to LTL 41.5 billion, For several years in a row, social spending and the fiscal deficit grew in double digits to has been growing faster than the overall in- 3.2% of GDP clearly exceeding the relevant dicator, while the percentage of NB spent on Maastricht criterion. The national fiscal pol- education increased for the first time in six icy which ignored the worsening economic years to almost 22%. Nevertheless, this in- trends also contributed to the deteriorating dicator was still too low as it was higher by Lithuania’s credit rating. 8 percentage points in 2001 and reached the In 2008, national budget (NB) revenue was highest level in 1999 (see Table 15 in the An- LTL 27.4 billion, including LTL 3.5 billion in EU nex). By the way, all governments of this de- support. Excluding the EU support, the an- cade insisted that the education sector was nual growth of NB revenue stood at 16.3% one of their priorities.

Diagram 9.1 General government revenue in 2008, ratio to GDP, %

60 55.7 55.4 52.5 49.3 50 48.6 48.2 46.5 46.4 46.0 44.5 43.8 42.7 40.9 39.2 39.0 40 37.9 36.6 35.5 34.0 33.8 33.1 32.7 30

0 Italy Spain Czech Latvia EU-27 Poland France Austria Estonia Ireland Finland Sweden Belgium Bulgaria Slovenia Slovakia Hungary Romania Germany Republic Lithuania Denmark Netherlands

Source: Eurostat

52 Lithuanian Economic Outlook Diagram 9.2 National budget revenue and expenditure, ratio to GDP, %

0 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU support 2.2 2.8 2.6 3.5 3.1 VAT 7.5 7.2 7.3 6.7 6.3 6.7 7.4 8.0 8.3 Income tax 5.5 5.2 4.9 4.7 4.9 5.0 4.9 4.6 4.6 Excise duties 2.6 2.7 3.3 3.1 3.0 2.8 2.9 2.9 3.0 Corporate income tax* 0.7 0.5 0.6 1.4 1.9 2.1 2.8 2.6 2.7 Other revenue 2.8 3.5 4.2 4.1 3.8 3.5 3.3 2.9 2.8 NB expenditure 20.7 20.3 22.4 21.9 23.2 23.7 25.2 24.9 25.7

* Including social tax

Source: Statistics Lithuania

Last year, revenue of the state social insur- the relevant revenue collection during the ance fund (Sodra) comprised LTL 11.2 billion. crisis would be LTL 30.2 billion and LTL 13.1 Its ratio to GDP increased significantly for a billion respectively, projecting an increase third consecutive year rising above 10% for of 10% and 17% from the previous year. In the first time (see Diagram 9.3). Since 2002, addition to these ‘fantastic’ revenues, the the Sodra budget enjoyed a considerable sur- government planned to borrow about LTL 6 plus which turned into a large deficit in 2008 billion for the repayment of previous loans after the Seimas decided to sweeten the deal which were nearing maturity and financing for voters and adopted a number of decisions of a substantial budget deficit since the ex- to raise social benefits, which resulted in an pected expenditure of the national budget unexpected increase in social spending and was by 8% higher than in the previous year pushed the said deficit to over LTL 1.4 billion. (LTL 32.8 billion). Seeing the extent of difficulties encountered by the national economy Last autumn, ‘black clouds’ gathered over the as well as the global economy this year, it country's public finance system. There were is obvious that any continuation of such vol- no longer any doubts that the Lithuanian untaristic policy would only bring the public economy was rapidly plunging into reces- finance system to its knees since the govern- sion and the example of Latvia illustrated the ment would have to borrow under extremely emerging default threat in the Baltic states. unfavourable terms. However, the then government of Lithuania turned a deaf ear to these warnings. In Octo- Subsequent developments in the public fi- ber, it approved very ambitious draft NB and nance sector looked as if someone had pressed Sodra budgets for 2009 which provided that a fast-forward button. In an attempt to in-

Government finance 53 Diagram 9.3 State Social Insurance Fund revenue and expenditure, ratio to GDP, %

0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Revenue 9.6 9.1 8.8 8.6 8.9 8.9 9.4 9.9 10.1 Expenditure 10.0 9.2 8.6 8.3 8.5 8.5 8.8 9.5 11.3

Source: Statistics Lithuania

crease treasury revenues, the new govern- nately, the first months of this year showed ment promptly drafted a set of amendments how misguided these projections were. Bud- to the fiscal system as well as a new draft get planners underestimated the negative budget, and most proposals were backed by indirect effect of higher taxes such as an in- the Seimas. The VAT rate was raised to 19%, crease in smuggling and tax evasion, shop- most tax privileges were scrapped, excise ping trips by Lithuanians to the neighbouring rates for fuel and alcohol went up steeply, countries, etc. Moreover, the economic down- and then the excise rate for tobacco products turn is much deeper than foreseen in the said was also increased in March 2009. Although draft budget. the personal income tax was reduced to 21%, It is hardly surprising that this careless piece higher-income people (earning more than LTL of work fell under heavy criticism and needed 3,150 per month) became no longer entitled improvement. The governing coalition admit- to non-taxable income deductions and most ted that the tax burden for people working income tax privileges were also cancelled. with business licences and self-employed A 20% tax rate replaced the previous 15% entrepreneurs was too heavy and promised rate for profits and dividends of legal entities. to correct these errors. However, we be- Deductions of social insurance contributions lieve that a lot more mistakes were made: to private funds were cut from 5.5% to 3%, the new rules for eligibility to non-taxable and new categories of workforce, previously income deductions made the proportional exempt from social security and health insur- taxation system unnecessarily complicated; ance contributions, were added to the sys- higher excise rates had a negative effect on tem. These contributions will now have to be the competitiveness of transport companies paid by athletes, farmers and people working and manufacturers of alcohol and raised the under author’s contracts, they will also be de- unemployment rate in the country, while their ducted from profits of sole proprietorships. aggregate impact on treasury revenue collec- The government expected that this fiscal re- tion has been negative in all probability; a form will help boost treasury revenue to a higher income tax rate for legal entities made level higher than in the previous year even Lithuania less attractive for investment com- despite the current crisis. The draft budget pared to the neighbouring countries and even for 2009 approved by the Seimas says that tempted company groups to rearrange their the NB revenue will reach LTL 29.7 billion and financial flows so that their profits could be expenditure LTL 31.2 billion, up by 8.4% and taken out elsewhere, in Latvia, for instance, 8.8% respectively from last year. Unfortu- where taxes are lower.

54 Lithuanian Economic Outlook Diagram 9.4 State debt, ratio to GDP, %

0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Domestic debt 7.6 8.1 8.9 8.2 7.4 7.3 5.7 5.6 5.6 Foreign debt 16.1 14.8 13.4 13.0 12.0 11.1 12.3 11.4 10.0

Source: Statistics Lithuania

Pretty soon the new Cabinet had to amend Cabinet had to be more proactive looking for the draft national budget and make significant external funding sources for the economy: it cuts in both revenue and expenditure. The should have asked the European Commission expenditure of the entire government sector, and other international organisations as well which includes the national budget, local-gov- as the governments of Nordic countries for ernment budgets, social budget and compul- financial assistance. sory health insurance budget, was reduced by A small national debt is a ray of light in these more than LTL 3 billion. Moreover, this was dark times. In 2008, the debt to GDP ratio fell not the final correction as new amendments by 1.4 percentage points to 15.6% of GDP to the budget are expected in June. (see Diagram 9.4). Lithuania’s foreign debt The Finance Ministry has also been increas- was nearly double its internal debt. However, ingly criticised for its preferred borrowing foreign debt will inevitably increase in 2009 method. It is becoming more evident that the for the first time in many years.

Government finance 55

10. Financial market 10. Financial market

As the ‘pandemic’ of the financial system Increasingly gloomier diagnoses of the health spread to the real world economy, major in- of EU economy forced the European Central ternational economic policy-makers began Bank (ECB) to act more actively in an at- consolidating their efforts. The second G20 tempt to revive the economy. Having quietly summit held this April produced a consid- watched a series of monetary moves made erable range of financial tools to battle the by the Fed to stimulate the economy, the ECB spreading crisis and the downturn of the glob- finally followed suit. In the last six months, al economy. A decision was made to boost the benchmark interest rate was cut seven the resources of the International Monetary times to 1% in May 2009 from 4.25% in Oc- Fund (IMF) to EUR 556 billion. In addition, tober 2008. It is the lowest level since 1999 credit line limits for IMF loans to struggling when the ECB began setting the cost of bor- countries was raised to EUR 185 billion. To rowing in the eurozone. reenergise trade flows and finance devel- A look at the mood on the European inter- opment, EUR 185 billion and EUR 75 billion bank market shows that these efforts by the respectively were provided, and the latter ECB were not in vain: the EURIBOR humbly will be distributed by banks set up by donor followed in the footsteps of key interest rates, countries. All these resources will be available and interbank markets of many countries in addition to those injected into the global outside the eurozone responded positively. economy by governments and central banks Nevertheless, banks are still reluctant to lend of individual countries. The pool of financial in the Baltic states (see Diagram 10.1). After rescue facilities is likely to grow to EUR 3.7 a leap at the end of 2008, the interbank cost trillion, the highest amount ever available to of borrowing went down to the original level 1 stimulate the economy. and stabilised for some time in Lithuania and

Diagram 10.1 3-month interbank interest rates, %

0 2008-07 2008-08 2008-09 2008-10 2008-11 2008-12 2009-01 2009-02 2009-03 2009-04 2009-05

EURIBOR TALIBOR RIGIBOR VILIBOR

Source: Reuters EcoWin

1 Source: http://ec.europa.eu/news.

58 Lithuanian Economic Outlook Diagram 10.2 Credit default swaps (in EUR) for the Baltics, 5 year period, bps

1200

1000

800

600

400

200

0 2008-10 2008-11 2008-12 2009-01 2009-02 2009-03 2009-04 2009-05

Latvia Lithuania Estonia

Source: Reuters EcoWin

Estonia. Meanwhile, interbank interest rates among the three outsiders compared to other have continued to go up in Latvia this year European nations, while the bottom two posi- as well. The main culprits are the country’s tions are occupied by IMF’s debtors Ukraine credit ratings which have been lowered down and Latvia. Estonia is fourth from the bot- to a speculative level, a ‘label’ of an IMF debt- tom, sharing its position with Hungary and or, changes in the political arena, inadequate Bulgaria. efforts to narrow down the fiscal ‘gap’ of Flat domestic demand had a negative effect the public sector and, most importantly, the on indicators of changes in the main mon- nomination of the biggest economic slump etary aggregates (see Table 10.1). Following in Europe. However, this internal risk ‘hump’ a 12.5% annual growth at the end of 2007, of the three Baltic states grew as a result of the M1 money supply stalled in the first half both objective indicators of macroeconomic of last year and subsequently fell by a con- imbalance and emotions and expectations of siderable margin of 16.5% year-on-year last market players. The reputation of financial December. Trends were similar in the first capacity of the Baltic states on international quarter of this year. The contraction of the M1 markets is perfectly illustrated by the curve money aggregate was mainly caused by the of credit default swap prices (see Diagram volume of overnight deposits, which fell by a 10.2). Until October 2008, 5-year CDSs to quarter in a year, while currency in circulation hedge against Lithuania’s credit risk stayed still increased by 5% by the end of 2008. The below 200 basis points. However, later this M2 money supply also lost momentum as the indicator increased almost fourfold and ex- indicator fell by a slight margin year-on-year ceeded 800 basis points in February 2009. last December. In March 2009, the annual fall And although the cost of CDSs of the Baltic of M2 reached nearly 3%. The reduction in states has been going down in spring, early M2 was mitigated by the continuing growth summer the three courtiers in dismay were of time deposits with a maturity up to 2 years observing uprising CDSs’ curves. In the near- which rose by a fifth over the year. est future the indicator is expected to remain within the highest-risk zone in the context of As official international reserves of Lithu- European countries. Currently, Lithuania is ania were depleting more slowly than the M1

Financial market 59 Table 10.1 Key indicators of Lithuanian financial market

Outstanding amounts, end of period, Ratio to Annual LTL Mio GDP, % change, % 2005 2006 2007 2008 2008 2007 2008

Monetary aggregates

M1 20902.5 24833.7 27938.1 23321.9 20.9 12.5 –16.5 Currency in circulation 6118.8 7244.5 8107.8 8520.4 7.6 11.9 5.1 M2 29487.8 35819.2 43470.1 43312.8 38.8 21.4 –0.4 M3 29850.5 36346 44227.8 44062.9 39.5 21.7 –0.4

Loans of credit institutions 25330.9 38404.3 55890.1 65914.5 59.1 45.5 17.9 granted to private sector

Non-financial corporations 15976.9 22569.0 30859.7 35733.8 32.0 36.7 15.8 LTL 5122.4 9426.6 12706.1 11674.3 10.5 34.8 –8.1 By EUR 9862.7 12215.6 16562.3 22321.4 20.0 35.6 34.8 currency Other currencies 991.9 926.8 1591.2 1738.1 1.6 71.7 9.2 Households 9353.9 15835.4 25030.4 30180.7 27.1 58.1 20.6 LTL 4234.6 8888.4 12568.7 11578.2 10.4 41.4 –7.9 By EUR 5058.2 6910.6 12415.2 18314.4 16.4 79.7 47.5 currency Other currencies 61.1 36.4 46.5 288.1 0.3 27.7 519.6 Housing loans 6457.5 10348.1 16743.9 20908.4 18.8 61.8 24.9 By Consumer credit 1522.7 2559.3 3659.5 4368.3 3.9 43.0 19.4 purpose Other 1373.7 2928.0 4627.1 4904.0 4.4 58.0 6.0

Private sector deposits 22015.4 26970.2 33449.7 33340.7 29.9 24.0 –0.3 in credit institutions

Non-financial corporations 7798.5 8408.1 9968.5 8648.0 7.8 18.6 –13.2 LTL 4723.9 6125.5 7558.4 6170.5 5.5 23.4 –18.4 By EUR 1262.6 1497.5 1939.4 2187.3 2.0 29.5 12.8 currency Other currencies 1812.0 785.0 470.7 290.2 0.3 –40.0 –38.3 Households 14217.0 18562.1 23481.2 24692.7 22.1 26.5 5.2 LTL 11118.7 14798.0 18355.2 18107.3 16.2 24.0 –1.4 By EUR 1549.8 2250.8 3726.6 5321.3 4.8 65.6 42.8 currency Other currencies 1548.5 1513.3 1399.4 1264.1 1.1 –7.5 –9.7

Interest rates for new loans and new deposits

LTL 4.70 5.37 8.61 10.08 – – – Loans EUR 3.76 4.94 6.04 5.91 – – – LTL 2.40 2.97 5.40 7.65 – – – Deposits EUR 2.32 3.04 3.96 3.66 – – –

Source: Bank of Lithuania, Statistics Lithuania

money supply, coverage of this monetary ag- national currency by gold reserves and hard gregate improved: compared to the end of foreign currency reserve. 2008, the ratio between the official international reserves and M1 rose by nearly 3 per- In terms of financial performance of the Lith- centage points in March and by as many as uanian banking system in 2008, total assets 9.3 percentage points year-on-year reach- of the sector rose by 10.8% and shareholder ing 70.4%. Lithuania continues to fully meet equity increased by 14.0%. The system of its commitment to maintain coverage of its credit institutions operated profitably during

60 Lithuanian Economic Outlook Diagram 10.3 Transactions of loans to households broken down by purpose, LTL Mio

700

600

500

400

300

200

100

-100

-200 2006-01 2006-03 2006-05 2006-07 2006-09 2006-11 2007-01 2007-03 2007-05 2007-07 2007-09 2007-11 2008-01 2008-03 2008-05 2008-07 2008-09 2008-11 2009-01 2009-03

Consumer credit Housing loans Other loans

Source: Bank of Lithuania the first three quarters of last year. However, Baltic states, the speed at which this ratio has the last quarter ended with a loss, and the been growing causes some concern. overall annual result stood at LTL 867.3 mil- Therefore, it is only natural that the lending lion, down by a quarter compared to the pre- flows of banks penetrating through a very vious year. 2008 was a profitable year for nine tight risk assessment ‘sieve’ have almost de- credit institutions and seven incurred losses pleted. Since December 2008, indicators of (in 2007, only two branches of foreign banks loan agreements have been negative which failed to break even). The beginning of 2009 means that monthly loan repayments ex- was extremely rough for credit institutions ceed newly issued credits. These trends also as the total loss of Lithuanian banks reached changed the path of loan portfolio move- LTL 20.1 million in the first quarter. These re- ments. Having settled at the peak in No- sults are hardly surprising since the banking vember 2008, the volumes of loans issued system which relies heavily on the financial by credit institutions began their downward health of its customers responds sensitively to slide. And although the annual increase in the ever increasing macroeconomic ‘woes’ of the loan portfolio stood at 10% in March, it was national economy. A double-digit unemploy- virtually the last year’s result as the volume ment rate, higher number of corporate bank- of credits contracted by almost 2% compared ruptcies and deteriorating business prospects with December 2008. In the first quarter, the in nearly every segment of the economy in- value of loans issued by banks to businesses creases the lending risk of banks forcing them and households dropped by 2.6% and 1.1% to cushion against these risks by higher pro- respectively. visions. These precautions are simply necessary for the banks as shown by rapidly deteri- Lithuanian households began generating orating quality indicators of the loan portfolio. negative total loan flows to banks this Feb- The ratio between the liabilities of customers ruary. As regards the flows of loans issued at least 60 days delinquent in repaying their to private customers by type (see Diagram loans and the loan portfolio rose to 2.91% 10.3), it should be noted that people were in the first quarter of this year from 1.14% most eager to get rid of consumer loans and at the end of last year. And even though the other loans.2 This behaviour of households ratio is not that bad compared to the other is hardly surprising as people try to reduce

2 Other loans include loans for businesses, debt consolidation, studies, etc.

Financial market 61 their periodic liabilities as much as possible by type of leased assets shows a low degree during economic downturn. Consumer loans of diversification in this respect. At the end of for other than the basic goods and services the first quarter of 2009, road vehicles and with quite sizeable interest rates are often re- cars comprised almost 64% of the entire leas- paid immediately, even using the ‘rainy day’ ing portfolio, while the so-called productive funds, to alleviate the financial burden during investments in capital goods and industrial this period of uncertainty. installations (except heavy-duty vehicles) accounted for a relatively small share of the A complete standstill in the residential prop- leasing portfolio (27.6%). It is yet another erty market is already reflected by statistics indicator showing that the Lithuanian econ- published with some delay and indicating a omy laid a very weak foundation for future negative growth of mortgage loan contracts. growth during the upturn phase. As indicators of the labour market and the prospects of employers continue to deterio- As regards liabilities of credit institutions, it rate at a record pace, Lithuanians are reluc- should be noted that the annual growth of tant to risk undertaking a long-term mort- deposits held by the private sector in credit gage loan burden. institutions virtually stopped growing in the first months of this year. While the annual As the cost of borrowing in the litas and euro increase in bank deposits by businesses and continued to move in opposite directions, the households stood at 10% and 20% respec- structure of credits issued to the private sector tively by the middle of last year, the annual has changed dramatically in terms of the pre- growth of deposits of the private sector is ferred currency. In March 2009, litas-denomi- close to zero at the moment. Deposits by nated loans accounted for 32.7% of the port- households rose by a mere 3.5% year-on- folio, down by 12.5 percentage points from the year in March, while deposits by businesses end of 2007. Both households and businesses in the banking system fell by 8% on average were reducing their liabilities to banks in the year-on-year in the first three months of this national currency and preferred to borrow in year. Statistics of deposit flows clearly show foreign currencies, mostly the euro. The lat- that households are very vulnerable to inten- ter trend applied both to new credits and to sifying public rumours about the pressure to refinancing of previous liabilities. Households the national currency. responded extremely sensitively to higher interest rates of litas-denominated loans. New- Despite very attractive interest rates offered ly issued litas-denominated loans in February by banks for deposits in litas, the annual and March accounted for just a quarter of all change in the balance of household depos- new credits. These statistics may also be con- its in litas has stayed in a negative territory strued as an indicator of customer sensitivity since December 2008. Meanwhile, euro-de- to risks. It is obvious that currently Lithuanian posits attracted by credit institutions retained businesses and households are reacting more their high rate of growth which was as high sensitively to higher interest expenditure than as 50% this March. As a result, the percent- to any rumours about the risk of exchange age of euro-deposits swelled by as many as rate stability. 8 percentage points year-on-year and comprised more than a quarter of the amount of Among alternative non-bank lending sources deposits attracted by the entire Lithuanian in Lithuania, the largest market share is held banking system. by leasing companies. At the end of the first quarter of this year, their assets comprised As stock markets ‘kept sinking to new lows’, LTL 10.4 billion, i.e. up to a tenth of the pro- last year was rather forgettable with regard jected GDP. As the main sectors (i.e. real es- to investments in collective investment un- tate, transport, etc.) continued to face a deep dertakings, a substitute for deposits offering downturn, the activities of leasing companies more freedom of choice. Although the be- previously ‘fed’ by the success of these sec- haviour of collective investment entities (see tors began to stall quite rapidly. In the first Diagram 10.4) has been rational and no one quarter of this year alone, the leasing port- was in a hurry to leave the market during the folio contracted by more than 8%, and leas- downturn with a considerable loss, their as- ing volumes fell by more than 12% compared sets have been melting rapidly so far. Since to the ‘spike’ seen in the middle of last year. the fourth quarter of 2007, the value of net Analysis of the consolidated leasing portfolio assets of mutual funds3 has fallen 3.5 times,

3 Including an investment company with variable capital.

62 Lithuanian Economic Outlook Diagram 10.4 The assets and the number of participants of Lithuanian collective investment undertakings

1400 49 1267.0 1261.4 1200 42 43.4 42.9 43.0 42.4 41.4 42.2 995.3 1000.8 1000 35 899.3 36.4 832.0 854.8 800 30.5 28

601.4 623.3 600 24.2 21 497.8 505.2 19.7 386.7 364.1 400 16.4 14 14.5 12.6 200 7

0 0 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 I II III IV I II III IV I II III IV I

Assets, LTL Mio (scale on the left) Number of participants, thou (scale on the right)

Source: Lithuanian Securities Commission and the indicators recorded in the last quar- vestment undertakings by region shows that ter of 2008 and the first quarter of 2009 were more than a half of securities bought by the down by more than 25% compared to the sector (except units of funds) were from the starting position of this financial instrument CIS countries. The Baltic states and Western in Lithuania in 2006. European regions with their respective shares of 21% and 14% of total direct investments In terms of investment products comprising are the other two significant directions of in- the assets of collective investment undertak- vestment strategy. From the macroeconomic ings registered in Lithuania, the overall strat- angle, this mix is quite risky since the old egy of the sector remains high-risk even in members of the EU are likely to face a lengthy this period of instability. In March 2009, stock downturn and the Baltic states should brace investments comprised the largest percent- themselves for the deepest recession in the 4 age (32.4%) of the portfolio of funds. And region. At the same time, any recovery in the although the percentage of stocks in total as- CIS countries, especially Russia, will depend sets of Lithuanian collective investment un- on the movement of oil prices whose trend, it dertakings fell by as many as 16 percentage seems, has been reversed already. points year-on-year to 32%, investments in stocks and equity funds taken together still As regards the outlook for this year, the fi- exceeded 50% of total assets of the sector. nancial sector will also face serious challenges Judging by investments of an average player, as the national economy continues to plunge this category of funds is the most popular down at a double-digit pace and market play- among minor investors who took the brunt of ers suffer from a decline in real income and the loss incurred by financial markets. higher unemployment risk. At present, the immediate objective should be putting the Analysis of the direct investment position credit risk under control and increasing oper- of management companies of collective in- ating efficiency.

4 Excluding investments in units of equity collective investment undertakings.

Financial market 63

DnB NORD būstas

11. Real estate market 11. Real estate market

Real estate markets of a number of countries their effects on the real estate market and de- have found themselves in a major standstill termined the average duration of a downturn as the global financial crisis cut the vital ‘ar- in the real estate market and decline of home tery’ of lending and the demand for housing prices (see Diagram 11.2). According to them, went down. The number of housing contracts a downturn in the real estate market caused plunged to record lows in nearly every major by historical financial crises stretches out over economy and prices began their steep down- six years on average and home prices decline ward slide giving in to the pressure (see Dia- by about 36% from the last ‘peak’. Although gram 11.1). Property developers which lost all the crises referred to in the analysis differ their projected income began delaying pay- in both their nature and scope, this assess- ments to their contractors and suppliers of ment enables to draw at least the preliminary materials. These signals of insolvency soon guidelines for projecting medium-term trends had a knock-on effect on the entire economy in different regions. It is only natural that the triggering a wave of bankruptcy among con- countries which underwent a more significant struction companies and businesses indirectly overheating of real estate will face a deeper related to the real estate market. This way one price decline, while housing markets of more of the fastest growing sectors in recent years dynamic economies will recover in less than 6 turned into one of the major weights plum- years. However, what should be emphasised meting national economies into the quagmire is the fact that the economies of different re- of recession. gions have achieved a high degree of integration in recent years. This helped countries to The main question keeping both the market grow during the upturn period but such close players and macroeconomic ‘gurus’ sleep- mutual dependence may become an obstacle less at night is when the downturn is likely on the road to recovery for the economies of to end. Carmen M. Reinhart and Kenneth S. individual countries in these difficult times. Rogoff, economists at University of Maryland and Harvard University, carried out a histori- Ongoing processes in the Lithuanian residen- cal analysis of financial crises worldwide and tial property sector have convinced even the

Diagram 11.1 Residential real estate prices, annual change, %

-10

-20

-30

-40 UK Latvia France Poland Austria Finland Ireland Estonia Norway Sweden Lithuania Germany Denmark

2007 2008

Source: RICS, ft.com, real estate agencies

66 Lithuanian Economic Outlook Diagram 11.2 Peak-to-trough real housing price declines and years duration of downturn*

10 6

-10

-20

-30

-40 -35.5

-50

-60 UK (2007) USA (1929) USA (2007) Spain (1977) Japan (1992) Korea (1997) Austria (2008) Finland (1991) Ireland (2007) Iceland (2007) Norway (1987) Norway (1899) Sweden (1991) Hungary (2008) Thailand (1997) Malaysia (1997) Columbia (1998) Argentina (2001) Indonesia (1997) Philippines (1997) Historical average Hong kong (1997)

Housing real price decline**, % Duration of downturn in years

Notes: * Each banking crisis episode is identified by country and the beginning year of the crisis; ** The historical average reported does not include ongoing crises episodes; consumer price indices are used to deflate nominal house prices.

Source: C. M. Reinhart, K. S. Rogoff (2008). “The Aftermath of Financial Crises” biggest downturn sceptics that this market The existing situation on the housing market is develops in cycles. Real estate agencies also well illustrated by the statistics on real estate admitted that the housing market has en- contracts. It should be pointed out that housing tered into the recession phase as their esti- sellers managed to retain rather solid indicators mates indicate that residential property pric- of trading in residential properties last year. es in Lithuania fell by almost a quarter last Even though the overall number of contracts year. The steepest decline was demonstrated fell by 32% compared to 2007, monthly sales by the prices of new mass-produced homes still comprised about 2,700 units on average. as a number of property developers overesti- The relevant indicators of the first quarter of mated their success and were unable to bal- this year already reflect deep market stagna- ance their cash flows. Early 2008 saw some tion. According to preliminary estimates of the attempts to maintain the price level relying Centre of Registers, the number of contracts on additional service packages boosting the contracted by nearly 60% year-on-year, and welfare. However, the first cases of an open the average monthly indicator was just above price slashing appeared in the second half of 1,000. The overall monthly result is likely to the year. These trends of price movements be even worse as this macroeconomic ‘curb’ point out to the fact that soon time will be (see Labour market and household income), ripe to start ‘feeling for the bottom’ and buy. which stopped any growth in this sector, has Sadly, macroeconomic and especially labour not finally tightened. market indicators show that the number of In terms of a short-term outlook of this sec- such ‘hunters’ will be quite low. In addition tor, it is useful to take a look at the neigh- to the decline in housing demand, players of bouring countries. Many analysts often note this market find themselves with their backs that the Lithuanian real estate market is fol- against the wall because of a tighter lending lowing in the footsteps of Estonia and Latvia, policy of banks. As the indicators of home sale albeit with a 6–9 month lag. According to Sta- contracts deteriorated, prices fell and the risk tistics Lithuania, the number of housing pur- level of real estate projects rose, the costs of chase contracts in Estonia fell by a third last borrowing were raised accordingly. year compared to 2007. In Tallinn, real estate

Real estate market 67 Box 11.1 Modernisation of public buildings and apartment houses

Apartment house renovation model in brief: • State aid for housing modernisation is 15% if the energy saving effect is achieved. • Private customers receive 20-year loans with a 3% fixed interest rate. • The state covers 100% of loan costs to low-income families. • After renovation, the aggregate amount of payments for heating and soft loan interest should be below the amount for heating of unrenovated housing. • Heat demand in a renovated apartment building must be reduced by 47%. • Financial assistance must be provided for the preparation and implementation of building's modernisation project. • A special renewable fund must be set up to finance modernisation pooling the resources of EU Structural Funds, loans of international financial institutions, national budget and commercial banks.

Having identified the problems of stalling engine of the national economy, the government chose to improve energy efficiency of buildings as one of the priorities of the economic stimulus plan. It seems rational at first glance as you can kill two birds with one stone: upgrade the buildings and support the construction sector which has found itself in a market sinkhole. However, a number of economists find a reason to criticise these objectives. They question the privileges for the construction sector with respect to other industries, reasonability of state aid (i.e. distribution of taxpayer money), timeliness of renovation processes, the issue of consensus in decision-making by residents of an apartment building, etc.

Table 11.1 Multi-storey blockhouses and number of inhabitants living in such dwellings broken down by type of building energy efficiency, as of 2008–2009 heating season

Heating Heating price Share of such Number of inhabit- consumption to heat 1 sq. m dwellings in ove- ants, living in such (VAT included) rall housing stock dwellings, Mio

I. Multi-storey blockhouses, where heating consumption is most 8 kWh/m2 2.00 Lt/m2 4.6% 0.09 effective (newly constructed high quality dwellings)

II. Multi-storey blockhouses, where heating consumption is low or 15 kWh/m2 3.75 Lt/m2 17.3% 0.36 medium (newly constructed and other heat-saving dwellings)

III. Multi-storey blockhouses, where heating consumption is high 25 kWh/m2 6.25 Lt/m2 55.7% 1.17 (old-construction not renovated dwellings)

IV. Multi-storey blockhouses, where heating consumption is most 35 kWh/m2 8.75 Lt/m2 22.4% 0.47 ineffective (old-construction dwellings with bad thermo-isolation)

Source: http://www.lsta.lt

Of course, renovation would definitely improve the energy efficiency of buildings and increase the national welfare level. Data from the Lithuanian District Heating Association illustrate the need for housing renovation. They reflect a considerable gap in the amounts of heating bills among flats with different heat insulation. During the 2008–2009 heating season, owners of old and poorly heat- insulated flats paid LTL 8.75 per 1 sq. m for heating, i.e. 4.4 times more than people living in newly-built flats (see the table). The sad thing is that 78% of all homes in Lithuania have low energy efficiency, and about a fifth of all homes are unrenovated apartment buildings which consume considerable volumes of heat. Out of the total number of people living in apartment houses, over a half of the national population live in unrenovated homes with poor heat insulation. The seriousness of the problem was obvious a long time ago, but the flywheel of renovation has failed to start racing. At first, the process lagged due to a lack of attention from construction companies targeting windfall profits on new homes, while later renovation efforts were hampered by the stalling link of public financing in the modernisation process. Today we have a brand new housing renovation model prepared by the Ministry of Environment and the Ministry of Economy. The government has set ambitious targets to renovate 1,000 apartment buildings every year (until now only about 200 buildings underwent renovation in a year), but the swamp of uncertainty and obscurity is even larger. This version of financing the renovation process is based on financial management models of pooling the resources of Structural Funds, public and private sectors recommended by JESSICA,1 a joint initiative of the European Commission and European Invest- ment Bank. The financing mechanism prepared under these schemes would operate as a renewable fund in Lithuania pooling the resources of state aid and Structural Funds. This ‘common pool’ would comprise up to 40% of the total funding demand. The remaining portion of the total amount planned for renovation of apartment houses would be contributed by commercial banks. Flat owners wishing to renovate an apartment building will have to take loans with a 5% down-payment and assume long-term (up to 20 years) obligations with respect to loan repayments and interest payments. It should be noted with regard to the latter that it would be difficult to find a less opportune moment to offer such loans to households. With the labour exchange facing record numbers of unemployed people and the unemployment rate lingering in a double- digit zone, Lithuanians feel very anxious about the future and are actively tightening their belts. Therefore, it will be extremely difficult to convince them of the necessity to take out a dubious loan (speculation that interest on these loans will be fixed at 3% is questionable until the proposals of commercial banks willing to take part in the renovation processes are received). Especially when the motivation to renovate homes will be undermined by the likely decline in heating prices. The interest of credit institution in this mechanism also raises a number of questions. Given the lending processes of recent years, the percentage of bank loan portfolio related to real estate projects has increased considerably. These types of loans issued by credit institutions to business customers comprise 22% of total loan portfolio, while the share of mortgage credits to households stands at 31%. Moreover, the percentage of bad loans in this segment is growing rather rapidly and the banks, despite the current downturn, will continue to avoid additional risks or credits will not be financially attractive to customers. The tension could only be relieved by additional state guarantees, credit insurance or a stronger contribution of the above-mentioned renewable fund to the project. In summary, it should be noted that renovation of homes considered by the Cabinet is not a cure-all for the national economy, especially as it moves in the opposite direction to market forces and expectations. A more attractive scheme is necessary to attract private capital and raise motivation of the population since households try to avoid any additional risks during the crisis.

Source: http://www.eib.org; http://www.skatinimoplanas.lt/; Lithuanian District Heating Association

1 Joint European Support for Sustainable Investment in City Areas.

68 Lithuanian Economic Outlook Diagram 11.3 Dynamics of commercial real estate space, thou sq. m

1000 925 900 860 200 800 760 200 700 160 607 225 600 530 225 102 500 225 425 80 155 400 65 160 300 90 500 500 200 435 435 375 375 350 270 290 100 0 2007 2008 2009 F 2007 2008 2009 F 2007 2008 2009 F Office premises Retail trade premises Warehousing premises*

Vilnius Kaunas Klaipėda Total

F – forecast; * districts of these cities

Source: Colliers International agencies2 recorded a 60% drop in the month- cord high in the last 15 years. Moreover, con- ly number of closed housing sale contracts as struction companies came up with yet another the relevant indicator fell from 1,100 in early proposal on how to ‘cure’ the real estate mar- 2007 to 375 last December. ket suggesting that the excess unsold homes should be handed over to the government In terms of movements of housing prices, at net cost thereby implementing the social Latvia was leading the trio of the Baltic states housing development plans. To ensure mutual which shared all anti-records within the Euro- benefit, such processes should be undertak- pean region. Compared to the peak of 2007, en openly and transparently by setting equal prices fell sharply by more than 36% in Latvia competition terms for everyone. However, we and by 27% in Estonia last year. The prices for believe that the biggest challenges lie here. mass-produced residential properties dropped to the range of 700–1,600 EUR/sq. m in Tal- Moreover, the government is trying to extend linn and 900–1,500 EUR/sq. m in Riga. a helping hand to Lithuanian property developers by attaching extra importance to ener- Property developers in Lithuania plan to reen- gy efficiency and maintenance of jobs in the ergise the housing market by cutting the sup- construction sector in its economic stimulus ply considerably. There is some speculation plan (see Box 11.1). that no new housing projects will be carried out in the country for the next 3 to 5 years. Last year, we anticipated that excessive opti- However, if we compare the numbers of flats mism of construction companies and the first built throughout the year by all three Baltic symptoms of an economic downturn was a states it becomes obvious that this strategy is menacing combination for the commercial too little too late for Lithuania. Last year, the property sector. This year we have already number of new flats on the market dropped seen these insights materialise. Even though by 25% and 13% in Estonia and Latvia re- the first signs of recession were obvious last spectively compared to 2007. In Lithuania, year, the pool of commercial properties in all meanwhile, the inertia of housing market pro- segments grew considerably in 2008 (see cesses still drove the supply of new flats up by Diagram 11.3). The strongest growth was re- 27%. As a result, the number of newly built corded by the warehousing segment (up by flats reached nearly 12,000 climbing to a re- almost a quarter), followed by more modest

2 Information of Ober-haus real estate agency.

Real estate market 69 increases in the area of retail and office space around 6% and is likely to go up considerably (up by 13% and 16% respectively).3 The oc- this year. Warehouses around these two cit- cupancy rate has declined dramatically both ies were also emptying, and the vacancy rate as a result of a new injection of new com- in Vilnius and Klaipėda was close to 8% and mercial properties and financial difficulties 16% respectively in January 2009. Kaunas, faced by tenants. In terms of modern office however, displayed different trends in these space in the capital, the vacancy rate went up segments of the commercial property mar- steeply by 10 percentage points last year and ket. Market analysts predict that Kaunas has reached nearly 12% this January. Operators the most stable outlook for the next year. Due of both class A and class B offices failed to re- to a limited supply of both warehousing and tain their tenants. Facing a shortage of orders retail space, the vacancy rate was below 2% and financial difficulties, many companies at the end of 2008 and the indicator is un- went on a ‘crisis diet’ cutting their appetite for likely to plummet this year as well. non-basic, luxury and image-building costs in With regard to the development of the com- the first place. Many businesses decided to mercial property market in the medium term, abandon their plans to have a modern office the sector in Lithuania can be expected to re- in the city centre. cover only after the macroeconomic health of In terms of the warehousing and retail seg- the country improves, its reputation on for- ments, the situation is similar in Vilnius and eign markets is restored, international trade Klaipėda. A ‘batch’ of new commercial prop- flows are reenergised and external investors erties supplied to the market against the are again able to see the potential for break- backdrop of diminishing financial capacities throughs in the region. Depending on the and needs of tenants had a negative impact ability of Lithuania and the economies im- on the occupancy rate and asking rent. At the portant for the country to tackle the current end of 2008, the vacancy rate of retail prop- downturn, the real estate market may begin erties in the capital and port city fluctuated at to recover in no less than 3 years.

3 Statistical information published by Colliers International was used for the review of commercial property market.

70 Lithuanian Economic Outlook 12. Agriculture 12. Agriculture

At the end of April, Statistics Lithuania pub- tor was up by 1.4% at constant prices and lished a press release on gross domestic prod- by 13.4% at the then prices compared to the uct saying that value added fell by the smallest previous year (see Diagram 13.1). It should margin in agriculture during the first quarter be noted that agriculture was one of a hand- of this year. Indeed it seems that agriculture ful of sectors of the Lithuanian economy to is the only industry to be little affected by the boast a positive year-on-year change in value economic crisis. Surveys of commercial banks added (at constant prices) in the second half indicate the same thing as banks have a fa- of 2008. vourable view of the industry. However, last year agricultural entities had Historically, agriculture has always been one to face serious difficulties mainly caused by of the most important industries in the coun- price movements unfavourable for farmers try. Although agriculture’s share in total val- both with respect to agricultural production ue added went down from 12.3% in 1996 to and goods bought for agricultural needs. The 4.5% in 2008, it plays an important role in said decline in purchased quantities of animal the current economy of Lithuania. Despite the breeding output was accompanied by an even said decline in its relative weight, agriculture larger fall of produce prices. In the fourth still generates a relatively large percentage of quarter of last year, this fall was caused by gross domestic product compared to the EU a 33% decline in milk producer prices, while average. The growth of production and ex- prices for animals were slightly higher than ports of the food industry, the largest sector one year ago. It should be emphasised that of the national economy, relies heavily on the the development of animal breeding has been results of agriculture. a cause for concern for a number of years At first glance it seems that agriculture was due to a clear downward trend of the num- in good nick last year. An 11% fall in pur- ber of animals. For instance, from 1990 to the chased quantities of animal breeding output beginning of this year, the number of cattle was offset by a marked increase in the output went down by more than three-fold (from of plant production (grain buying-in leaped 2,422,300 to 770,900) and the number of by 43%), and value added by the entire sec- pigs shrank from 2,730,200 to 897,100. To tor increased by a small margin: the indica- meet the needs of pork processing compa-

Diagram 12.1 Value added created by agriculture, annual change, %

25 22.8 18.9 20 9.5 13.4 15

10 16.9 12.5 12.0 7.4 3.6 13.3 5 1.3 2.2 4.2 2.0 1.9 0 -0.6 1.4 -3.9 -6.1 -5 -10.3 -5.8 -10

-15 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

72 Lithuanian Economic Outlook Table 12.1 Key statistical indicators of agriculture, hunting and forestry

Ratio to the Annual growth Year economy’s rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 2911 2953 1786 1820 4.1 1.4 1.9 Value added (at current prices), LTL Mio 3873 4393 2501 2403 4.4 13.4 –3.9 Total production, LTL Mio 8340 10017 5199 5815 5.0 20.1 11.8 Labour productivity, LTL thou** 24.7 37.7 16.5 19.9 47.3 52.6 20.7 Number of persons employed, thou 156.9 116.6 151.4 120.5 9.3 –25.7 –20.4 Average monthly earnings, LTL 1482 1786 1590 1817 79.4 20.5 14.3 Fixed investments, LTL Mio 447 549 270 332 2.5 23.0 23.2 Foreign direct investments 192 269 192 269 0.9 39.9 14.1 (end of period), LTL Mio

* FDI – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania nies, Lithuania would have to raise about 4 can operate profitably, which takes time dur- million pigs. Danish businessmen, who have ing a downturn. encountered problems trying to expand pig Changes in the production and prices of oth- breeding in Lithuania, indicate that Denmark er agricultural output are also less than en- raises about 25 million pigs annually, even couraging. In the first quarter of 2009, pur- though the country’s territory is 1.5 times chased quantities of animals and poultry (by smaller than Lithuania’s. live weight) fell by 11% year-on-year. At first The increase in the output of crop production glance, buying-in of cattle declined fraction- was offset by an almost 40% year-on-year ally (5%). However, the decline in the over- decline in grain prices in the fourth quarter all indicator would have been much larger if of 2008. Farmers suffered an extra blow from not for an 18% increase in cow slaughtering. the prices of mineral fertilisers which nearly Moreover, slaughtered cows comprised almost doubled. This factor also affected the results a half of total cattle. This fact is disconcerting of dairy companies, which were hit by a sharp since farmers are forced to slaughter cows fall in dairy producer prices and the fact that because of falling milk producer prices which the so-called herbage fodder was being pre- means that milk production is likely to decline pared at the time when fuel prices were at in future as it is difficult to quickly restore a record highs. cattle herd. Although swine producer prices remained virtually unchanged in a year, buy- Although prices of mineral resources used in ing-in quantities fell by 25% year-on-year in agriculture began falling at the end of last the first quarter of this year. Poultry producer year, the situation in the sector improved just prices contracted by almost 15% and buying- marginally in the first quarter of this year. in quantities fell by 5%. Farmers are also struggling with continuously declining producer prices. The most affected The beginning of this year was slightly better are dairy farmers as the annual drop in milk for crop producers. In contrast to last year, producer prices exceeded 40% in the first half buying-in of almost all types of output in- of the year. So far, intervention by the Euro- creased in the crop production sector in the pean Commission which renewed its export first quarter of this year. Buying-in of- cere subsidies for dairy products exported to third als rose by 55%, potatoes by 37%, vegeta- countries at the beginning of the year and bles by 0.7% and buying-in of fruit doubled subsequently raised them on 20 February had year-on-year in the first quarter of this year. little, if any, effect. However, it would have However, the relevant producer prices fell by been naive to expect the immediate results similar margins or even sharper, by 47.6%, as this measure should firstly revive exports 17.5%, 11.3% and 46.5% respectively. Given and ensure that milk processing companies these opposite trends, farmers are unlikely to

Agriculture 73 see any considerable increase in their sales Maybe the deteriorating situation in the con- revenue. struction, transport and other sectors of the national economy will make some workers re- However, financial results of farmers for the turn to agriculture naturally. However, as time first quarter of this year should be improved went by, it became unpopular and unfashion- by movements in price indexes of goods ac- able to be a farmer. Therefore, we believe that quired for production of agricultural output the EU financial support must also be accom- and invested in agricultural production. The panied by actions of the national government gross index fell by 14.2% year-on-year. Costs aimed at improving a farmer’s reputation for of farmers were only affected by a rough- instance, introduction of the most advanced ly 20% increase in prices of chemical plant global technologies and forms of business or- protection products and electricity as well as ganisation, inflow of foreign direct investment slightly higher (2.8%) prices of combined fod- and development of a training framework for der for poultry. The steepest year-on-year de- highly-skilled labour force. The time has come cline was in the prices of other fodder (grain for Lithuania to finally realise that in addition and offal) and agricultural structures. Prices to being a style of life agriculture can also be of building materials, petroleum products and a lucrative business. mineral fertilisers dropped by 13.7%, 20.4% and 8.0% respectively. Prices of agricultural Another fundamental problem for Lithuania is machinery and vehicles also declined slightly. a lack of a single food sector in the national economy uniting agriculture and process- Current trends in the agricultural industry ing entities, which negatively affects both on the back of deep recession of the global sides. Lithuania is dominated by small farms economy indicate that short-term outlook for and small processing companies which incur the sector is not as gloomy as for other sec- higher production costs. The European Com- tors of the Lithuanian economy, but even ag- mission estimates that Lithuania lingers at the riculture is unlikely to avoid a downturn. In bottom of the list of EU countries in terms of the immediate future, milk producers will find milk production per farm. The indicator is low- it most difficult to survive. However, food is er in Bulgaria and Romania only. The situation food and after the crisis is over its demand could be improved by closer cooperation of will undoubtedly begin to grow worldwide. farmers (according to the European Commis- Therefore, the Lithuanian agricultural sector sion, Lithuanian cooperative companies united should have a bright future ahead of it, es- 10% of agricultural producers in 2007, while pecially given the considerable inflows of EU 25% of people living in rural areas of older EU support (LTL 14.4 billion will be appropriated member states belong to cooperatives) as it for Lithuanian agriculture and rural develop- would give more power to farmers in negotia- ment in 2007–2013). However, the question tions with processing companies. The number is: will there be any entities able to use the of small companies in the Lithuanian meat support efficiently? A lack of skilled labour processing sector is excessive. Undertakings in agriculture became a serious problem in of this type are unable to use their production Lithuania as far back as 2007, and Lithuanian capacities in full and find it extremely difficult farmers began talking about the possibilities to penetrate foreign markets as they can only to invite people from third countries to work offer small quantities of their products and in agriculture. Indeed, since the accession to are unknown. Processing entities should also the EU until last year, the number of workers change their approach to farmers. It seems decreased by half in the sector. On the one that food producers chose the easiest strat- hand, it is a positive development showing egy: to maximise their profits here and now. that farms are becoming increasingly mod- However, this strategy is doomed to fail as ern, labour productivity is improving, un- one day they may find it impossible to obtain skilled workers are leaving the industry, etc. raw materials. Instead of a short-sighted ap- On the other hand, it is obvious that some proach to their business, they should engage skilled labour also drained away from the sec- in dialogue and coordinated activities with tor as people went abroad looking for work or farmers. Needless to say that the government were ‘successfully absorbed’ by the construc- and various associated structures should also tion sector which offered much higher pay. join in addressing this problem.

74 Lithuanian Economic Outlook 13. Mining and quarrying 13. Mining and quarrying

When the national economy is broken down exports, which accounted for 42% of output into sectors according to the classification of sold and went down by 2 percentage points economic activities, industry on the first level (see Diagram 13.2). comprises three economic activities: mining Mining boasts excellent financial indicators: industry, manufacturing industry and supply in the last decade it stood out for its excellent of electricity, gas and water (energy). Since profitability, exceeding 25% last year and Lithuania is not rich in natural resources, growing despite the above-mentioned de- mining is the smallest sector of the econo- cline in mining in the second half of the year. my and has three branches: oil production, Total liabilities of the sector’s companies were peat production and quarrying of stone, sand relatively much lower than the entire econo- and clay. Last year, this sector accounted for my’s and the debt ratio stood at just 0.23 at just 0.41% of value added generated nation- the end of 2008 (see Table 13.1). Last year, wide, while the share of the entire mining in- the sector enjoyed a considerable increase dustry was above 22%. The growth indicator in investments in tangible assets which grew of the mining industry was negative for the 1.7 times compared to the previous year. The fifth consecutive year. In 2008, the industry’s indicator improved markedly in the quarry- value added at constant prices fell by about ing sector as well as in oil production. Last 7% from 2007 and the decline even acceler- year, the average wage in the mining industry ated in the second half of last year (see Dia- went up by more than a fifth and exceeded gram 13.1). While the prices of output grew the national average almost 1.3 times, but moderately in 2007, they increased consid- the number of workers fell by 8%. erably last year. As a result, value added at the then prices rose by 8% compared to the Several years ago, the mining industry was previous year. A positive result was ensured dominated by oil production in Lithuania. Re- by the first half of the year since the annual cord volumes of oil were produced in 2001 change in these prices contracted significant- (about 470,000 tonnes) and oil production ly in the following six months and the nomi- accounted for over 78% of value added gen- nal value added was lower than a year ago. erated by the mining industry in 2001. How- Turnover of the sector concerned increased ever, since then the relative weight of oil pro- by about 7% last year, sales on the domes- duction has been declining steadily and fell tic market were growing much faster than to just 40% last year. In 2008, only 128,000

Diagram 13.1 Value added created by mining and quarrying industry, annual change, %

20 13.4 15 10.1 8.0 10 22.0 10.1 4.1 5 12.1 0.8 15.2 8.7 4.9 8.7 2.6 0 -2.0 -1.8 -3.9 -5.2 -4.6 -7.2 -5 -8.6 -12.5 -10 -15 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

76 Lithuanian Economic Outlook Diagram 13.2 Sales of mining and quarrying products, LTL Mio

700

600

275 500 270 226 400 224 117 215 238 300

200 385 339 346 310 291 250 100 209

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania tonnes of oil was produced since prospected ever, their sales contracted to just LTL 100 fields are almost depleted, while the Geologi- million, and over 80% of output was sold on cal Survey held a tendering procedure for oil foreign markets. Annual changes in produc- prospecting and production at new fields in tion and sales correlate weakly since much 2006. Since then, two winning tenderers – LL of the output is stored and sold during next Investicijos and Geonafta − have been in- year. Lithuania has vast resources of peat and volved in a legal battle. And although the the demand is strong even during the crisis. companies seem to have finally come to an Therefore, peat producers are full of optimism agreement and intend to cooperate, the pros- despite suffering a small loss last year due to pecting work was been quite sluggish and the poor first half of the year. Durpeta, one rather unsuccessful so far. J. Mockevičius, of the largest peat producers and processors, head of the Geological Survey, says that no built a new modern peat processing plant in positive changes in the oil production indus- Šepeta, Kupiškis district, investing LTL 15 mil- try should be expected this year. Moreover, lion. The company is expected to create 50 operations of oil production companies may additional jobs in summer for seasonal work be negatively affected by the proposal put in Kupiškis alone. Šilutės Durpės, a company forward by the Government to scrap roy- of the German Klasmann-Deilmann group, alty tax incentives and impose a 20% basic also plans to expand. tax rate on all oil and gas fields. “If we go The results of the quarrying sector, which back to a single tax rate for all fields, oil pro- depend quite strongly on the construction duction in small fields could be suspended,” industry, were respectable last year: value says Mockevičius. However, this implication added at the then prices increased consider- is doubtful as the current tax burden for oil ably due to higher product prices and stood production is really low in Lithuania, while the at around LTL 180 million, or over 44% of sector’s profitability rate is above 35%. the total indicator of mining, turnover rose Last year, production of peat and peat bri- by 12% to LTL 340 million and average profit- quettes rose considerably compared to the ability of companies reached 26%. However, previous year, and value added, measured at there is little doubt that this year’s results will the then prices, generated by peat producers be much worse as the construction industry is increased by about 8% during the year. How- set to undergo a deep downturn and another

Mining and quarrying 77 Table 13.1 Key statistical indicators of mining and quarrying

Ratio to the Annual growth Year economy’s rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 309 287 171 149 0.4 –7.2 –12.5 Value added (at current prices), LTL Mio 380 410 214 205 0.4 8.0 –3.9 Total production, LTL Mio 777 834 450 414 0.4 7.3 –8.0 Labour productivity, LTL thou** 121.8 143.2 68.2 69.8 185.4 17.6 2.4 Number of persons employed, thou 3.1 2.9 3.1 2.9 0.2 –8.1 –6.1 Average monthly earnings, LTL 2389 2887 2561 2947 128.4 20.9 15.1 Fixed investments, LTL Mio 53 90 31 45 0.4 69.5 43.9 Foreign direct investments 187 188 187 188 0.6 0.7 4.6 (end of period), LTL Mio Sales of goods and services, LTL Mio 739 734 419 372 0.3 –0.7 –11.2 Gross profit, LTL Mio 320 324 184 164 0.8 1.4 –11.0 Operating profit, LTL Mio 187 173 109 74 1.7 –7.6 –32.3 Profit before tax, LTL Mio 179 186 101 101 2.3 4.0 0.3 Assets (end of period), LTL Mio 1041 1150 1041 1150 0.6 10.5 3.8 Liabilities (end of period), LTL Mio 233 262 233 262 0.3 12.6 –21.5 Return on sales, % 24.24 25.39 24.12 27.25 659.2 – – Return on assets, % 18.40 16.66 19.91 17.60 396.9 – – Debt ratio (end of period), % 0.22 0.23 0.22 0.23 50.9 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

industry important for quarrying and produc- budget spending which will not be fully offset tion of break-stone, road building and repair, by stronger EU financial support. will also face difficulties due to the reduced

78 Lithuanian Economic Outlook 14. Manufacturing 14. Manufacturing

Last year, the manufacturing industry (MI) re- the highest level on record. Without MN’s in- mained the largest sector of the Lithuanian put, the relevant indicator rose by a percent- economy even though its share in the GDP age point to 54.5%. In a year, the volume of structure fell for a third consecutive year to exports went up by 7.5% to LTL 20.6 billion 18.6%. Despite reaching the lowest level since and domestic sales stood at LTL 17.2 million 2000, the indicator was still well above those last year, exceeding the indicator of 2007 by of Latvia and Estonia as well as the EU aver- about 3% (see Diagram 14.2). age. In 2004–2006, the MI grew very strongly as the average annual increase in value The level of productivity of Lithuanian MI added stood at 11% at constant prices in the companies is several times lower than in de- period concerned and was much higher than veloped countries. However, in 2008 it went the economy’s average. Two years ago, the up markedly as the average value added sector’s growth slowed down to 7.5% and fell per employee, measured at the then prices, to a mere 2.1% in 2008 (see Diagram 14.1). was up by a fifth on previous year’s indicator Overall indicators of the MI rely heavily on (see Table 14.1). This year, labour productiv- the performance of Mažeikių Nafta (MN), the ity should not be expected to rise sharply as largest industrial company, which varies from the level of capital investments dropped con- year to year. Excluding MF’s contribution, an- siderably last year, down by nearly a tenth nual changes in value added generated by the in volume compared to 2007 (about 15% at sector concerned were as follows: 12.0% in constant prices). The main contributors were 2006, 10.8% in 2007, 3.9% in the first half of low expectations of businessmen, higher 2008 and –7.2% in the second half of 2008, borrowing costs and lower profitability of a signalling a rather steep downward trend. number of industrial sectors (see Table 4 in the Annex). In addition, the sector concerned A large part of output produced by Lithu- lost its appeal to foreign investors as the flow anian manufacturing industry companies of FDI to the share capital of MI companies is sold abroad. As a result of flat domestic was just LTL 112 million in 2008. consumption and exports of petroleum products which more than doubled, the share of Last year, the MI lost its status as the largest exports in the MI’s turnover soared by more employer in Lithuania since workforce con- than 5 percentage points to 61.2% last year, tracted by 7% to 203,000 and lagged behind

Diagram 14.1 Value added created by manufacturing industry, annual change, %

25 20.4 20

8.7 14.7 15 13.3 11.6 10.5 11.3 6.0 10 0.9 14.0 3.8 9.5 5.1 11.8 5 8.6 9.5 7.5 7.5 2.1 0 -0.7 -2.3

-5 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

80 Lithuanian Economic Outlook Diagram 14.2 Manufacturing industry sales, LTL Mio

40000

35000

30000 20566 19131 25000 15093 20000 13216 11876 15000 10708 9695 10000 16681 17239 13887 10173 11482 5000 7686 8913

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania domestic trade for the first time. The -aver while industry in Estonia has been falling for age wage in the MI rose by a smaller margin 13 months in a row reaching record levels in that across the entire economy (by less than February and March for the entire downturn 17%). As we can see, after an interval of two period (30%). In the first quarter of this year, years labour costs were growing at a slower industrial output went down by 23.2% year- pace than productivity in the manufacturing on-year in Latvia, nearly 12% in Poland, over industry. Despite an increase in the total turn- 14% in Russia and 32% in Ukraine. over, MI companies earned LTL 1.3 billion in Production of manufacturing industry’s com- pretax profits in 2008, or nearly twice as little panies account for the ‘lion’s share’ of visible as one year ago, and the profitability ratio exports of Lithuanian origin and the recovery declined by more than 3 percentage points to of the national economy is believed to be de- a mere 2.3%. Last year saw a slowdown in pendent on the growth of exports. Therefore, borrowing by MI companies. During the year, further development of the economy relies the volume of liabilities rose by less than 2% heavily on the ability of the sector concerned and the debt ratio fell slightly to 0.51. to pick up. General recipes on improving the A very sudden reversal of the trend of pro- situation of the MI can also be found in the duction indicators and a dismal situation in previous issues of the Lithuanian Economic the neighbouring markets leave no hope that Outlook and include the elimination of red tape the MI could manage to avoid a deep down- barriers, improvement of public administra- turn this year. It is also reflected by data for tion and law enforcement effectiveness, elim- the first quarter of this year: output sold by ination of corruption, liberalisation of labour the manufacturing industry at constant prices market, support for export, fostering contacts fell by 15.3%, or by 22% if we exclude MN. with potential investors, widening the range Lithuania is no exception in this respect in of public services (information, etc.) for busi- Europe as the industry is battling recession in nesses, more pragmatism in relations with a number of countries. According to Eurostat, Russia, development of venture capital funds. in March industrial production in the eurozone Long-term prospects of the MI also rely heav- fell for the seventh consecutive month and ily on the overall quality of vocational training the annual decline was more than 20%, the and higher education system, where there is highest fall since 1990 when records began. much room for improvement, as well as ef- Slovakia is sending very worrying signals, ficient collaboration between the academic

Manufacturing 81 Table 14.1 Key statistical indicators of manufacturing industry

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 15152 15476 7891 7708 21.6 2.1 –2.3 Value added (at current prices), LTL Mio 16692 18631 8853 9308 18.6 11.6 5.1 Total production, LTL Mio 52458 64755 28113 32148 32.3 23.4 14.4 Labour productivity, LTL thou** 76.4 91.8 41.1 47.9 118.9 20.1 16.7 Number of persons employed, thou 218.5 203.0 215.6 194.2 15.7 –7.1 –9.9 Average monthly earnings, LTL 1814 2116 1941 2177 94.1 16.7 12.2 Fixed investments, LTL Mio 3176 2872 1764 1511 13.3 –9.6 –14.3 Foreign direct investments (end of period), 12571 7326 12571 7326 23.3 –41.7 –36.2 LTL Mio Sales of goods and services, LTL Mio 46071 56678 24815 27954 26.8 23.0 12.7 Gross profit, LTL Mio 8516 7808 4534 3257 19.4 –8.3 –28.2 Operating profit, LTL Mio 2599 1753 1256 261 17.5 –32.5 –79.2 Profit before tax, LTL Mio 2563 1308 1352 –144 16.1 –49.0 – Assets (end of period), LTL Mio 32554 33486 32554 33486 17.6 2.9 –8.0 Liabilities (end of period), LTL Mio 16824 17084 16824 17084 20.0 1.5 –12.2 Return on sales, % 5.56 2.31 5.45 –0.52 59.9 – – Return on assets, % 8.35 3.71 8.47 –0.83 88.5 – – Debt ratio (end of period), % 0.52 0.51 0.52 0.51 114.2 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

and business communities. The most press- slo Žinios business daily (5 May 2009), the ing issue today is the recovery of the financial Economic Stimulus Plan has had no impact so market as companies are in a severe need of far. The association Investors’ Forum agrees cheap credits. The problem will not be solved adding that the Investment Promotion Pro- without government interference (loan guar- gramme became outdated before it was even antees, etc.) in the immediate future. put to practice and direct contracts with potential foreign investors remained very weak. In addition to exporting companies, it is very By the way, although now the country needs important to support production aimed at the foreign investment more than ever, the role domestic market which drives out imported and efficiency of the Lithuanian Development goods or services. Given the current unem- Agency remain meagre. ployment rate which is close to a record high, it is necessary to stimulate domestic turnover, Nevertheless, there are some encouraging in other words, production of goods and pro- signs: Sunrise and Sunset Commissions are vision of services for our own needs. To quote putting forward recommendations and have Prof. Čičinskas: “It is extremely reasonable to the backing of the Cabinet; the business com- support the activities of small companies, es- munity welcomed new proposals of the Minis- pecially family businesses; the rules for set- try of Economy to support exports by way of ting up, accounting and taxation must be as short-term credits and to provide partial risk simple as possible.” compensation to insurance companies, to de- It seems that the national government under- fine the criteria when preparation of detailed stands the urgency of action but everything plans is unnecessary for extension or restruc- the current Cabinet has done until now was turing of production (which would speed up too little too late. As rightfully noted by Ver- the complex and protracted approval process

82 Lithuanian Economic Outlook of spatial planning documents as well as the ity (the food industry) generated the larg- development of infrastructure for industrial est amount of value added last year. At the parks and facilitate FDI flows). The govern- then prices it comprised LTL 3.4 billion, or ment agreed that the detailed plans in areas 18.1% of the entire MI’s indicator. Its rela- which have the approved master plan of the tive weight used to be even higher in previ- municipal territory and do not provide for con- ous years: having stood at 30% in 1995, it struction of any major infrastructure facilities gradually declined to 17% (2005–2006) dur- can be approved by the director of municipal ing the decade. Two years ago, a different administration instead of the municipal coun- trend emerged as the sector reviewed was cil. The requirement to prepare a detailed plan growing at a much faster pace than the man- will also be scrapped for land lots which are ufacturing industry’s average. Although value being merged or divided, where new buildings added generated by the food industry at con- are planned to be built or the existing ones to stant prices last year fell by 2.3% annually be rebuilt or upgraded on a built-up territory, (see Diagram 14.3), the decline was caused when forests are to be planted on agricultural by short-term adverse circumstances such land according to the approved procedure and as the global financial crisis, massive price in other cases. One can only hope that these fluctuations on global markets and temporary measures will be implemented quickly. suspension of EU export subsidies and does not signal any deterioration in long-term out- The development of the MI relies heavily on look. On the contrary, the United Nations and the situation on export markets and thus many futurologists predict that the demand on the development of the global economy. for food products and their prices will grow However, if the current crisis forces the na- worldwide, so the main premises for the de- tional government and businessmen to join velopment of the national food industry re- efforts in materially improving the business main unchanged. environment and competitiveness, it is very likely that the downturn of the manufacturing In 2003–2007, the annual growth of exports industry and other economic sectors will not was faster than that of domestic sales. How- last long, showing that there is truth in the ever, their share in turnover of companies saying that every cloud has its silver lining. within the food products and beverages industry declined by almost two percentage Food products and beverages points last year to 34% (see Diagram 14.4). In addition to the above-mentioned reasons, Among the sectors of the manufacturing in- the situation was compounded by the weak- dustry reviewed here, this economic activ- ening US dollar as well as depreciation of na-

Diagram 14.3 Value added created by manufacture of food products, annual change, %

25 22.1

20 8.1 15 12.4 10.6 9.8 8.2 10 8.4 4.4 2.6 4.4 14.0 3.9 5 9.8 8.0 10.4 5.4 8.0 7.8 0 -1.4 -2.3 -3.9 -5

-10 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

Manufacturing 83 Diagram 14.4 Sales of food products and beverages, LTL Mio

10000

9000

8000 3359 3234 7000

6000 2409 2119 5000 1733 1445 1237 4000 6405 3000 5750 4740 4207 2000 3557 3753 3913

1000

0 2002 2003 2004 2005 2006 2007 2008 Domestic sales Exports

Source: Statistics Lithuania

tional currencies in Russia, Poland and some in the country lags behind the accelerating other markets important for our exports. food production. For a third year in a row, capital investments This year will not be easy for the food indus- and labour productivity in the industry im- try as signalled by the declining sales in the proved considerably, and the growth of sales first quarter of 2009. As the Lithuanian econ- was accompanied by a shrinking number of omy is contracting rapidly, the domestic de- workers. Last year, the capital investments to mand is weakening, competition from Polish value added ratio reached nearly a fifth and products is strengthening and the situation stood well above the manufacturing industry’s in the neighbouring regions is unfavourable indicator. It is logical that the average wage for exports now. Drop in turnover of almost in the food industry increased by a slightly 10% clearly shows that. Russia has become higher margin than across the entire MI. In a very important market for the food industry 2008, it rose by 17% from the previous year because it absorbs about a third of exported (see Table 14.2). The FDI flow to the industry foodstuffs. However, Russian economy is set stood at LTL 111 million last year and rose by to undergo a deep recession in 2009 which about a fifth compared to 2007. will inevitably restrict import opportunities. For several years, the food industry stood out For a number of years, the milk process- for its almost stable profitability ratio which ing sector has been generating the largest amounted to 5.3% on average in 2003–2006, share of turnover of the food industry, which rose to 7.3% two years ago and fell below was above 26% last year. Following a mas- 3% last year. Still, for a third consecutive sive leap in 2007, the volume of total output year, the sector was more profitable than the sold by milk processing companies (here and entire manufacturing industry. Several fac- further: including products not attributed to tors cloud excellent future prospects of the core activities of the company and services industry: a relatively high debt ratio which provided) grew by just 6.5% to around LTL grew to 0.53 last year; the ratio of total liabil- 3 billion. This deceleration was caused by ities of companies operating in the sector to weaker exports as their contribution to turn- value added generated during the year was over fell by more than five percentage points well above the MI’s indicator (1.09); a recent to 44.4%. The year 2008 will be one of the shortage of local raw materials as agriculture worst years for milk processing companies in

84 Lithuanian Economic Outlook Table 14.2 Key statistical indicators of food products manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 2594 2535 1420 1364 16.4 –2.3 –3.9 Value added (at current prices), LTL Mio 3124 3379 1781 1850 18.1 8.2 3.9 Total production, LTL Mio 8984 9764 4864 5040 17.8 8.7 3.6 Exports, LTL Mio 3234 3359 1801 1726 10.0 3.9 –4.1 Labour productivity, LTL thou** 1) 71.6 78.8 40.8 43.8 85.9 10.0 7.3 Number of persons employed, thou 45.0 44.3 45.1 43.6 21.8 –1.6 –3.4 Average monthly earnings, LTL 1721 2021 1832 2070 95.5 17.4 13.0 Fixed investments, LTL Mio 590 668 316 374 23.3 13.3 18.5 Foreign direct investments (end of period), 1523 1554 1523 1554 21.2 2.0 2.7 LTL Mio 1) Sales of goods and services, LTL Mio 9927 10609 5554 5559 18.7 6.9 0.1 Gross profit, LTL Mio 2391 1974 1379 1027 25.3 –17.4 –25.6 Operating profit, LTL Mio 804 330 486 205 18.8 –58.9 –57.8 Profit before tax, LTL Mio 725 302 439 169 23.1 –58.4 –61.4 Assets (end of period), LTL Mio 6558 6969 6558 6969 20.8 6.3 –0.9 Liabilities (end of period), LTL Mio 3378 3697 3378 3697 21.6 9.4 –5.5 Return on sales, % 7.31 2.85 7.91 3.05 123.3 – – Return on assets, % 12.00 4.34 13.95 4.85 116.8 – – Debt ratio (end of period), % 0.52 0.53 0.52 0.53 104.0 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices 1) Indicator of food products, beverages and tabacco manufacture

Source: Statistics Lithuania terms of profitability because of the surplus uania saw the steepest decline and the low- of products existing on export markets and est price level achieved. However, milk prices the global economic downturn. The decline in have stabilised recently after the EU renewed product prices, which were much higher in and raised subsidies for dairy exports to third the second half of 2007, worldwide as well as countries. the lifting of EU subsidies for dairy products exported to third countries in mid-2007 had Actually, small dairy farms dominate in Lithjua- a strong negative impact. The deteriorating nia. which entails higher dairy production situation pushed all major dairy companies costs. The European Commission estimates in the country into a negative territory last that Lithuania is third from the bottom in the year as their raw materials acquired under list of EU countries in terms of milk production earlier contracts were much more expensive. per farm. In our country, average annual milk As milk processing companies began rapidly production per farm is about 20,000 litres, reducing milk producer prices, farmers have and only Bulgaria and Romania have lower found themselves in an unenviable situation indicators. Therefore, it is hardly surprising as their costs soared last year due to higher that Lithuania has failed so far to utilise the fertiliser and fuel prices. The Ministry of Ag- milk quota granted by the EU, which stood at riculture reported that maximum milk pro- 1.6 million tonnes in 2008−2009, while the ducer prices declined 1.9 times in the period production indicator was below 85%. Last from December 2007 to March 2009 (down year, the buying-in volumes of milk rose by from 923 to 488 LTL/t) and reached the level a mere 2% from the previous year. However, of June 2004. Although milk producer prices an increasing amount of raw milk is being were falling across the European Union, Lith- imported from Latvia. In 2008, imports from

Manufacturing 85 Latvia accounted for about 13% of total con- tively looking for new markets and is eyeing sumption by Lithuanian companies. African countries and Azerbaijan. There is a high degree of concentration in the Fish processing companies increased their Lithuanian milk processing sector. About 95% production strongly in 2007 but slowed down of overall earnings in the milk processing considerably last year earning about LTL 860 sector are shared by five largest companies: million in revenue, up by almost 7% from the Rokiškio Sūris, Pieno Žvaigždės, Žemaitijos previous year. Over 70% of production was Pienas, Marijampolės Pieno Konservai and exported. Vilkyškių Pieninė, whose sales have grown The meat processing industry has been strongly and profit margins have been- re growing strongly for six years in a row, al- spectable in recent years. However, last though it lost some momentum last year. year’s results were disappointing. In 2008, Turnover of meat processing companies rose revenue of Pieno Žvaigždės, one of the larg- by almost 16% to LTL 2 billion, and the sec- est milk processing companies in Lithuania, tor’s share in total revenue of food industry virtually did not change and stood at LTL 663 companies rose by a percentage point to million, but a good profit earned during the 17.5%. A low degree of concentration of com- previous year was replaced by a loss of LTL panies in the sector is inhibiting the growth of 4.3 million. The company exports much of its exports; the percentage of products sold on production to Russia and has optimistic plans foreign markets declined by 1.1 percentage for this year thanks to the above-mentioned points to 21% in 2008. Since the situation of export subsidies as it looks to earn LTL 690 the Lithuanian economy is deteriorating rap- million in turnover and LTL 24 million in pre- idly, immediate prospects of meat processing tax profit. In the first quarter of this year, the companies do not look good as they should company returned a profit. focus more on the penetration of foreign mar- Last year’s results of Rokiškio Sūris were also kets. By the way, Russia has been increasing similar: sales grew marginally to LTL 682 mil- imports of meat and meat products strongly lion and the company incurred a loss of LTL in recent months. 18.3 million. Meanwhile, in the first quarter of Producers of meat products are constantly this year, sales shrank by 5% year-on-year. facing problems with the supply of raw mate- The company expects that its profit margins rials: the majority of them must be imported will be 1–2% and turnover will drop by 14% because Lithuanian cattle and pig breeders in 2009. Having invested about LTL 40 million are successfully selling their animals abroad, to modernise production, the company plans but cattle exports fell by about 7% last year. to invest just LTL 5 million this year. In general, cattle and swine herds have been The Žemaitijos Pienas group earned LTL 472 contracting in Lithuania lately (see Agricul- million in turnover, up by about 2%, and in- ture). curred a loss of LTL 3.7 million last year. In Currently, the concentration process in the the first quarter of this year, the volume of meat sector has accelerated. Looking at indi- output sold declined by a fifth and losses vidual companies we can see that the Biovela shrank by a third year-on-year. group has been reinforcing its position look- Sales of the Vilkyškių Pieninė group rose by ing to acquire new companies, including in 12% last year to LTL 152 million and losses Latvia as well. Its turnover stood at LTL 352 stood at about LTL 12 million. The compa- million two years ago and rose to about LTL ny has grown strongly this year achieving a 500 million last year. Agrovet, one of the turnover of LTL 46 million from January to largest companies in the meat industry which April, up by 39% year-on-year. invests heavily, boosted its sales by 35% for the second year in a row and earned LTL 246 Marijampolės Pieno Konservai is a manufac- million in revenue last year. turer of slightly different products than these four companies. Its product range is domi- The share of bread, confectionery and nated by canned dairy products and milk sugar producers in the output sold by the powder. The company has grown strongly food industry did not change in 2008 and for several successive years, and its turnover stood at around 18%, while their overall rose by 8.3% to LTL 314 million in 2008. As a turnover grew by about 9% to LTL 2.03 bil- result of a steep increase in purchasing prices lion during the year. Exports generated about of raw materials, the company incurred a loss 27% of turnover, a similar percentage to two of LTL 3 million last year. The company is ac- years ago. The said increase in turnover was

86 Lithuanian Economic Outlook caused by higher product prices since pro- clined slightly during the year to 15.4%. The duction of bread and confectionary did not growth of sales relied on the domestic market increase and sugar production declined 1.8 which was negatively affected by higher ex- times to just 70,000 tonnes. This year, sug- cise rates on alcoholic beverages introduced ar production should fall even further as the in early 2008, since exports comprised just sugar quota for the only remaining factory in about 8% of output and did not change dur- Kėdainiai was cut to 64,000 tonnes. By the ing the year. Although the value of production way, retailers noticed that sales of sugar in sold increased, Statistics Lithuania estimates the first quarter of this year rose by a third that the production volume of all main groups year-on-year. This raises suspicion that sugar of beverages, namely, soft drinks, beer, wine may be bought for the increasing production and strong drinks, declined in 2008. Produc- of moonshine. tion of the latter and beer comprised 1.54 million decalitres (dal) and 28.1 million dal Last year, Vilniaus Duona controlled by Finn- respectively in Lithuania last year, down by ish capital raised its product prices by 15%. 17% and 2% from the previous year. This Its sales went up by almost a quarter to LTL year will be a difficult one for the sector as the 119 million but the company incurred a loss of sharp economic downturn coupled with high- LTL 3.6 million. Vilniaus Duona opened a new er excise rates has negatively affected the do- bakery which required significant investment mestic demand and no export breakthroughs and was operating below its full capacity in are also expected. Figures of the first quarter 2008. The company hopes to boost produc- signal that the situation is dire: companies tion through exports to other Baltic states. have reported partial suspension of produc- Having successfully survived the change in tion and layoffs. Moreover, competition from management, candy maker Vilniaus Pergalė imported beverages also intensified. Even the exceeded its targets last year boosting turn- Lithuanian beer, which has strong positions, over by 11% to LTL 82 million and expects to feels the pressure of cheap Polish imports. earn LTL 90 million in revenue this year. Vil- niaus Pergalė has a 3-ha land plot in a pres- Last year, Švyturys-Utenos Alus remained the tigious Žvėrynas area near the new commer- beer market leader with its 46% market share. cial centre Panorama. This April, the company Turnover of the company owned by the Dan- was divided into four enterprises two of which ish Carlsberg group stood at LTL 567 million, will manage real estate. up by 10.2% from the previous year. Com- pared to 2007, the company’s pre-tax profit Last year, turnover of the grain processing fell by 15.6% to LTL 144.5 million. According and fodder sector stood at around LTL 1.5 to the company's press release, the growth billion, or about 13% of the food industry’s of turnover mostly relied on higher product indicator, rising by almost a tenth in a year. prices resulting from an increase in the cost of Exports accounted for over 50% of total rev- raw materials and energy sources. Last year, enue and their share has grown for several the company produced and sold 19.3 million years in a row. Kauno Grūdai remained the dal of drinks, down by 1.4% from 2007. largest company in the sector. Judging from the figures for January to September, its sales In 2008, revenue of Kalnapilio-Tauro Grupė, rose almost 1.6 times in 2008 to over LTL 450 the second largest brewery in Lithuania con- million. trolled by Danish Royal Unibrew, reached LTL 184 million, up by 24% from two years ago. Panevėžys-based Amilina (formerly known Last year, the volume of drinks sold by the as Malsena) retained its high growth rate in company increased by 16% from 2007 to 9.2 2008 boosting sales by about 40% to LTL 227 million dal. Royal Unibrew reported that Kal- million. Last year, the company sold its flour napilio-Tauro Grupė strengthened its posi- and pasta businesses focusing solely on pro- tions both on the beer and soft drinks market. duction of starch, which is expected to grow The report said that the company controlled by about 30% this year and generate about about 25% of the Lithuanian beer market. LTL 170 million in revenue. The company exports 95% of its production. Last year, turnover of Kaunas-based Ragutis, Last year, the growth of turnover of com- a brewery within the Finnish Olvi group, rose panies operating in the beverages sector by 8% from 2007 to LTL 82 million and op- slowed down considerably. Sales rose by more erating profit was just LTL 110,000. Ragutis than 7% to LTL 1.75 billion, while its relative brewed 4.4 million dal, up by 3.1% from two weight in turnover of the food industry de- years ago.

Manufacturing 87 For several consecutive years, Šiauliai-based Textiles and wearing apparel Gubernija operated at a loss. Last year, it incurred LTL 6 million in losses, a result similar This sector, also called the light industry, is to 2007, and revenue plunged by almost a undergoing difficult times. Higher labour costs quarter to LTL 38 million. and an influx of cheap imports from Asia have contributed to a rather poor performance of Last year, total turnover of makers of strong the sector concerned in recent years. In 2008, drinks did not grow much and the situation these problems were compounded by a lack of has been even worse this year. In 2008, working capital after the banks tightened their Kaunas-based Stumbras earned LTL 161 lending policies. As a result, a decline of two million in revenue and LTL 29 million in net years ago was followed by a 12% drop in val- profit, down by 4.2% and 11.6% respectively ue added at constant prices generated by the from 2007. At the beginning of the year, sales light industry in 2008 (see Diagram 14.5). At declined in double digits and the company the then prices, value added was LTL 1.44 mil- was forced to suspend production for a short lion, its lowest level since 2000. Having stood period of time. at over 20% in 1999, the industry’s share in In 2008, turnover of Alytus-based Alyta value added generated by the MI went down group rose by 3% to LTL 204 million, but the to 7.7% last year. In six years, domestic sales company incurred a loss of LTL 12.7 million. almost doubled but were offset by contract- In the first quarter of this year, the company, ing exports (see Diagram 14.6). Last year, which has lately operated just four days per exports declined by 17% compared to 2007, week, also returned a loss. while sales in Lithuania did not change much. Last year, net profit of Vilniaus Degtinė fell As a result, the relative weight of exports fell by a quarter to LTL 1.27 million and sales by 3.5 percentage points to about 72%. Our rose by 2.3% to LTL 69 million. Compared to companies have been losing their position on 2007, exports of production rose 1.8 times foreign markets. The downward trend of tex- to LTL 2.3 million. According to polling com- tiles and apparel exports (of Lithuanian origin) pany AC Nielsen, Vilniaus Degtinė managed is reflected in foreign trade statistics, while to raise its vodka market share from 21.9% domestic consumption will also weaken in the to 24.5% in the first quarter of this year. coming years due to the economic downturn. This year and next year will be difficult for The light industry has been steadily losing its producers of strong beverages as the rel- importance as one of the largest employers. evant shadow economy keeps growing and The relative number of workers in the indus- people now are more inclined to save. try has been declining for several years and

Diagram 14.5 Value added created by manufacture of textiles, annual change, %

10 6.1 5.9 5 10.7 3.8 8.3 1.5 0 -1.4 -2.7 1.0 -0.8 -4.6 -5.2 -2.4 -5 -2.2 -3.7 -6.5 -12.1 -10 -18.4

-15 -11.1 -0.2 -20 -18.6 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

88 Lithuanian Economic Outlook Diagram 14.6 Sales of apparel and textiles, LTL Mio

3500

3000

2500

2000 2947 2596 2504 2330 2355 2363 1960 1500

1000

500 624 666 702 721 751 746 402 0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania stood at 30,600 in 2008, down by a fifth from dustry is still capable of competing on foreign two years ago and 1.8 times from 2002 when markets and becoming a higher value-added it reached the maximum. Wages grew by less industrial sector. By the way, textiles remain than 14% and remained much lowed than one of a handful of product groups with a pos- the MI’s average. itive foreign trade balance. The current global economic crisis and changed situation on the Unfortunately, recent investment and profit local labour market (labour force is no longer indicators of the sector are regrettable (see in deficit, labour costs began to fall sharply Table 14.3). Having contracted by 40% two this year) open up new opportunities for the years ago, investments in tangible assets de- light industry: there is an increasing num- clined further by almost a fifth, and their ratio ber of signals that foreign companies began to value added was just 5.6%, nearly three searching actively for partners in the Baltic times lower than the MI’s average. The prof- states. Gediminas Viškelis, Director General itability ratio went into a negative territory of the Lithuanian Apparel and Textile Industry last year and stood at –1% but financial li- Association (LATIA), believes that Western abilities also declined by about 9%. companies, given the current situation, are The light industry comprises textiles, dress- no longer willing (or able) to risk large-scale making as well as leather and footwear indus- buying in China. In his opinion, the number try. The latter ended 2008 with a zero prof- of workers in this Lithuanian economic sector it, the average profitability of dressmakers has declined recently as a result of advanced plummeted about three-fold to 1.6% and the technologies, not a shortage of orders. This textile indicator, which was already negative statement is partially supported by statistics two years ago, lost another three percentage as labour productivity rose by a tenth in the points falling to –3.8% last year. Sales of all light industry last year. Nevertheless, the ap- these three industries plunged last year. parel and textile industry needs government support more than any other sectors as it is Since the light industry is labour-intensive, in a severe need of cheap credits to finance the Cabinet should pay more attention to it working capital and investments. given the massive scale of unemployment in the country. Moreover, the industry has old Still, neither Western European nor Lithua- traditions in Lithuania as well as a certain sci- nian companies will be able to compete with entific potential. The apparel and textile in- their Asian counterparts on production costs

Manufacturing 89 Table 14.3 Key statistical indicators of textiles manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 1526 1341 771 629 8.7 –12.1 –18.4 Value added (at current prices), LTL Mio 1616 1437 816 664 7.7 –11.1 –18.6 Total production, LTL Mio 3114 2706 1557 1279 4.9 –13.1 –17.8 Exports, LTL Mio 2363 1960 1154 907 5.8 –17.1 –21.4 Labour productivity, LTL thou** 42.5 46.9 22.8 23.7 51.1 10.3 3.5 Number of persons employed, thou 38.0 30.6 35.7 28.1 15.1 –19.4 –21.4 Average monthly earnings, LTL 1345 1529 1430 1561 72.3 13.7 9.2 Fixed investments, LTL Mio 98 80 54 58 2.8 –18.1 6.1 Foreign direct investments (end of period), 451 404 451 404 5.5 –10.4 –7.7 LTL Mio Sales of goods and services, LTL Mio 2375 2114 1194 1004 3.7 –11.0 –15.9 Gross profit, LTL Mio 478 390 224 191 5.0 –18.3 –14.9 Operating profit, LTL Mio 73 9 14 0 0.5 –87.1 –100.7 Profit before tax, LTL Mio 42 –20 –4 –17 – – – Assets (end of period), LTL Mio 1950 1866 1950 1866 5.6 –4.3 –6.3 Liabilities (end of period), LTL Mio 982 897 982 897 5.3 –8.6 –12.6 Return on sales, % 1.77 –0.96 –0.32 –1.68 – – – Return on assets, % 2.08 –1.04 –0.38 –1.79 – – – Debt ratio (end of period), % 0.50 0.48 0.50 0.48 94.3 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

given recent developments. The national ap- nies within the light industry laying off work- parel and textile industry will have to invest ers, going into bankruptcy or out of busi- more into brands and design developing prod- ness has been increasing. The latter include ucts with higher value added and outsource Kaunas-based Drobė and Dobilas, Raseiniai- more and more cheaper and simple opera- based Litspin and Camira Fabrics, Kėdainiai- tions to low-cost countries. Lithuania has ma- based Natūrali Oda, Alytus-based ERC and jor trump cards: producers are flexible, -ex Trikotažo Gama, Kupiškis-based Viglita, etc. peditious and are able to make fashionable Last year, more than 800 people were made clothes, which allows them to cooperate with redundant by Linas, 272 by Audimas, 120 by well-known European companies. Moreover, Sparta, 56 by Skinija, even though this com- as we mentioned in our previous publication, pany, which has grown strongly in the last it is reasonable to concentrate on manufac- few years, saw its turnover increase by 7% ture of products that are given priority by in 2008 to LTL 24.5 million. Last year, Sparta the EU. These products include articles from lost a major customer from Ireland and its biodegradable materials, protective clothing, sales dropped down by a tenth to LTL 13.4 technical textile products, etc. Another prom- million. The company incurred losses but ising area is the design of products, logistics hopes to return a profit this year despite the and management of apparel manufacture. expected decrease in turnover. Although the results across the sector vary Last year, Panevėžys-based Linas group in- from company to company, the aggregate curred a huge loss of LTL 15.9 million and its figures highlight the deteriorating situation in revenue dropped by almost 30% to LTL 45 the sector. The number of reports on compa- million.

90 Lithuanian Economic Outlook Sportswear and leisurewear maker Audimas Wood, paper products and furniture remained one of the largest companies in the sector but its sales went down by 23% to LTL The wood, paper products and furniture in- 86 million. dustry (hereinafter the ‘wood industry’) has been growing strongly for a long time. In Failures continue to haunt the Utenos 2000–2006, its value added at constant prices Trikotažas group, probably the most famous was rising by 18% on average annually. Two company in the light industry. Last year, its years ago, the growth indicator was slightly losses rose 2.4 times from 2007 to LTL 18.6 below the said average and stood at 11%, million and turnover shrank by almost a fifth then declined to 3% in 2008 (see Diagram to LTL 111 million. Still, there is “some light 14.7). This marked slowdown was caused by at the end of the tunnel”. Nerijus Vilūnas, weaker demand on foreign markets because CEO of Utenos Trikotažas, says that the com- of the global crisis and by negative develop- pany has not lost any of its major and long- ments in the Lithuanian construction indus- term customers during this year. In the first try. These negative factors will only become quarter of this year, turnover of the compa- stronger this year and the wood industry is ny stood at LTL 20.4 million, down by 41% very likely to undergo a deep downturn. In year-on-year, but operating profit rose from the first quarter, sales went down by more LTL 0.4 million to LTL 0.7 million. “Our profit than 25% already. margins increased as a result of two factors: optimised operations which allowed us to cut Last year, value added at the then prices gen- costs significantly and our focus on higher erated by the wood industry stood at LTL 3.1 value-added production,” insisted Vilūnas. billion, or almost 17% of the MI’s indicator, Today, the company is not operating in a sur- and was close to the figure of the food and vival mode; it is looking for ways to continue beverages industry. During the year, prices of its restructuring process and increase exports its products increased slightly. of new products. The sector has been able to compete success- It is quite difficult to find any success sto- fully on foreign markets as reflected in the ries of late in the industry concerned. One of large surplus of foreign trade in the relevant the candidates is Danspin from Raseiniai dis- products. However, the growth of exports of trict. Founded by the Danish capital, this yarn the wood industry slowed down considerably spinning company managed to boost its turn- last year to just 2% (see Diagram 14.8). Al- over by about a quarter to LTL 14 million and though domestic sales also increased by a earned a profit of LTL 0.8 million last year. small margin, the relative weight of exports

Diagram 14.7 Value added created by manufacture of wood, paper products and furniture, annual change, %

30 25.7 25 19.3 8.9 20 16.7 14.3 15 0.1 10.6 5.9 10 20.2 16.7 1.9 14.2 4.2 5 8.7 10.8 0.9 0.2 3.3 0 1.1 -1.0 -0.9 -5 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

Manufacturing 91 Diagram 14.8 Sales of wood, paper products and furniture, LTL Mio

6000

5000

3172 4000 3098

2726 3000 2409 2185

2000 2111 1753 2535 2632 1000 1960 1381 1590 737 892 0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

fell for a fifth year in a row to below 55%. By where it plans to manufacture both pre-forms comparison, this indicator was above 70% in and final products. 2002–2003 but subsequently exports of both wood products and furniture grew at a much All this is yet another example of the lack of slower pace than domestic sales. national strategy for forestry and wood industry and the need for a comprehensive ap- This trend is disconcerting and is partially proach. This has resulted in a strange situa- caused by a lack of foreign direct investment. tion when investors are withdrawing from the Nevertheless, last December saw a break- country due to shortages of raw materials and through in the industry: Swedish furniture forest enterprises complain of their inability to giant IKEA became the strategic investor in sell the same. Managers of forest enterprise Kazlų Rūda-based Girių Bizonas, the largest have been complaining that no one buys or manufacturer of chipboard for furniture. Un- can afford to buy timber as the construction til then, Sigitas Paulauskas, owner of Vakarų industry has come to a halt during crisis and Medienos Grupė (VMG) which previously con- that the timber prices, which were fixed under trolled the company, had plans to join efforts a new procedure as far back as December, with IKEA and build an industrial complex in cannot be easily adjusted. “Forest enterprises Alytus as well. The plant was said to become are unable to sell and processing companies one of the most up-to-date and largest man- cannot afford to buy timber at approved pric- ufacturers of medium-density fibreboard in es since they are too high for the market,” Europe. The project was believed to be worth said Benjaminas Sakalauskas, head of the Di- LTL 450–700 million with 350–600 new jobs. rectorate General, this February. For more on Unfortunately, VMG failed to find a compro- the topic of forestry, please see the previous mise with the Directorate General of State issue of the Lithuanian Economic Outlook. Forests and obtain any guarantees for the supply of raw materials and decided to move The main statistical indicators of the wood in- the project to Belarus. Paulauskas says that dustry are presented in Table 14.4. In the last VMG also plans to relocate some of the ex- decade, the headcount in the industry was on isting production capacity from Lithuania to the rise but declined by almost 9% last year Belarus. Moreover, VMG will also invest into to 48,000. A number of companies operat- its wood processing unit in Ukraine this year ing in the sector are located in remote areas

92 Lithuanian Economic Outlook Table 14.4 Key statistical indicators of wood and paper products and furniture manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 2823 2917 1422 1438 18.8 3.3 1.1 Value added (at current prices), LTL Mio 2999 3125 1533 1535 16.8 4.2 0.2 Total production, LTL Mio 5633 5805 2911 2828 10.6 3.1 –2.9 Exports, LTL Mio 3098 3172 1536 1501 9.5 2.4 –2.3 Labour productivity, LTL thou** 57.1 65.1 29.6 33.7 71.0 13.9 14.0 Number of persons employed, thou 52.5 48.0 51.8 45.5 23.6 –8.5 –12.1 Average monthly earnings, LTL 1631 1900 1748 1945 89.8 16.5 11.3 Fixed investments, LTL Mio 446 466 269 194 16.2 4.6 –27.9 Foreign direct investments (end of period), 777 817 777 817 11.2 5.1 5.5 LTL Mio 1) Sales of goods and services, LTL Mio 5746 6378 2983 3104 11.3 11.0 4.1 Gross profit, LTL Mio 782 762 372 375 9.8 –2.5 0.8 Operating profit, LTL Mio 251 104 104 15 5.9 –58.6 –85.3 Profit before tax, LTL Mio 170 –13 59 –45 – – – Assets (end of period), LTL Mio 4226 4862 4226 4862 14.5 15.0 –8.1 Liabilities (end of period), LTL Mio 2530 3278 2530 3278 19.2 29.5 –1.4 Return on sales, % 2.95 –0.21 1.97 –1.44 – – – Return on assets, % 4.16 –0.26 2.80 –1.80 – – – Debt ratio (end of period), % 0.60 0.67 0.60 0.67 132.1 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices 1) Indicator of wood, paper products, furniture, publishing and printing manufacture

Source: Statistics Lithuania of the country, so previous growth promoted noted that statistics on capital investments more rational use of human resources and do not fully reflect the production moderni- reduced the disparities of economic develop- sation process since a large percentage of ment between regions. If the emerging trend equipment is bought by way of leasing. of shrinking workforce in the wood industry becomes stronger, it will raise the unemploy- The profitability ratio of the wood industry ment rate in rural areas where it is already has been declining for several consecutive much higher than in cities. Last year, the av- years. Two years ago, it stood at 3% and was erage wage in the sector was still by about almost twice as low as the MI’s average. Due a tenth lower than the manufacturing indus- to the rising cost of labour and energy as well try’s average although it grew by around 17% as the weakening demand, the profitability compared to 2007. dipped into a negative territory last year and is most likely to remain there in 2009. The Last year, productivity of the wood industry relative reduction in profits in recent years rose by almost 14% but was 29% lower than was accompanied by a sharp rise in the lever- the manufacturing industry’s average and age ratio. In 2008, total financial liabilities of the gap only widened during the year. Having companies operating within the wood industry grown by more than a quarter two years ago, jumped by 30% and the debt ratio went up capital investments in the wood industry rose to 0.67, a much higher indicator than those by less than 5% last year compared to 2007. of other industrial sectors reviewed here (see Their ratio to value added remained virtually Table 5 in the Annex). the same and stood at around 15%, which was just below the average level across the For the third consecutive year, the profit- manufacturing industry. However, it must be ability of pulp and paper manufacturers was

Manufacturing 93 better than the wood industry’s average and the case of Venta, it was internal manage- stood at 4% in 2008. Financial indicators of ment problems. This year, Dilikas, a company furniture makers were much better last year of the Baltijos Baldai group, went under and compared to manufacturers of other wood laid off more than 200 workers. Last year, its products as profit margins stood at 3.1% turnover stood at LTL 40 million, the eight- and the debt ratio was 0.57. Moreover, the best result among furniture manufacturers. annual growth of their exports soared to The Vilnius District Court decided this April to 19% in 2008 which, it seems, signalled quite start a bankruptcy procedure against Narbu- good trends. However, in the first quarter of tas Ir Ko, one of the largest companies in the this year, sales of the furniture industry fell sector which grew very strongly in 2007 and by a fifth year-on-year, while the results of enjoyed excellent profitability. The company other above-mentioned sectors of the wood had ambitious plans and launched a new of- industry were even poorer: the indicator of fice furniture plant, the largest of its kind in paper industry fell by almost a quarter and the Baltic states, in July 2008 in Ukmergė. It that of wood and wood products contracted invested about LTL 75 million into buildings, by a third. installations, advanced technologies and in- So the short-term prospects of the wood infrastructure. Last year, the company earned dustry are bad. The demand for wood and LTL 87 million in turnover and employed over wood products relies strongly on the situ- 500 people. The average wage at Narbutas ation in the construction sector which has was the highest among major furniture mak- been struggling lately both in Lithuania and ers and exceeded LTL 3,000. One can only in the surrounding regions. The decline in the hope that the suspended production can be housing market is usually accompanied by renewed. weakening demand for furniture. Short-term Last year, Vakarų Medienos Grupė boosted its development of the industry concerned will turnover by 17% to LTL 420 million; most of depend on exports as the domestic market is its production was sold to IKEA. Having lost unlikely to recover in 2009–2010. However, Girių Bizonas, its largest company, the group the situation on foreign markets is also bleak plans to increase its sales by at least a quar- and the weakening US dollar against the euro ter and expand production in Belarus and is undercutting the competitiveness of Lithu- Ukraine. In 2008, revenue of Girių Bizonas anian products outside the EU. Probably the rose by 28% to LTL 248 million, turning the only good news is the fact that the growth company into the largest enterprise in the of relevant exports from China finally slowed wood industry. down considerably last year. Following a loss of LTL 3.7 million incurred in In the long-run, the wood industry will prob- 2007, parquet maker Boen Lietuva earned a ably play an important role. Forest coverage pre-tax profit of LTL 6.6 million last year. Ac- in Lithuania is high and the wood industry cording to the list of Lithuanian furniture and has acquired vast experience. In addition, wood industry companies compiled by busi- the industry is an important component of ness daily Verslo Žinios, sales of the com- the production sector even in well-developed pany fell by 5% in the period concerned to countries (such as Denmark, Finland, Italy, LTL 188 million. etc.). However, the development of this national sector will rely heavily on the speed Baltijos Baldų Grupė, which supplies its prod- of modernisation processes and success in ucts almost exclusively to IKEA, saw its sales securing additional supplies of raw materials fall marginally to LTL 201 million last year. from abroad as well as in optimising the use Furniture maker Freda controlled by the com- of local resources. In this area, the govern- pany earned a pre-tax profit of LTL 4.6 mil- ment plays a key role. lion and its turnover reached LTL 113 million, slightly down from 2007. We will review the results of individual companies briefly as a large share of this type of Consolidated sales of the SBA furniture group statistics is available in the magazine Lietu- stood at LTL 334 million last year and were vos Medienos ir Baldų Pramonės Žinios. The slightly lower than in 2007. Klaipėdos Baldai, overall performance of the wood industry was the largest furniture maker in the country dragged down by two large companies, name- controlled by the SBA group, boosted its turn- ly Pajūrio Mediena and Venta, which went out over by a fifth to LTL 185 million and earned of business last year. The companies ceased a net profit of LTL 3 million, the same as two to exist for reasons other than the crisis. In years ago.

94 Lithuanian Economic Outlook The results of Vilniaus Baldai were a lot worse some of the figures derived using theMN data last year as sales reached LTL 138 million, published by the media. down by 9% from 2007. Although the com- As you might remember, a fire broke out at pany returned a net profit of LTL 7 million, the MN in October 2006 and its effects were felt result came from the sale of its stake in Girių throughout 2007. In addition, the oil refin- Bizonas rather than from core activities. ery was undergoing running repairs during Last year, the Grigiškės group incurred an un- a period of about 1.5 months in 2007. Last audited loss of LTL 4.3 million after it enjoyed year, the plant operated at full throttle. As a net profit of LTL 5.1 million two years ago. a result, indicators of this sector improved Revenue of the group rose by 1% to LTL 145 impressively last year. Having been falling million last year. considerably for two consecutive years, value added at constant prices rose 1.7 times in Turnover of Alytus-based Stora Enso Timber, 2008 compared to the previous year. More- one of the largest and modern sawmills in the over, prices of petroleum products increased country, plunged by 30% to LTL 60 million. by more than a quarter on average in 2008 Recently, the company has been utilising only compared to 2007, thereby nearly doubling about one half of its production capacity. the sector’s share in value added generated Turnover of Klaipėdos Kartonas, manufacturer by the MI to 11.9%. of paper products controlled by Hanner, was The Mažeikiai-based company has retained LTL 110 million last year, down by 10.6% from one of the highest efficiency rates in Lithu- 2007, and its workforce was cut by a fifth. ania. Therefore, labour productivity of the sector concerned is several times higher than Refined petroleum products in other branches of industry. Last year, average value added per worker at the then Mažeikių Nafta (MN) generates nearly 100% prices was about seven times higher than the of the oil industry’s turnover and, therefore, indicator of the entire manufacturing indus- Statistics Lithuania does not disclose many try. Compared to 2007, the refining volume of the sector’s indicators for reasons of con- of Mažeikių Nafta rose by 95% to 9.24 mil- fidentiality. In this publication, we present lion tonnes. In 2008, the company’s exports

Diagram 14.9 Sales of refined petroleum products, LTL Mio

18000

16000

14000

12000 13005 10000

8000 8949 8549 6000 5776 5907 4000 3213 3783 2000 4040 2397 2795 2871 1249 1234 1523 0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

Manufacturing 95 stood at 7.1 million tonnes, up 1.8 times from ping and European markets are increasingly the previous year. sourcing fuels from the regions which have more modern ‘black gold’ refineries, says the According to PKN Orlen, a Polish company Wall Street Journal. which controls MN, revenue more than doubled last year to about LTL 20 billion and As the competition is increasing, it is vitally consolidated net profit stood at around LTL important for MN to secure sufficient quanti- 55 million. In 2008, the Lithuanian company ties of crude oil at the lowest possible cost. invested approximately LTL 600 million. The Therefore, there is some speculation that the annual profit indicator was held up by the in- refinery may be taken over by Russian capi- surance benefit paid for the said fire.- How tal. “Investments at the Mažeikiai plant have ever, changes on global markets meant that economic implications. If the company were the company finished the second half of the controlled by somebody else, it may have a year with a loss. In the first three months of negative impact on our fuel market and Or- this year, MN refined 2.2 million tonnes of oil, len positions. However, given the current fractionally up year-on-year, but incurred LTL situation – the global recession and declin- 48.5 million in unaudited consolidated loss. ing investments – we cannot eliminate the The company utilised 86% of its refining ca- possibility that we might be forced to look pacity. According to MN, the performance in for a partner for this investment,” said Jacek the first quarter of this year was mostly af- Krawiec, president of PKN Orlen, in an inter- fected by falling fuel consumption and low oil view to Polish daily Rzeczpospolita. refining margins due to the global crisis. The prospects of the Mažeikiai-based com- Chemicals and chemical products pany are not clear. European oil refineries, whose profits have already been undercut by This industry also has a high concentration the global recession and lower energy prices, degree. Last year, about three quarters of in- will soon have to compete with new plants dustry’s output was generated by three com- in Asia and Middle East which, analysts es- panies, namely, fertiliser makers Achema and timate, will be able to offer higher-quality Lifosa and PET resin manufacturer Neo Group. fuel to the market. The oldest refineries in In 2008, the weight of the chemical industry Europe may be forced to reduce their produc- in value added generated by the manufactur- tion volumes or go out of business entirely in ing industry rose by almost two percentage the next few years as the demand is drop- points to 12.3% (by comparison, it stood at

Diagram 14.10 Value added created by manufacture of chemical products, annual change, %

76.7 80

25.3 60

37.5 40 29.6 31.9 26.3 5.0 51.4 17.8 20 17.1 36.8 32.5 5.7 24.7 12.5 36.6 6.7 1.5 0 -1.0 -4.9 -18.7 -20 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

96 Lithuanian Economic Outlook Diagram 14.11 Sales of chemicals and chemical products, LTL Mio

7000

6000

5000

4000 5279

3000 3837

2000 1946 1601 1000 1266 922 1041 1295 761 1057 256 243 284 408 0 2002 2003 2004 2005 2006 2007 2008 Domestic sales Exports

Source: Statistics Lithuania a mere 4.5% in 2003). The sector was third recent years, the chemical industry stood out among all MI’s branches by volume of pro- for its lavish capital investments. Their vol- duction. This leap was caused by a significant ume rose by almost 28% in 2008 compared increase in product prices since value added to the previous year achieving the highest generated by the chemical industry at con- growth indicator among the MI’s sectors pre- stant prices shrank by almost 5% compared sented in Table 3 in the Annex. to the previous year (see Diagram 14.10). The said sharp increase in the product pric- According to Statistics Lithuania, physical es resulted in much higher profit margins in volumes of production of main chemicals and the chemical industry. The profitability ratio fertilisers declined in 2008, but the value of stood at 5.5% in 2006, rose to 9.6% in 2007 output sold by the industry concerned rose and was above 16% in the first half of last by more than a third to LTL 6.6 billion (see year. However, production costs and prices Diagram 14.11). Foreign markets accounted of raw materials also rose steeply last year for over 80% of sales, the highest indicator and the demand for production weakened among all industries reviewed. considerably in autumn and was accompa- In Lithuania, the sector concerned has a much nied by a decline in prices. Therefore, the higher labour productivity than the entire in- total profit indicator of companies operating dustry. Last year, value added per worker was in the chemical industry was negative in the LTL 377,000 on average in the chemical in- second half of the year, while the average an- dustry, up by almost a fifth from two years nual profitability stood at 7.6% last year. The ago and four times more than in the manu- industry is expected to post a much worse facturing industry (see Table 14.5). It is only result this year. natural that the average wage in the sector Recently, the debt level of companies within was 1.7 times higher than the MI’s average the industry concerned has improved mark- and stood at LTL 3,600 in 2008 rising by 18% edly: in 2002, the leverage ratio of the chem- during the year. A change in the trends of ical industry stood at 0.73 and was one of global and Lithuanian economy last year re- the highest among all sectors of the national sulted in a reduction of workforce across most economy, but it declined to 0.37 in 2008 and of industries but the chemical sector boosted was well below the economy’s and MI’s indi- the number of workers by a tenth last year. In cators.

Manufacturing 97 Table 14.5 Key statistical indicators of chemical products manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 1122 1067 572 465 6.9 –4.9 –18.7 Value added (at current prices), LTL Mio 1744 2300 995 1172 12.3 31.9 17.8 Total production, LTL Mio 4894 6574 2631 3117 12.0 34.3 18.4 Exports, LTL Mio 3837 5279 2084 2597 15.7 37.6 24.6 Labour productivity, LTL thou** 315.3 377.1 179.6 190.6 410.9 19.6 6.1 Number of persons employed, thou 5.5 6.1 5.5 6.1 3.0 10.3 11.0 Average monthly earnings, LTL 3054 3600 3245 3688 170.1 17.9 13.7 Fixed investments, LTL Mio 236 301 140 150 10.5 27.6 7.3 Foreign direct investments (end of period), 2472 1413 2472 1413 19.3 –42.9 –52.8 LTL Mio*** Sales of goods and services, LTL Mio 5019 6054 2697 2921 10.7 20.6 8.3 Gross profit, LTL Mio 1100 944 633 87 12.1 –14.2 –86.3 Operating profit, LTL Mio 548 412 359 –133 23.5 –24.9 – Profit before tax, LTL Mio 481 463 305 –50 35.4 –3.7 – Assets (end of period), LTL Mio 3936 3810 3936 3810 11.4 –3.2 –9.9 Liabilities (end of period), LTL Mio 1707 1394 1707 1394 8.2 –18.4 –11.8 Return on sales, % 9.57 7.65 11.32 –1.70 331.3 – – Return on assets, % 13.15 11.16 15.66 –2.35 300.4 – – Debt ratio (end of period), % 0.43 0.37 0.43 0.37 71.7 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices *** Refined petroleum and chemical products industry

Source: Statistics Lithuania

As we already mentioned, the national chemi- market developments which emerged by cal industry is dominated by fertiliser and PET the end of the year will hardly be reversed resin manufacturers which generated 89% of this year as the global economy continues to total turnover by the companies operating in plunge deeper into recession. It is very likely the chemical industry in 2008. The share of that the Lithuanian chemical industry will see output of the so-called other chemicals was a negative growth indicator in 2009. In the still small (about 6%), although it rose 4.3 first quarter of this year, sales of this sector times last year. This segment includes some fell by about 30% year-on-year (by 13.3% at biofuel companies which have been develop- constant prices). ing strongly. High oil prices were very favour- Nitrogen fertiliser maker Achema remained able for its last year's spurt even though the the largest company of the sector last year price of these commodities went down in au- earning LTL 2.1 billion in revenue, up by 44% tumn. The European Union requires to ensure from 2007. From January to September, the that biofuel consumption accounts for up to company returned a pre-tax profit of LTL 201 10% of total fuel consumption by 2020. Dur- million. The growth in turnover was mostly ing the year, the relative weight of the phar- caused by higher product prices which almost maceutical sector in turnover of the chemical doubled year-on-year in summer. In October, industry dropped by a percentage point to prices of fertilisers went down sharply world- 2%, while the share of chemical fibres almost wide, while the cost of natural gas, the main halved falling to just about 1%. input, remained high, forcing the company to Last year, the conditions on foreign markets reduce production in November and return were extremely favourable for the chemical to full-throttle operation only in early April industry. However, the trend of unfavourable 2009. In the first quarter of this year, Ache-

98 Lithuanian Economic Outlook ma incurred a loss of LTL 14.6 million and the year which will boost its production capac- volume of its output sold fell by 45% year- ity four-fold. The company received LTL 2.8 on-year to LTL 277 million. In 2008, revenue million in EU financial support to upgrade its of the Achema group increased by 35% to process lines. Previous reports indicated that LTL 5.04 billion, and the group invested about the company planned to invest around LTL 15 LTL 300 million. The group expects to invest million into this project. a similar amount in 2009 as well even though it projects that turnover will only reach LTL 3 billion. Rubber and plastic products Despite the slowing economy and a stand- A decade-long rapid development of the plas- still in the fertiliser market, Kėdainiai-based tic industry came to an end in 2007. Last year, phosphate fertiliser maker Lifosa controlled its growth was negative for the second year by Russian Jevrochim also intends to contin- in a row as value added at constant prices ue its investment programme. The company fell by 5.5% compared to the previous year, is about to launch construction of a new fod- and the decline accelerated in the second half der-grade phosphate production line for LTL of 2008 (see Diagram 14.12). Last year, the 50 million. Last year, the company earned share of the plastic industry in value added LTL 237 million in net profit, up by 7.3% from generated by the MI dropped by nearly a per- 2007, and its revenue rose 1.9 times to LTL centage point to 4.9%. The industry’s sales 1,749 million. This year, the company tar- abroad contracted marginally but domes- gets sales of LTL 1 billion. In the first quarter tic sales fell dramatically last year, boosting of 2009, Lifosa incurred a loss of LTL 11.9 the export’s share in turnover from 51.6% million (cf. LTL 70.3 million in net profit in to 54% (see Diagram 14.13). Since the de- the same quarter of last year). Sales of di- mand for many plastic products is created by ammonium phosphate, the main product of the construction industry, the need for plas- the company, rose by 32.5% year-on-year tics will weaken considerably in Lithuania this to 256,000 tonnes both were worth only LTL year, and the situation on foreign markets is 254 million, down by 9.4%. unlikely to improve either. In 2008, revenue of PET resin manufacturer Nevertheless, capital investments in the plas- Neo Group stood at around LTL 880 million, tic industry were quite encouraging. Last year, down by about a fifth from a year ago. The the investment volume increased by almost a company plans to cut its workforce from 213 quarter and the investment to value added to 185 people. Since November, the company ratio rose to nearly 19%, was well above the has operated at half of its capacity and planned MI average. Moreover, as Table 14.6 shows, to return to normal mode in March 2009. the number of people employed in the plastic industry did not change much, although the Last year, Kaunas-based Sanitas, the larg- decline across the manufacturing industry est pharmaceutical company in Lithuania, in- was very sizeable. The sector concerned has curred a loss of LTL 12.3 million, down from a relatively high labour productivity. Although a net profit of LTL 16.5 million in 2007. Its value added per worker in the industry was turnover stood at LTL 26.8 million and fell by by a fifth higher than the manufacturing in- a quarter compared to two years ago. This dustry’s average in 2008, the gap narrowed summer, the company plans to relocate pro- down significantly in the last couple of years. duction of some industrial medicines to its The average wage in the plastic industry was new plant in Kaunas which cost Sanitas LTL fractionally above the MI average and even 68 million in investment. Last year, the Sani- came closer last year since it rose by a slight- tas group, which operates pharmaceutical ly smaller margin during the year compared factories in Lithuania, Poland and Slovakia, to MI’s indicator. incurred a loss of LTL 1.9 million, down from a net profit of LTL 37.3 million in 2007. Rev- Profit margins in the plastic industry dropped enue of the group rose by 14% to LTL 382.5 by almost two percentage points to 3.5% million in 2008. last year but, in contrast to the majority of MI branches, the sector managed to avoid Last year, sales of Lithuanian skincare pro- any major decline in the second half of the ducer Biok stood at LTL 11.6 million, up by year. Another important factor was a size- 22.4% from the previous year. able decrease in the average debt ratio of Producer of soaps and detergents Naujo- plastic companies. Having risen to 0.63 in ji Ringuva plans to build a new factory this the first half of 2008, it fell to 0.58 at the

Manufacturing 99 Diagram 14.12 Value added created by manufacture of plastic products, annual change, %

40 35.3

25.2 30 22.6 45.3 4.2 20 7.2 9.2 10 21.0 15.5 2.8 12.7 3.5 0 -0.8 -3.5 -5.5 -10.1 -0.3 -10.5 -10 -5.8 -4.3

-20 -14.8 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

end of the year. Nevertheless, even this level for the entire manufacturing industry as well, is quite high. but there are many signs that the downturn in the sector will be short-lived. In the first quarter of 2009, sales of the industry concerned fell by a third year-on-year. PET resin maker Retal Europe (formerly Generally, it can be said that this year will known as Nemuno Banga) is one of the larg- not be a successful one for the sector, and est companies of the industry concerned. To-

Diagram 14.13 Sales of rubber and plastic products, LTL Mio

2000

1500 1033 1047 913

729 1000 493 534

305 500 902 969 892 648 715 540 420

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

100 Lithuanian Economic Outlook Table 14.6 Key statistical indicators of rubber and plastic products

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 991 937 509 456 6.1 –5.5 –10.5 Value added (at current prices), LTL Mio 966 910 509 433 4.9 –5.8 –14.8 Total production, LTL Mio 2001 1938 1040 945 3.5 –3.1 –9.1 Exports, LTL Mio 1033 1047 513 501 3.1 1.4 –2.5 Labour productivity, LTL thou** 116.1 110.4 61.8 54.4 120.3 –4.9 –11.9 Number of persons employed, thou 8.3 8.2 8.2 8.0 4.1 –0.9 –3.3 Average monthly earnings, LTL 1969 2274 2099 2373 107.5 15.5 13.0 Fixed investments, LTL Mio 138 171 67 75 5.9 23.7 10.9 Foreign direct investments (end of period), 293 309 293 309 4.2 5.2 1.6 LTL Mio Sales of goods and services, LTL Mio 2590 2391 1385 1156 4.2 –7.7 –16.5 Gross profit, LTL Mio 470 382 260 187 4.9 –18.6 –27.8 Operating profit, LTL Mio 159 126 84 59 7.2 –21.0 –30.4 Profit before tax, LTL Mio 139 84 72 35 6.5 –39.1 –51.0 Assets (end of period), LTL Mio 1741 1883 1741 1883 5.6 8.2 –3.7 Liabilities (end of period), LTL Mio 1063 1098 1063 1098 6.4 3.4 –11.0 Return on sales, % 5.35 3.53 5.21 3.06 152.9 – – Return on assets, % 8.67 4.40 8.60 3.67 118.4 – – Debt ratio (end of period), % 0.61 0.58 0.61 0.58 114.3 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania gether with the above-mentioned Neo Group, Panevėžys-based Stigma exports almost all it is owned by the Retal Industries group. Two its production. Two years ago, the maker years ago, turnover of the company rose by a of plastic and rubber products increased its fifth to LTL 428 million, but the figures for the turnover more than 1.5 times to LTL 34 mil- first three quarters of last year indicate that it lion and earned a profit of LTL 1.8 million. In fell by a tenth year-on-year in 2008. 2008, the company targeted a revenue level of LTL 40 million but sales rose to LTL 36 mil- Last year, sales of Megrame, manufacturer lion only, which is a respectable achievement of plastic windows, rose by 2% to LTL 338 given the ongoing crisis. million. Plastic packaging manufacturer Umaras grew very strongly in 2006–2007. Two years ago, Other non-metallic mineral products its revenue stood at LTL 123 million, and revenue in the first nine months of 2008 in- This sector comprises manufacture of build- creased by 7% year-on-year. ing materials (cement, plaster, bricks, etc.), glass and ceramics. In Lithuania, the sector Sales of Plasta, one of the oldest companies is domestically-oriented and relies heavily on in the sector concerned, were LTL 73 million the construction industry. The period 2003 last year, up by 11% from the previous year. to 2006 was successful for building materi- Last year saw a rather strong growth of Ave- als industry. The demand for its production plast, manufacturer of plastic windows and was strong on the domestic market and value doors, which boosted its sales by 18% to LTL added at constant prices grew by 27% an- 32 million. The company expects its growth nually on average. The trend was reversed rate to reach at least 14% this year. in 2007. While the sector’s growth was still

Manufacturing 101 Diagram 14.14 Value added created by manufacture of building materials, annual change, %

50 40.3 40 35.1 7.8 1.8 30 22.3 16.9 20 33.2 12.3 27.5 2.7 32.4 10 14.3 10.1 0 2.2 -5.2 -16.7 -10 -24.4 -20 -1.9 -18.6 -1.6 -30 -26.0 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

rather strong in the first half of the year, the result of rising cost of inputs, energy and la- decline started in the second half of the year bour, product prices were growing rapidly in and has continued up to the present. There- the last three years. The volume of produc- fore, the industry’s value added at constant tion sold at current prices still rose strongly in prices increased by a mere 2% in 2007 com- 2007 but subsequently went down by almost pared to the previous year, while last year a tenth last year as higher prices of products the industry’s growth was negative compris- just partially offset the contraction in produc- ing about –17% (see Diagram 14.14). As a tion (see Diagram 14.15).

Diagram 14.15 Sales of building materials, LTL Mio

2000 314

348 1500 271

187 1000 1675 147 153 1381 1446 153 500 958 634 708 475

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

102 Lithuanian Economic Outlook Table 14.7 Key statistical indicators of building materials manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 827 689 449 340 4.5 –16.7 –24.4 Value added (at current prices), LTL Mio 950 774 530 392 4.2 –18.6 –26.0 Total production, LTL Mio 1989 1794 1122 876 3.3 –9.8 –21.9 Exports, LTL Mio 314 348 167 172 1.0 10.8 2.4 Labour productivity, LTL thou** 91.4 80.7 50.1 44.0 88.0 –11.6 –12.2 Number of persons employed, thou 10.4 9.6 10.6 8.9 4.7 –7.8 –15.7 Average monthly earnings, LTL 2272 2527 2440 2582 119.4 11.2 5.8 Fixed investments, LTL Mio 186 113 117 66 3.9 –39.1 –43.9 Foreign direct investments (end of period), 384 499 384 499 6.8 29.9 9.9 LTL Mio Sales of goods and services, LTL Mio 2155 1945 1223 939 3.4 –9.8 –23.2 Gross profit, LTL Mio 615 441 360 191 5.7 –28.2 –46.9 Operating profit, LTL Mio 343 157 200 42 8.9 –54.3 –78.9 Profit before tax, LTL Mio 335 137 195 36 10.5 –59.0 –81.5 Assets (end of period), LTL Mio 2022 2184 2022 2184 6.5 8.0 –0.5 Liabilities (end of period), LTL Mio 805 895 805 895 5.2 11.2 –4.3 Return on sales, % 15.54 7.06 15.93 3.84 305.8 – – Return on assets, % 17.97 6.40 19.33 3.26 172.3 – – Debt ratio (end of period), % 0.40 0.41 0.40 0.41 80.4 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

The stalling domestic market contributed to costs in the sector concerned were rising a rise in exports which increased by 16% in much faster than across the entire manufac- 2008. However, even after a significant leap, turing industry or Lithuanian economy. How- exports still accounted for a small share of ever, the average wage increased by just 11% turnover (less than 20% last year). Since last year compared to 2007, i.e. the rate of construction companies are now cutting the growth fell by more than half. volume of work both in Lithuania and in most The construction boom was very conducive neighbouring countries, exports of the sec- to improving profit margins of manufacturers tor’s output are unlikely to surge this year. of building materials. As a result, the average The indicators of capital investments are not profitability in 2006–2007 was very high and encouraging either. Following a strong growth stood at 15.6% despite a significant increase in 2006–2007, their volume fell by nearly in costs. Last year, profitability fell to about 40% last year (see Table 14.7). Labour pro- 7% and went down below 4% in the sec- ductivity also deteriorated significantly. For ond half of the year. There is no doubt that a several years, value added per worker was downward trend has emerged since compa- much higher in the sector compared to the nies operating within the industry previously entire manufacturing industry, but last year’s would see higher profits in the second half of indicator plunged and comprised just 88% of the year. Due to high profitability of recent the MI’s average. As the production volume years, the sector’s debt ratio was much lower began to shrink, so did the labour force. In than the MI’s average, standing at 0.41 at a year, the number of workers went down by the end of last year. 8% and the process, unfortunately, will only In 2009, the decline of building materials is accelerate this year. In 2003–2007, labour likely to be one of the steepest among all re-

Manufacturing 103 viewed sectors of the manufacturing industry. Finnish Finnfoam, one of the largest mak- In the first quarter of this year, the sector’s ers of thermal insulation boards in Scandi- sales contracted 2.5 times year-on-year. The navia, plans to build a plant in the Kaunas outlook of this sector will rely quite strongly free economic zone (FEZ) investing LTL 70 on the growth of exports. Although the envi- million. Construction is scheduled to begin ronment is not favourable for growth at the this summer and the plant is expected to be moment, the construction industry is likely to fully operational by next spring. The compa- recover sooner in the neighbouring regions ny intends to invest another LTL 30 million in than in Lithuania, while the Polish economy Lithuania by 2012. may avoid a downturn. In 2007, turnover of Betonika, manufacturer Last year, Akmenės Cementas, the largest of concrete and reinforced concrete struc- company of the sector concerned, manufactures, fell by a fifth and dropped by another tured 1.1 million tonnes of cement. Although 9% last year to LTL 45 million. More than a the output was similar to the previous year, third of workers were made redundant. higher product prices led to a 14% increase Despite the crisis, glass packaging maker in turnover which stood at LTL 282 million. Kauno Stiklas continues with its plans to in- Net profit reached LTL 48.8 million, down by vest over LTL 25 million into the production a tenth compared to a year ago, as the con- line of disposable glass bottles for export to struction crisis has also affected the cement Poland. Manufacture of disposable glass bot- market and turnover fell in the last quarter tles would help save raw materials and re- of 2008. The weakening demand means that duce the electricity bill. Thin-wall and inex- the production volumes of Akmenės Cemen- pensive bottles, which can be recycled after a tas will continue to shrink in the nearest fu- single use, could interest beverage exporters ture. In the first three months of the year, as such bottles are lighter than the conven- sales of the company fell by 40% but the de- tional ones. Moreover, they are very popular cline was also caused by a colder winter, so in countries which have no bottle deposit sys- the drop does not show a full picture. In our tem as the one used in Lithuania. previous publications, we mentioned that the company was carrying out a LTL 290 million investment project scheduled for completion Basic metals and metal products in 2011. The new dry-process cement production line will enable the company to im- The metal industry relies heavily on the con- prove labour productivity considerably and struction sector which uses a lot of metal cut energy costs. The design capacity of the structures. In 2003–2007, both industries line is 1.5 million tonnes of cement per year. were growing very rapidly but the construction boom lost steam last year which caused Dvarčionių Keramika, the largest manufac- a decline in the metal industry as value added turer of ceramic tiles in the Baltic states, saw at constant prices generated by the industry its sales rise by almost 4% last year to nearly fell by almost 19% from the previous year, the LTL 70 million and earned a small profit. The worst result among all economic activities re- company managed to boost its sales through viewed here (see Diagram 14.16 and Table 1 much stronger exports to Poland and the CIS in the Annex). At the then prices, the decline countries. Its revenue increased by 6% to was more moderate since the products of this LTL 3.9 million in Ukraine, by 63% to LTL 5.3 sector became more expensive in 2008. De- million in Russia, by 58% to LTL 1.3 million in spite a worsening situation on foreign markets Belarus and almost tripled to LTL 5.3 million last year, domestic sales fell twice as rapidly in Poland. However, the company incurred a as exports. The percentage of exports in the loss of LTL 2 million in the first quarter of this output sold rose by three percentage points to year and sales fell by almost 40%. over 45% (see Diagram 14.17). By the way, Bituminous roofing producer Gargždų Mida, as we mentioned in our previous publication, which saw its sales reach LTL 90 million in statistical indicators of the industry concerned 2008, looks to earn just LTL 65 million in rev- could have been distorted by reclassification enue this year. It has laid off more than a of some companies (through mergers, etc.) quarter of its workforce and expects a poor which could have reduced last year’s turnover year. However, the company intends to in- of the metal industry and increased that of crease sales in the Czech Republic and Nordic the machinery industry. countries. Last year, revenue of the Gargždų Today, the potential of the metal industry is Mida group rose by 7% to LTL 108 million. limited not only by a weaker demand for its

104 Lithuanian Economic Outlook Diagram 14.16 Value added created by manufacture of metal products, annual change, %

50 42.6 38.1 40 33.9 32.5 7.8 30 10.6 23.1 4.0 20 43.7 30.3 28.5 10 23.3 24.0 6.8 7.3 0 -1.1 -0.9 -12.1 -10 -17.2 -18.9 -20 -24.5 -30 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania products but a shortage of specialists and the metal industry shrank by more than a insufficient production capacities. In recent tenth and the average wage was very close to years, labour productivity in this industry has MI’s overall indicator. This industry has failed comprised just about 3/4 of the manufactur- to attract any significant flows of foreign in- ing industry’s indicator and fell to 72% last vestment so far, although the flows increased year (see Table 14.8). In 2008, workforce in by almost a third in 2008. The figures of capi-

Diagram 14.17 Sales of metal and fabricated metal products, LTL Mio

2500

2000

915

1500 832 707

1000 584

416 214 1264 500 1012 188 885 692 502 566 332 0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

Manufacturing 105 Table 14.8 Key statistical indicators of metals and fabricated metal products manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 1038 841 560 422 5.4 –18.9 –24.5 Value added (at current prices), LTL Mio 1107 973 600 497 5.2 –12.1 –17.2 Total production, LTL Mio 2178 1843 1147 918 3.4 –15.4 –20.0 Exports, LTL Mio 915 832 455 411 2.5 –9.0 –9.8 Labour productivity, LTL thou** 67.7 66.6 37.4 36.1 72.6 –1.6 –3.5 Number of persons employed, thou 16.3 14.6 16.0 13.8 7.2 –10.6 –14.2 Average monthly earnings, LTL 1996 2180 2147 2188 103.0 9.2 1.9 Fixed investments, LTL Mio 128 82 79 41 2.8 –35.9 –48.4 Foreign direct investments (end of period), 136 177 136 177 2.4 30.6 1.5 LTL Mio Sales of goods and services, LTL Mio 2481 2523 1326 1245 4.5 1.7 –6.1 Gross profit, LTL Mio 536 551 278 272 7.1 2.8 –2.4 Operating profit, LTL Mio 148 114 68 43 6.5 –23.2 –36.2 Profit before tax, LTL Mio 139 107 62 34 8.2 –23.1 –45.5 Assets (end of period), LTL Mio 1545 1550 1545 1550 4.6 0.3 –5.7 Liabilities (end of period), LTL Mio 885 831 885 831 4.9 –6.1 –12.5 Return on sales, % 5.60 4.23 4.65 2.70 183.4 – – Return on assets, % 9.00 6.57 7.83 4.16 176.9 – – Debt ratio (end of period), % 0.57 0.54 0.57 0.54 105.1 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

tal investments were very poor last year as in the country becomes more relevant. Lithu- the volume fell by 36% from 2007 and the ania has a poor network of vocational training ratio to value added remained much lower schools with barren and outdated technical than the average level across the MI. facilities, while the level of university gradu- ates is not up to the standards of companies. Considering the decline in production, fi- Both the metal industry and related indus- nancial indicators of companies operating tries (machinery and equipment, electronics, in the medal industry remained respectable etc.) will retain their competitiveness if the last year. Although pre-tax profits contracted technologies are updated, the qualification by 23% compared to the previous year, the level of workforce is improved and the envi- profitability ratio was almost double the MI’s ronment for innovations is more favourable. indicator and stood at 4.2. In 2008, financial liabilities of companies operating in the The results of individual companies vary. Two sector concerned went down by 6% and the years ago, turnover of the Hronas group, pro- debt ratio fell to 0.54 remaining just margin- ducer of metal and glass structures, rose by ally above the MI’s average. almost a quarter to LTL 197 million but the stalling construction marked changed the sit- This year is not likely to bring any good news uation dramatically as turnover of the group for the Lithuanian metal industry: its turnover fell to LTL 125 million and workforce was cut fell by more than a third in the first quarter of significantly last year. 2008. The long-term outlook is not clear and will improve considerably only if the industry In 2008, sales of Mechel Nemunas, manufac- manages to attract significant flows of FDI or turer of wire products controlled by a Russian maintains strong partnership with the leading group, stood at LTL 130 million, up by 9% from foreign companies and the vocational training 2007, but the company returned no profit.

106 Lithuanian Economic Outlook It seems that the crisis has not affected Alyt- Machinery and equipment us-based Astra, maker of stainless steel products, which grew at a remarkable pace two The share of machinery and equipment (the years ago and enjoyed high profit margins. It machinery industry) in the national GDP is probably the only major company in Alytus structure was the lowest among all reviewed which has managed to retain its workforce and sectors of the manufacturing industry. In pre- to invest heavily in modernisation of the pro- vious years, it declined slightly and was just duction process. Still, turnover of Astra fell by 3.4% in 2008. In the last five years, the sec- 4% to LTL 61 million and profit stood at LTL 2.6 tor grew quite strongly. In 2004–2007, the million last year. Currently, the plant employs annual change in value added at constant about 300 people. This year, Astra launched prices was above 12% but fell below 8% last a new state-of-the-art production line for year (see Diagram 14.18). While the growth stainless steel tanks investing about LTL 13.5 rate picked up some speed in the first half million. The company exports its products to of 2008, the relevant annual change went more than 22 countries worldwide, including into a negative territory in the second half of Germany, Romania, the Netherlands, France, the year. Analysis of changes in the volume Russia and other countries. It sells less than of output sold (at the then prices) last year 20% of production domestically. paints a similar picture: a very strong growth in the first half of the year was followed by Arginta, manufacturer of metal structures a moderate decline in the second half, while and their parts, was growing rapidly in 2007, turnover of the entire 2008 rose by about almost doubled its sales to LTL 33 million and 11% from two years ago. As can be seen from earned a profit of LTL 2.3 million last year. Diagram 14.19, exports of products went up The company exports most of its products. by more than 15% last year and their relative Last year, aluminium foundry Baltical grew weight exceeded 58%, while domestic sales strongly earning LTL 4.7 million in pre-tax increased by only about 5% compared to the profit and LTL 22 million in revenue, up 1.7 previous year. times from 2007. In 2004–2007, the flow of capital invest- After a successful year in 2007, Marijampolė- ments in the machinery industry was very based Stevila, which exports most of its strong but the trend was reversed last year. products to the EU, struggled last year as its Although the volume fell by 36% compared turnover fell by 40%. However, the company to 2007, it was still well above the indicator has seen its order book improve this year. of 2006. This decline is indeed very bad news

Diagram 14.18 Value added created by manufacture of equipment, annual change, %

20 17.9 13.2 10.7 1.9 9.9 10 6.9 18.0 2.2 3.8 12.0 11.3 0.8 7.8 7.7 0 3.0 -1.2 -0.9 -0.1 -5.7 -0.6 -6.3 -10 2003 2004 2005 2006 2007 2008 2008 II H

Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

Manufacturing 107 Diagram 14.19 Sales of machinery and equipment, LTL Mio

1500

1200

763 900 662 531 474 600 428 425 424

300 550 469 522 327 392 265 276

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

since the companies operating in this sector tal increased, the debt ratio fell to 0.46 and invested rather modestly in tangible fixed as- was by a tenth smaller than the MI’s indicator sets despite the above-mentioned growth pe- (see Table 5 in the Annex). riod lasting several years. Although the need The machinery industry, just like the entire for production modernisation in the machin- economy, will face serious difficulties this ery industry is strong, the ratio between cap- year. Companies pin their hopes on exports. ital investments and value added remained According to the Engineering Industry Asso- below 10% last year and was much lower ciation of Lithuania (LINPRA), local business- than the MI’s average. Labour productivity in es have networked successfully with western the sector rose by almost a fifth last year but companies lately and they hope that their still comprised 79% of the MI’s average (see sales will recover. However, it is unlikely to Table 14.9). happen this year. In the first quarter of the Despite lower productivity, the average wage year, the volume of sales contracted by 30% in the sector has been markedly higher than year-on-year. The long-term outlook of the across the manufacturing industry due to a sector is quite good as companies are expe- severe shortage of skilled labour. Last year, rienced and Lithuania boasts quite capable it grew by almost 12%. At the same time, technological universities and a favourable workforce in the machinery industry con- geographical location. Moreover, the Govern- tracted by about 8% in 2008, and the sector ment aims to increase the weight of high and was similar in this respect to other branches medium-high technology sector (which also of the manufacturing industry. includes the machinery industry) in the national economy and promote the relevant in- In contrast to most sectors of the MI reviewed vestments and exports, declaring its commit- here, profit margins in the machinery indus- ment to deal with chronic vocational training try fell considerably in 2007 already as they problems. If the machinery and equipment were affected negatively by higher labour and industry managed to attract new significant commodity costs. Last year, the profitability FDI flows, the growth would be strong again. ratio stood at a mere 1.3%. However, total financial liabilities of companies operating in Unfortunately, Alytus-based Snaigė, the this sector did not grow in 2008 in contrast largest company in the sector concerned, to most industries. Therefore, as equity capi- has been balancing on the brink of bank-

108 Lithuanian Economic Outlook Table 14.9 Key statistical indicators of equipment manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 621 669 343 323 4.3 7.7 –5.7 Value added (at current prices), LTL Mio 584 642 324 303 3.4 9.9 –6.3 Total production, LTL Mio 1184 1313 666 646 2.4 10.9 –3.0 Exports, LTL Mio 662 763 375 373 2.3 15.2 –0.5 Labour productivity, LTL thou** 61.0 72.7 33.6 35.9 79.3 19.2 6.7 Number of persons employed, thou 9.6 8.8 9.6 8.5 4.3 –7.8 –12.2 Average monthly earnings, LTL 2043 2281 2173 2359 107.8 11.7 8.5 Fixed investments, LTL Mio 99 63 54 26 2.2 –36.0 –51.7 Foreign direct investments (end of period), 176 81 176 81 1.1 –53.8 –21.7 LTL Mio Sales of goods and services, LTL Mio 1341 1234 767 618 2.2 –8.0 –19.4 Gross profit, LTL Mio 257 242 149 116 3.1 –6.0 –22.1 Operating profit, LTL Mio 61 32 43 2 1.8 –47.8 –95.8 Profit before tax, LTL Mio 52 15 36 –7 1.2 –70.1 – Assets (end of period), LTL Mio 1051 1147 1051 1147 3.4 9.2 –8.2 Liabilities (end of period), LTL Mio 531 530 531 530 3.1 –0.2 –19.0 Return on sales, % 3.85 1.25 4.66 –1.13 54.3 – – Return on assets, % 4.87 1.27 6.82 –1.18 34.3 – – Debt ratio (end of period), % 0.51 0.46 0.51 0.46 90.6 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania ruptcy lately. The only fridge maker in the to workers this year. In the first three months Baltic states also has a company in Kalinin- of 2009, turnover of the company reached grad whose performance has been very poor. LTL 32.8 million, down 2.4 year-on-year, and Last year, consolidated sales of the Snaigė consolidated unaudited pre-tax loss stood at group plummeted by 17.4% to LTL 339 mil- LTL 14.1 million, up 1.8 times year-on-year. lion and the company incurred a consolidated Although the situation is extremely bleak on audited loss of LTL 24.1 million, more than the fridge market at the moment and even double compared to 2007. In 2008, Snaigė multinational companies are finding it difficult sold 523,200 refrigerators, down by 19.9% to make ends meet, shareholders of Snaigė from two years ago. The company sold 55% are making every effort to keep the company of its production on Eastern markets (mostly afloat. Let’s hope that they succeed. Russia and Ukraine) where it earned LTL 195 Last year, special-purpose equipment maker million in revenue, 41% was sold on Western Iremas saw its turnover rise by 9% to LTL 73 markets (LTL 118.5 million in revenue) and million and earned over LTL 1 million in pre- 4% in the Baltic states (LTL 14.1 million in tax profit. revenue). On 2 March, the company indefi- nitely suspended production at its Kaliningrad Utena-based Umega, one of the largest Lith- plant and rumour has it that the plant may uanian companies in metal and machinery be shut down. The plant in Alytus was also industries, earned a net profit of LTL 3.4 mil- forced to lay off workers. In 2008 and at the lion last year, up by 87% from 2007. Its rev- beginning of 2009, about 600 workers got enue rose marginally to LTL 36 million. The the pink slip. Unable to secure enough work- company manufactures electrical devices, ing capital, Snaigė has been offering refrig- agricultural machinery, heating equipment erators as part of their redundancy package and metal structures. In 2008, it acquired

Manufacturing 109 Ukmergė-based Vienybė, a company with a year and its share in the structure of MI’s similar profile. value added was as high as 8.6%. However, later the situation in the electronics industry Following a strong growth in 2007, compres- deteriorated as many products were no longer sor maker Panevėžio Aurida earned LTL 26 able to compete with cheaper Asian imports, million in revenue, which was slightly less than and Ekranas, the largest company within the two years ago. Most of its products are sold in industry, together with its business partner the East and efforts to penetrate the Western Vilniaus Vingis had to stop production. As a markets have been unsuccessful so far. result, growth indicators of the entire sector Two years ago, Vingriai, manufacturer of ma- concerned declined and went into a negative chine tools for metal processing, boosted its territory in 2006–2007. Last year, the rela- sales by a quarter to LTL 16 million, but its tive weight of MEOE in the manufacturing in- revenue reached only LTL 11 million last year. dustry stood at just 5%. In the past year, it The number of workers shrank by 27% in declined marginally partly due to much low- 2008. er product prices. Nevertheless, production grew strongly after a break of three years. Last year, household appliance maker Vilma In 2008, value added at constant prices gen- earned more than LTL 50 million in revenue, erated by MEOE companies rose by 15.5% up by 3% from a year ago. compared to the previous year and, despite the deteriorating global economy, the growth Electrical and optical equipment rate of the industry remained high in the second half of the year (see Diagram 14.20). This sector (MEOE) comprises computers, Turnover indicators were much worse: the electrical machinery and apparatus, electron- volume of output sold at the then prices de- ics, medical devices as well as precision and clined by almost 6% last year compared to optical instruments. Just a fraction of Lithu- 2007 (see Diagram 14.20). The share of ex- anian industrial companies are bracketed ports in sales fell marginally to around 72%. within the high-tech category and most of Analysis of indicators of individual MEOE in- them belong to the MEOE which has been suc- dustries shows that sales of electronics sector cessful for a number of years. In 1996–2004, as well as electrical machinery and apparatus its growth was much faster and profitability dropped down by more than a fifth last year, much higher than the manufacturing indus- turnover of medical devices and precision in- try’s average. In this period, its value added struments remained virtually the same, while at constant prices increased four-fold every sales of computer industry increased almost

Diagram 14.20 Value added created by manufacture of electrical equipment, annual change, %

27.5 30 25.8 5.8 20 36.1 9.0 10 21.7 11.0 15.5 -0.4 0 1.1 1.9 -4.7 -6.5 -10.3 -5.9 -6.5 -2.8 -1.1 -11.4 -10 -4.8 -7.6

-20 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

110 Lithuanian Economic Outlook Diagram 14.21 Sales of electrical and optical equipment, LTL Mio

2500

2000

1500 1710 1526 1544 1459 1496 1358

1000 1117

500

577 561 560 557 543 411 431

0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania five-fold during the year. Having been quite debt ratio fell to 0.46 and was by more than small until now, the share of the latter indus- a tenth lower than the MI’s average. try in MEOE sales rose to 13%. This year is unlikely to bring any good news for Last year’s investment indicators illustrated the MEOE companies as the global electronics the worsening prospects of the sector: FDI market is projected to undergo a downturn. flows were weak and the volume of capital The latest figures support this forecast. In the investments fell by 6%. The ratio between first quarter of this year, sales of the indus- capital investments and value added was low try concerned fell by a third year-on-year. It for a third consecutive year and stood at just is extremely difficult to predict the long-term 8.5% in 2008, down 3.3 times from the aver- outlook for the sector in Lithuania. Like the age indicator of the period of strongest growth transport equipment industry, the MEOE is in 2001–2003. Despite skimpy investments classified as the HMHT sector but Lithuanian and lower product prices, the average value MEOE companies feel a much stronger com- added per MEOE worker at the then prices petition from Asian manufacturers compared rose by 14% last year but remained by about to other industries. Still, good performance 9% lower than the MI’s indicator (see Table indicators of some MEOE companies are a 14.10). Last year, the headcount in the sec- source for optimism. tor contracted. The number of workers stood Last year, revenue of Kaunas-based sub- at 11,300, down by almost 5% from 2007, sidiary of Norwegian electronics company while the annual change in the average wage Kitron, which manufactures electronic devic- remained high for a third year in a row and es and units, rose by almost a third to LTL reached almost 20%. 177 million and pre-tax profit stood at LTL In the last nine years, the sector concerned 14.2 million. This year, the company plans to was profitable. However, like the majority of increase its turnover by a fifth. According to other branches of the manufacturing indus- the subsidiary, it was able to achieve excel- try it saw its pre-tax profits slump in 2008 lent results last year and can project growth compared to the previous year, while the for this year thanks to a significant improve- profitability ratio fell 2.5 times to below 4%. ment of efficiency. In the first quarter of this Total financial liabilities of MEOE companies year, revenue of Kitron subsidiary in Lithu- declined by about 8% last year, while the ania went up by 23% year-on-year.

Manufacturing 111 Table 14.10 Key statistical indicators of electrical equipment manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 1092 1261 575 639 8.1 15.5 11.0 Value added (at current prices), LTL Mio 870 948 460 458 5.1 9.0 –0.4 Total production, LTL Mio 2016 1901 1015 926 3.5 –5.7 –8.8 Exports, LTL Mio 1459 1358 727 657 4.0 –6.9 –9.6 Labour productivity, LTL thou** 73.2 83.7 39.2 42.7 91.3 14.4 9.0 Number of persons employed, thou 11.9 11.3 11.7 10.7 5.6 –4.7 –8.7 Average monthly earnings, LTL 1899 2271 2026 2330 107.3 19.6 15.0 Fixed investments, LTL Mio 86 81 45 44 2.8 –6.1 –1.5 Foreign direct investments (end of period), 395 415 395 415 5.7 5.0 –0.2 LTL Mio Sales of goods and services, LTL Mio 2002 1992 1012 938 3.5 –0.5 –7.2 Gross profit, LTL Mio 435 385 189 195 4.9 –11.5 3.4 Operating profit, LTL Mio 213 99 56 33 5.6 –53.4 –40.6 Profit before tax, LTL Mio 197 77 47 18 5.9 –61.1 –60.8 Assets (end of period), LTL Mio 1395 1373 1395 1373 4.1 –1.6 –7.4 Liabilities (end of period), LTL Mio 678 625 678 625 3.7 –7.8 –18.9 Return on sales, % 9.85 3.85 4.62 1.95 166.9 – – Return on assets, % 14.43 5.24 6.68 2.55 141.2 – – Debt ratio (end of period), % 0.49 0.46 0.49 0.46 89.2 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

Šiaulių Tauro Televizoriai switched to manu- over LTL 159 million in revenue, up by almost facture of more complex and more expensive a quarter from the previous year. Currently, products. This year, the company has stopped the plant employs about 1,200 people and the production of CRT television sets and will fo- headcount has been on the rise. A number of cus on products with LCD screens. In 2008, employees underwent training at Intersurgi- turnover of the company increased by a frac- cal located in the United Kingdom. tion to LTL 181 million but losses amounted Last year, turnover of the Eksma group spe- to more than LTL 4 million and were lower cialising in laser and medical devices rose by than two years ago. The company expected 11% to LTL 48.5 million and pre-tax profit to grow strongly this year but the crisis forced stood at LTL 1.5 million, down by 50% from it to adjust these plans. a year ago. In 2008, sales of the entire la- Having grown at a remarkable pace two years ser industry amounted to LTL 98 million, up ago, Šiauliai-based manufacturer of electrical by 15.5% from 2007, and 86% of production equipment Elga boosted its sales by 15% in was exported. 2008 to LTL 104 million. However, a profit of Manufacturer of electrical engineering equip- LTL 1 million was almost six times as low as ment Rifas earned LTL 28 million in revenue in 2007. in 2008, almost 1.6 times more than in 2007. Despite the ongoing crisis, Pabradė-based A similar increase in sales was posted by elec- maker of disposable medical breathing sys- trical switchboard maker Automatikos Siste- tems and their accessories Intersurgical has mos, which achieved a turnover of LTL 23 been operating successfully and its products million and profitability of almost 12%, and have been in great demand in a number of electronics company Selteka, which earned countries. Last year, the company earned LTL 15 million in revenue.

112 Lithuanian Economic Outlook Meanwhile, revenue of telecom Skaidula and few years ago it was able to provide work for Televizijos Ir Ryšio Sistemos fell about 1.5 4,000 workers. times in 2008 to LTL 28 million and LTL 31 Sales of Panevėžys-based wire and cable million respectively, but both companies man- maker Lietkabelis declined by 13% in 2007 aged to retain respectable profit margins. to LTL 95 million, fell to LTL 59 million last US-based manufacturer of industrial and year and are expected to contract even fur- medical installations Moog Inc. paid USD 21 ther to just LTL 35 million this year. However, million (LTL 51.5 million) for a 100% stake in the company continues with its investment Lithuanian syringe pump maker Viltechmeda, programme. Having secured support from which has grown strongly in recent years and the EU, it has already ordered new installa- returned excellent profits. tions and plans to begin assembling them at the end of the year. The total value of invest- A subsidiary of Japanese Yazaki Wiring Tech- ment is LTL 12 million, and modernisation is nologies in Klaipėda has been reducing its scheduled to be completed within three years. output and laying off workers. After June, the The company has signed a contract with an company will only employ about 200 people unknown Scandinavian enterprise and hopes in Lithuania. It will probably have to aban- that sales to the new partner will generate up don its plans to relocate some production of to 30% of company’s revenue in autumn. wiring sets for Volvo trucks from Portugal to Klaipeda since the estimated relocation costs would exceed the potential benefits of this project due to reduced output. Transport equipment Currently, about 500 workers are still assem- In 2004–2006, this sector grew at the fast- bling wiring sets for Renault Megane and Re- est pace among all economic activities renault Scenic cars. Yazaki branches in Plungė, viewed in this publication but began ‘losing Šilutė and Mažeikiai have already been shut momentum’ in 2007. Last year, the transport down and the majority of work has been equipment industry again demonstrated ex- taken over by Bulgarian companies. Just a cellent growth as its value added at constant couple of years ago, the company asked the prices rose by almost a quarter compared to government for permission to bring in cheap- the previous year (see Diagram 14.22). The er labour from Belarus when its turnover volume of sales increased by almost a fifth stood at around LTL 500 million. Last year, last year compared to 2007. Exports of pro- the company employed 950 people, while a duction leaped by 23%, and over two-thirds

Diagram 14.22 Value added created by manufacture of motor vehicles, annual change, %

50 41.0 40.9 40 3.2 2.0

30 24.9 23.3 3.1 20.3 37.8 1.6 20 39.0 2.3

10 5.4 21.8 7.6 21.7 1.1 18.0 5.5 6.5 0 -0.2

-10 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

Manufacturing 113 Diagram 14.23 Sales of motor vehicles and other transport equipment, LTL Mio

1800

1500

1200 1119

900 912 741

600 544

427 300 375 394 508 410 451 317 181 60 105 0 2002 2003 2004 2005 2006 2007 2008

Domestic sales Exports

Source: Statistics Lithuania

of output was sold on foreign markets (see be mentioned that it remained quite respect- Diagram 14.23). Despite the global economic able in the second half of the year when profit downturn, the industry retained its strong margins across the manufacturing industry growth and remained in the positive territory shrank dramatically. Last year, the average in the first half of the year, in contrast to the debt ratio of companies operating in this sec- majority of industries. tor went down to 0.43 and was by 15% lower than the MI’s average. Table 14.11 presents the main indicators of the sector. As we can see, labour productivity The transport equipment industry should in the transport equipment sector was by a brace itself for serious challenges this year. fifth above the MI’s average in 2008, although The demand for vehicles has drastically de- the annual growth of this indicator was much clined worldwide and the year will not be as smaller than across the manufacturing in- successful as 2008. In the first quarter of this dustry. Value added per worker increased by year, the sales volume of the sector fell by about 14%. The growth of productivity was half year-on-year. hampered by a low level of investment: for a We will now briefly review the structure of total fourth year in a row, the ratio between capital turnover of companies operating in this indus- investments and value added was lower than try and changes in this structure throughout 10% and even fell below 8% last year, which is 2008. Shipbuilding and repair companies twice as little as the MI’s average even though generated the largest percentage of total turn- the latter was not high either. While the num- over which stood at about 40% last year, ris- ber of workers in the manufacturing industry ing by two percentage points over the year. continued to decline, workforce in the sector For the last several years, manufacture of concerned increased by almost 8%. In the vehicle bodies and trailers has been grow- last four years, the headcount rose by 36%. ing very strongly. The relative weight of these For a third year in a row, average profitabil- companies increased by a percentage point to ity of manufacturers of transport equipment 31% last year. In a year, the weight of bicycle was much higher than the manufacturing in- manufacture fell from 12.3% to 10% of ag- dustry’s average. It stood at 8.4% two years gregate turnover. The contribution by railway ago and dropped to 7% last year. It should locomotive and rolling stock manufacture

114 Lithuanian Economic Outlook Table 14.11 Key statistical indicators of motor vehicles manufacture

Ratio to the Annual growth manufacturing rate, % indicator, % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 761 926 381 450 6.0 21.7 18.0 Value added (at current prices), LTL Mio 754 929 378 455 5.0 23.3 20.3 Total production, LTL Mio 1364 1627 656 770 3.0 19.3 17.4 Exports, LTL Mio 912 1119 434 543 3.3 22.7 25.3 Labour productivity, LTL thou** 96.3 110.3 47.7 55.4 120.2 14.5 16.1 Number of persons employed, thou 7.8 8.4 7.9 8.2 4.2 7.7 3.6 Average monthly earnings, LTL 2342 2876 2523 3005 135.9 22.8 19.1 Fixed investments, LTL Mio 63 66 37 35 2.3 4.5 –5.1 Foreign direct investments (end of period), 495 530 495 530 7.2 7.0 2.1 LTL Mio Sales of goods and services, LTL Mio 1705 2069 912 1092 3.7 21.4 19.8 Gross profit, LTL Mio 371 375 184 185 4.8 1.2 0.9 Operating profit, LTL Mio 150 158 59 67 9.0 5.3 12.7 Profit before tax, LTL Mio 143 145 55 56 11.1 1.2 2.0 Assets (end of period), LTL Mio 966 1184 966 1184 3.5 22.6 –9.2 Liabilities (end of period), LTL Mio 424 511 424 511 3.0 20.5 –23.5 Return on sales, % 8.41 7.01 6.02 5.13 303.8 – – Return on assets, % 11.67 10.58 6.57 10.26 284.9 – – Debt ratio (end of period), % 0.44 0.43 0.44 0.43 84.6 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania and repair companies was almost the same In 2008, turnover of Baltijos Laivų Statykla in 2008, rising slightly above the indicator of stood at LTL 195 million, up by 23% from two 2007. The percentage of car assembly com- years ago, but profit was close to zero. The panies declined more than 1.5 times last year shipyard is controlled by the Danish Odense to around 4%, while the relative weight of Shipyard which has been securing orders for aircraft manufacture and repair plunged the Lithuanian company lately. The Klaipėda- to 1.5%. based company seems to have sufficient or- Vakarų Laivų Gamykla, the largest company ders for this year but is not sure about its in the transport equipment sector, and its prospects in 2010–2011 as the Danish parent subsidiaries boosted their sales by 63% to has already felt the aftermath of the crisis. LTL 401 million and employed 1,500 people Baltijos Laivų Statykla employs about 1,400 last year. The company controlled by Estonian people but plans to make about one hundred BLRT Grupp earned LTL 66 million in consoli- workers redundant in the coming months. In dated pre-tax profit, up 1.9 times compared to general, the number of shipbuilding orders 2007. The shipyard is fully booked until 2011. has fallen considerably worldwide, while the Arnoldas Šileika, CEO of the company, admit- competitive pressure of Asian manufacturers ted that the volume of work has declined but has increased which means that both Lithu- shipyards have also benefited from the cri- anian shipyards will face serious challenges. sis. While the prices of metals and equipment In Panevėžys, Schmitz Cargobull Baltic, sub- have doubled and wages have risen steeply sidiary of German Schmitz Cargobull, manu- in recent years, the crisis helped cut these factures isothermal car bodies, ferroplast pan- costs of producers. els and tilt semi-trailers. The company has

Manufacturing 115 enjoyed strong growth for several consecutive In 2008, Vilniaus Lokomotyvų Remonto Depas years. In 2008, turnover rose to LTL 341 mil- saw its sales rise by 12% to LTL 118 million lion and pre-tax profit stood at LTL 32 million, and its profit double to over LTL 4 million. up by 56% and 63% respectively compared to Last year, railroad switch maker VAE Legete- 2007. However, orders were few and far be- cha earned LTL 51 million in revenue and LTL tween at the end of the year and the company 2.6 million in profit, up by 42% and 37% re- laid off 54 people out of 347. The European spectively from a year ago. Automobile Manufacturers’ Association predicts that the global economic crisis will cut Eu- Žiemgalos Automobiliai, which assembles Be- ropean production of cars by 25%, which will larusian MAZ trucks, grew strongly in 2004– most probably translate into a weaker demand 2007. However, a standstill in the construction for the output of Panevėžys-based company. industry across Europe last year weakened the demand for dump trucks and the compa- Bicycle producer Baltik Vairas owned by the ny’s turnover shrank almost by half to LTL 30 German Panther group earned LTL 164 mil- million. lion in revenue last year, a fractional decline from the previous year.

116 Lithuanian Economic Outlook 15. Electricity, gas and water supply 15. Electricity, gas and water supply

Some unresolved problems have accumulat- prices. According to the European require- ed lately in the Lithuanian energy sector, not ments, Lithuania will have to select measures to mention the fact that the Ignalina nuclear to break up the monopolies within a period of power plant (INPP) will be decommissioned 18 months. Estonia and Latvia face the same at the end of the year which will dramatically problems and it is increasingly likely that the change the situation in the electricity industry. Baltic states will soon create a single electric- Therefore, even the latest drive to cut govern- ity market. Sweden also has some interest in ment spending could not prevent the resurrec- it as this country should be connected to Lith- tion of the Ministry of Energy. The first action uania via an electricity link to be co-financed taken by the new minister Arvydas Sekmokas by the EU (EUR 175 million). Prime Minister signalled a commitment to firmly control the Kubilius insists that this market will be cre- undertakings subordinate to the government, ated based on the example of Nord Pool, the ensure their efficiency and curb rising prices single Nordic market. of supplied energy. However, it is important not to go over the top: if savings are made This sector plays a very important role in sacrificing the necessary investments, the ex- modern economy and its output is regarded isting problems will only become more press- as one of the basic necessities. Lithuania still ing in future. The government needs to take stands out among other EU member states by measures aimed at liberalisation of the energy its energy-intensive economy and, therefore, market, promotion of small energy producers it is only logical that the comparative weight and broader use of renewable energy sources. of the sector concerned is much higher than By the way, the European Parliament agreed across EU-15, although the gap to the EU av- to the so-called third energy market liberalisa- erage has narrowed slightly in recent years. tion package in late April. The new legislation The energy and fuel balance indicates that provides for the ways in which member states final energy consumption was growing at a should separate production and transmission slower pace than value added generated coun- of electricity and gas. The European Com- try-wide in 2006–2007. Two years ago, it in- mission said that the package was designed creased by 5.2% annually to 5 million tonnes to promote competition and reduce energy of oil equivalent (TOE). The detailed data of

Diagram 15.1 Value added created by electricity, gas and water supply, annual change, %

30 26.4 0.8 25

20 17.6 14.8 15 25.6 10 18.8 5.3 5.8 15.2 5 3.2 1.4 4.7 7.4 3.2 0 0.0 0.3 1.1 1.1 -0.4 -2.1 -1.2

-5 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices Labour market and wages Source: Statistics Lithuania

118 Lithuanian Economic Outlook Table 15.1 Key statistical indicators of electricity, gas and water supply sector

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 2512 2501 1260 1245 3.5 –0.4 –1.2 Value added (at current prices), LTL Mio 2768 3177 1407 1655 3.2 14.8 17.6 Total production, LTL Mio 6057 7446 2954 3731 3.7 22.9 26.3 Labour productivity, LTL thou** 117.5 138.2 60.1 73.0 179.0 17.6 21.5 Number of persons employed, thou 23.6 23.0 23.4 22.7 1.8 –2.4 –3.2 Average monthly earnings, LTL 2360 2738 2487 2832 121.8 16.0 13.9 Fixed investments, LTL Mio 1650 1579 1052 963 7.3 –4.3 –8.4 Foreign direct investments (end of period), 3206 2354 3206 2354 7.5 –26.6 –15.2 LTL Mio Sales of goods and services, LTL Mio 7563 9915 3767 5156 4.7 31.1 36.9 Gross profit, LTL Mio 951 837 289 227 2.1 –12.0 –21.5 Operating profit, LTL Mio 341 168 –45 –109 1.7 –50.5 – Profit before tax, LTL Mio 399 167 19 –94 2.1 –58.0 – Assets (end of period), LTL Mio 22014 24645 22014 24645 12.9 12.0 2.9 Liabilities (end of period), LTL Mio 4282 5774 4282 5774 6.8 34.8 17.2 Return on sales, % 5.27 1.69 0.50 –1.83 43.9 – – Return on assets, % 1.92 0.70 0.18 –0.78 16.7 – – Debt ratio (end of period), % 0.19 0.23 0.19 0.23 52.4 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

2008 are not available yet but gross inland increase was a mere 5% and the volume fell consumption of natural gas, which includes by a similar margin in 2008. Therefore, mod- consumption of energy sources for both en- ernisation of the energy industry is moving ergy generation and non-energy needs, fell ‘at a snail’s pace’. This can be explained to a by a tenth last year and the relevant indicator degree by a decline in industry’s profitabil- of electricity rose by less than 4%. ity: having stood at 7.3% in 2006, the profit to revenue ratio fell for the second consec- Last year, value added generated by the in- utive year in 2008 to just 1.7%. Moreover, dustry concerned (hereinafter the ‘E industry/ the E sector carries a considerable ‘hump’ of sector’) stood at LTL 3.2 billion, up by almost debt. Although the debt ratio of the indus- 15% from 2007. Its share in the GDP struc- try is much lower than the economy’s aver- ture increased slightly to 3.2% exceeding the age (see Table 15.1), the liabilities to annual relevant EU indicator almost 1.5 times. This value added ratio rose strongly in 2008 for a growth relied on higher product prices since fifth year in a row and was one of the highest value added at constant prices generated by among the economic sectors reviewed here the E industry fell by a small margin com- and was double the economy’s average. Last pared to two years ago (see Diagram 15.1). year, the amount of total liabilities of compa- Although the E sector has always had a rela- nies operating in the E industry swelled by tively strong flow of capital investments and more than a third. the ratio between these investments and value added was 2.3 times higher than the The headcount in the E sector has been de- economy’s average last year (see Table 3 in clining for several years. In 2008, it fell by the Annex), the volume of capital investments 2.4%, or almost twice as little as in the few has almost stalled lately. In 2007, the annual previous years. At the same time, the growth

Electricity, gas and water supply 119 of average wages accelerated. In 2008, the 20% and 10% respectively. Lithuania has a average wage in the E industry rose by 16% commitment to the European Union to gen- to LTL 2,738 and remained much higher erate 7% of electricity using ‘green’ sources than the national average. During the year, by 2010. Prof. Jurgis Vilemas believes that value added per worker in the energy sec- Lithuania will not be able to meet the target tor went up by almost 18% on average, but next year as it is a couple of years behind this increase was mostly due to higher prod- schedule. He sees the only option: in addition uct prices, as mentioned before, rather than to small wind farms, Lithuania has to build higher efficiency. 200 MW or more powerful installations as the developed countries do. Next year, after the decommissioning of the INPP, which generates about 70% of total There are also vast opportunities for eco- electricity consumption in Lithuania, the en- friendly heating and biofuel use but their ergy sector will face serious challenges and potential has not been tapped yet. Repre- the country will become even more energy- sentatives of companies selling solar heat- dependent on Russia. However, the threat of ing systems, heat pumps and biofuel boilers the potential electricity deficit and a steep insist that advanced and eco-friendly energy increase in prices should not be exagger- generation technologies struggle to find a ated. No doubt, the era of cheap electricity place in our lives because private consum- will end and the period of 2010–2011 will be ers in Lithuania are not offered any incentives extremely difficult until two modern 400 MW or compensations for the use of alternative and 320 MW units are put into operation by energy sources. At the same time, many Eu- power plants Lietuvos Elektrinė and Kauno ropean countries have put in place a support Elektrinė. Although there seems to be quite system promoting investment in alternative good electricity import opportunities, experts energy generation. believe that the price for household customers may rocket to 0.55 LTL/kWh (see an ar- By giving priority to these types of energy, ticle by Dr. A. Galinis in Mokslas ir technika, Lithuania would deal with its energy security 2009/7). It will strongly depend both on the and pricing issues supporting, at the same global prices of oil and the efficiency of elec- time, local businesses and introduction of tricity distribution and supply systems. In new technologies, which is vitally important many countries, the producer or wholesaler during the economic downturn. It seems that price comprises 20–40% of the final price paid the situation is changing for the better with by the consumer. The rest is paid for trans- the arrival of the new Cabinet. Lithuania has mission, distribution, etc. Therefore, it is im- set a target to generate 23% of energy from portant to ensure that the electricity market renewable sources by 2020, with particular has as strong competition as possible, which focus on the generation of thermal energy. simply has not existed in Lithuania until now. The government has plans to promote bio- This factor is also important for the competi- fuel use and development of wind farms. The tiveness of our economy. Some industry rep- latter area has been reenergised. Currently, resentatives maintain that many companies the total capacity of wind farms amounts to are finding it increasingly difficult to compete 70 MW in Lithuania and is set to reach 200 with foreign companies because of the inflex- MW by 2011, i.e. comprise about a sixth of ible current energy pricing policy. the currently used capacity of INPP. However, electricity imports are very likely to increase The development of alternative energy sourc- dramatically next year and the production in- es is another pressing problem. Currently, dicators of the E sector will decline. they meet only 9% of the demand in the EU but their share has been growing strongly. In The Lithuanian economy also relies heavily 2007, wind energy alone accounted for 40% on imports of natural gas. Its dependence of new electricity generation capacity. Lithua- on a single supplier means that Gazprom is nia, as a country highly dependent on Russia, unlikely to agree to any concessions. More- performed poorly in the field of alternative en- over, Lithuania may face a shortage of gas ergy sources, and builders of wind farms say in future. However, until now Lithuania has that they even encountered artificial barriers. not experienced any disruptions in the supply In 2007, only 4.6% of total electricity gen- of natural gas or abnormal price hikes incon- eration came from alternative sources in our sistent with the global trends, so the debate country. Most of this energy was generated by about construction of the liquefied gas import hydro power plants (70%), while wind farms terminal has subsided. This project would not and biofuel incineration plants produced just be cost-effective and it seems that, given the

120 Lithuanian Economic Outlook current crisis, nobody is interested in the ter- Last year, net profit of Lietuvos Energija minal. At the same time, local gas custom- stood at LTL 47 million and was similar to last ers can enjoy some good news as gas utility year’s, while revenue went up by 31% to LTL Lietuvos Dujos plans to lower its prices due 1,482 million. Domestic sales comprised 10.1 to the falling cost of oil. From the middle of million MWh of electricity, up by 3.6% from this year, gas prices for households are set to 2007, and 2.4 million MWh was exported. The shrink by 14–19%. company’s investments into renovation and development of energy installations reached Cheaper gas gives hope that the district heat- LTL 160 million in 2008, up by 5% from 2007, ing costs will also go down. Actually, the po- and this year the volume of investment will tential for cheaper energy or reduced imports shrink slightly. of energy sources lies not only in a broader use of local biofuel and biogas for heat gen- Profits of power distribution companies were eration but also in renovation of buildings and quite high in 2007, but margins declined con- heat supply lines. The Association of Heat siderably last year due to the higher price of Suppliers estimates that technical losses in bought-in electricity. Last year, VST revenue Lithuanian heat transmission networks have rose by 10% to LTL 1,165 million and net accounted for over 17% of total heat supplied profit plummeted 5.8 times to LTL 11.7 mil- in recent years. lion. The company invested LTL 144 million into renovation of networks and installations, Finally, let’s review the latest results of indi- slightly more than two years ago. vidual companies operating in the E sector. In 2008, Rytų Skirstomieji Tinklai (RST) According to preliminary estimates, total earned LTL 1,191 million in revenue, up by electricity generation comprised 13.9 billion 12.3%, to but incurred a loss of LTL 81 mil- kWh in Lithuania last year, down by 0.7% lion as a result of revaluation of assets and from 2007. Last year, 71% of total energy higher electricity production costs. Last year, in Lithuania was generated by the Ignalina the company invested about LTL 250 million nuclear power plant, 21% by thermal power into tangible fixed assets and plans to spend plants, 7% by hydro power plants and Kruon- LTL more than 180 million this year. is pumped storage plant, 1% by wind farms. Last year, total energy consumption rose by Higher fuel prices meant that Lithuanian heat 3.4% compared to 2007 to 9.1 billion kWh, suppliers have been unable to return a profit of which retailers and service providers con- lately. In 2008, turnover of Kauno Energija sumed 35.2%, industrial companies 31.9% rose by 22% and a loss of LTL 4.3 million was and households 29.7%. Last year, Ignalina twice as little as a year ago. The company NPP sold 9.14 million MWh of generated elec- expects to earn almost LTL 11 million in profit tricity, a similar volume to 2007. Its revenue this year. rose by 4.3% to LTL 597 million, but pre-tax Higher prices of gas contributed to an im- profit fell in double digits to LTL 2 million. pressive growth of turnover of gas compa- In 2008, revenue of Lietuvos Elektrinė grew nies last year, but their profitability went by 30% to LTL 396 million, but net profit of down. As a result of higher gas import prices, LTL 34 million earned in 2007 was replaced sales of Lietuvos Dujos soared by 51.9% to by a loss of similar magnitude. Last year, LTL 1,555 million last year, pre-tax profit fell the power plant, which will become the ma- by 41.5% to LTL 73.3 million and net prof- jor producer of electricity after the INPP is it shrank by 38.3% to LTL 64.2 million. In decommissioned, received LTL 63.5 million a year, the company’s investments rose by in grants for its modernisation projects. The 4.1% to LTL 123 million, of which LTL 38.6 International Ignalina NPP Decommission- million was invested into renovation of gas ing Fund transferred LTL 48.6 million to the transmission and distribution system and power plant and another LTL 14.9 million was LTL 84.7 million into construction of new gas received from the National INPP Decommis- systems. The company plans to invest LTL sioning Fund. 250 million this year.

Electricity, gas and water supply 121

16. Construction 16. Construction

Having been ‘spoiled’ by the booming real of a deep downturn. The sector retained its estate market in recent years, players of the growth rate (at current prices) in the posi- construction sector are struggling for their tive territory thanks to the annual increase survival today. The freefall of the economy has in input prices which still stood at 5.9% on drastically adjusted the needs and possibilities average in the second half of 2008. However, of customers, while the increased operational monthly changes in the annual inflation of risk of the sector made it more difficult to bal- construction input prices show that the indi- ance financial flows. Companies have suspend- cator was losing 11% percentage points since ed their operations as they are unable to find a June 2008 and finally came to a halt last De- safe haven to make it through the downturn. cember. It is not surprising that the first fall As a result, the construction industry went into in prices was seen in the housing segment, a standstill at the end of last year. and construction prices in other categories Although the annual growth of gross output of real estate also began sliding down in the of the construction industry remained in the first quarter of this year. The main ‘anchor’ double-digit zone (11.1%) in 2008, this in- dragging the annual change in the construc- dicator essentially represents the result of tion input price index down into the negative the first quarter as gross output of construc- territory was labour-related costs. While the tion rose by 2.9% year-on-year in the second component of wage costs was still growing at half of 2008 in Lithuania. The turning point in a rate of 5% last autumn, it contracted by al- the construction sector is even more vividly most a quarter year-on-year in March 2009 in reflected in the trends of value added- gen the industry concerned. It means that the li- eration (see Diagram 16.1). After impressive abilities have put a stranglehold on the devel- leaps of 2006 and 2007, last year’s 1.2% opers and building companies forcing them to annual increase in value added looks very improve their efficiency, optimise costs and modest indeed. While the sector still demon- lay off workers. As payment delays become strated an inert growth of over 8% in the first more abundant, construction companies half of 2008, the result of the second half of made the first announcements of massive re- the year, a drop of almost 4% in value add- dundancies at the end of last year. As a re- ed, was a clear curtain-raiser to the phase sult, the number of workers, which has been

Diagram 16.1 Value added created by construction sector, annual change, %

40 37.2 33.3

30 16.0 24.2 12.4 1.4 19.9 20 13.8 8.5 10.8 22.8 10 6.6 21.0 21.2 9.6 3.2 7.3 11.4 0 1.2 6.9 -3.8

-10 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

124 Lithuanian Economic Outlook Table 16.1 Key statistical indicators of construction sector

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 6254 6330 3674 3537 8.9 1.2 –3.8 Value added (at current prices), LTL Mio 8992 9964 5424 5596 10.0 10.8 3.2 Total production, LTL Mio 18431 20480 11148 11476 10.2 11.1 2.9 Labour productivity, LTL thou** 86.4 94.5 51.2 55.6 122.5 9.5 8.6 Number of persons employed, thou 104.1 105.4 106.0 100.7 8.1 1.2 –5.0 Average monthly earnings, LTL 2213 2449 2377 2471 108.9 10.6 4.0 Fixed investments, LTL Mio 672 473 364 208 2.2 –29.6 –42.8 Foreign direct investments (end of period), 549 632 549 632 2.0 15.1 15.9 LTL Mio Sales of goods and services, LTL Mio 17021 18145 10095 9987 8.6 6.6 –1.1 Gross profit, LTL Mio 3648 3443 2225 1883 8.5 –5.6 –15.4 Operating profit, LTL Mio 1652 1201 1069 733 12.0 –27.3 –31.4 Profit before tax, LTL Mio 1617 1102 1043 672 13.6 –31.8 –35.6 Assets (end of period), LTL Mio 10593 12104 10593 12104 6.3 14.3 –1.3 Liabilities (end of period), LTL Mio 6042 6964 6042 6964 8.2 15.3 –9.1 Return on sales, % 9.50 6.07 10.33 6.73 157.7 – – Return on assets, % 16.33 8.98 19.62 10.58 214.0 – – Debt ratio (end of period), % 0.57 0.58 0.57 0.58 128.7 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania growing in double digits for several years in residential buildings and engineering works, a row, fell by 5% year-on-year in the second both segments were falling in unison dur- half of 2008. Today, the situation in the con- ing the fourth quarter. Analysis of individual struction labour market is even gloomier as categories of construction work shows that both local builders who have lost their jobs the broadest range of fluctuations could be and the returning emigrants who had ‘their seen in the volumes of residential construc- wings clipped abroad’ are joining the ranks of tion work, which accounts for up to a fifth of the unemployed. Labour productivity indica- construction work. Having grown 1.5 times tors (see Table 16.1) point out that the sector in 2007, the volume of this type of work be- has benefited from this painful workforce re- gan declining in the third quarter of 2008 duction procedure. Despite the financial diffi- and plunged by a massive 70% in the first culties befalling the construction industry, the quarter of this year. In the first three quarters latter efficiency measure continued to grow of 2008, the volume of non-residential con- strongly in the second half of 2008 (up by struction was still growing strongly. However, 8.6% year-on-year). the stalling market of commercial properties contributed to an 8.6% year-on-year decline However, given the current standstill, these in the construction volume in the last quar- efforts are unlikely to have much effect. ter of last year. Deplorable indicators for the The indicators of own-account construction first quarter of the year (the volume of own- work show that the construction industry will account work in non-residential construction be ‘lethargic’ in the coming years (see Dia- contracted by almost 48% year-on-year) sig- gram 16.2). While the sector continued to nal that this segment, which generates over grow quite strongly in the first three quar- 40% of total construction work volume, is set ters of 2008 supported by the inertia of non- to decline at a double-digit rate this year.

Construction 125 Diagram 16.2 Construction works carried out by local construction enterprises within the country (at current prices, VAT excluded), annual change, %

60 52.2

45 39.0 41.6 40.0 37.5 36.2 37.0 31.4 28.430.8 30 23.1 23.7 13.6 15 12.0 11.8

0 -1.4 -6.6 -15 -8.6 -12.3 -13.2 -15.9 -30

-45 -45.1 -47.8 -60

-75 -69.9 Total Residential Non-residential Civil engineering buildings buildings works

2007 2008 I 2008 II 2008 III 2008 IV 2009 I

Source: Statistics Lithuania

As the residential property market came to a but could not avoid a symbolic annual decline halt, the volume of own-account construction of 1.4% by the end of the year. The cost cut- work carried out abroad has risen sharply. In ting initiative undertaken by the government 2007, this sort of construction work exports al- has dealt a severe blow to investment proj- most doubled (87%), while the relevant annual ects: construction volumes of engineering change stood at 23% last year. These trends works contracted by 13.2% year-on-year in are supported by statistics of the balance the first quarter of this year. of payments of construction services export Analysis of domestically carried out construc- published by the Bank of Lithuania. However, tion work by type indicates that the structure it is likely that the haven found by Lithuanian has remained stable in the last few years and construction companies abroad will be short- that new projects accounted for more than a lived as real estate markets of a number of half of domestic construction work. The rest countries are also undergoing a deep price re- was shared between reconstruction as well as cession. In terms of the mid-term prospects of repairs and renovation work in almost equal the construction industry, developers struggle parts. However, the growth rate of the volume with finding a niche for their operations where of individual types of construction work (at they could safely sweat out the economic the then prices) changed compared to 2007. recession. As both housing and commercial While the volume of new construction work in- property markets stalled, construction com- creased roughly 1.5 times in 2006 and 2007, panies feverishly rushed to look for ‘straws’ i.e. nearly double the rate of other catego- to catch in the modernisation programme for ries, new construction was growing 3.5 times public and apartment buildings as well as con- slower than repairs and reconstruction work in struction of engineering works. However, cur- 2008. Last year, the volume of new construc- rent developments in public finance indicate tion work increased by 5% compared to the that, unfortunately, the government sector is relevant indicator of 2007, while the volume of also struggling to make ends meet. Accord- reconstruction work went up by 18% and the ing to the figures of last year, development of volume of restoration and repair work rose by engineering works comprised nearly 38.6% of 16.4% compared to the previous year. own-account construction work. This segment continued to grow strongly at an average rate The fact that Lithuanian businessmen no lon- of 31.3% in the first three quarters of 2008 ger see their future in property development

126 Lithuanian Economic Outlook is also reflected in the statistics of -invest and even beat its operating targets. In 2008, ments in tangible assets. After an exceptional it earned LTL 24.2 million in net profit, down growth period during the construction boom, by 21% from the previous year, and its rev- investments in capital goods and real estate enue rose by 13% to LTL 0.586 billion. At the fell by a third at constant prices and by a same time, another market giant, a group of massive 43% at the then prices last year. The construction and real estate investment com- indicator is not expected to recover this year, panies Ranga Group, can only ‘boast’ about while market pessimists believe that the de- an intricate net of debts around its companies velopment of both residential and commercial and angry creditors. Debts of property devel- projects will continue to stagnate for at least oper Ranga IV, which belongs to his group, three years. Foreign investors are more opti- reached LTL 74.84 million1 at the end of 2008, mistic about Lithuania’s prospects. Last year, and nearly half of the amount comprised li- foreign direct investment in the construction abilities to other companies associated with sector stayed at the level of 2007 and contin- the director of Ranga IV. At the beginning of ued to grow by more than 15%. This signals this year, Ranga IV went into restructuring that foreign investors expect a positive return but its creditors want to terminate the proce- in the longer run at least. dure accusing the group of deliberately creating the chain of debts. In 2008, Ranga Group Last year, the financial performance of the earned LTL 0.35 billion in revenue, down by construction sector was much more modest 40% from the previous year. than before. Having grown at an average annual rate of 35% in 2005–2007, total revenue Turnover of Telšiai-based Vėtrūna, which is of construction companies rose by just 6.6% building Kaunas Arena, contracted by 2% last year, and the indicator was negative in compared to 2007 and stood at LTL 263.58 the second half of 2008. During the year, the million. Meanwhile, services and sales of the leverage ratio in the sector grew marginally by Mitnija group, one of the top five property de- one basis point to 0.58 at the end of 2008 but velopers in Lithuania, grew by 22% last year was by 29% higher than the economy’s av- to LTL 288 million. Revenue of property devel- erage. Last year’s profit indicators were also oper Eika also rose by a fifth (to LTL 252.15 more modest: pre-tax profits of construction million) in 2008 but its last year's profit more companies fell by almost a third during the than halved compared to 2007 and stood at year and their profit margins dropped from LTL 14.4 million. 9.5% in 2007 to 6.1% in 2008. And even The psychological climate of players in the though the inertia of the construction seg- construction sector and their sentiments about ment kept this indicator still 1.5 times above the future are well reflected in the ‘barom- the economy’s average in 2008, the situation eter’ of expectations of construction compa- will soon change. Weak demand for construc- nies (see Business and consumer confidence tion services, depleting sources of earnings indicators), which has been indicating bleak and high loan administration costs are forcing prospects for some time now. Having reached a number of companies into the negative ter- a record high for the construction confidence ritory or even out of business. These trends indicator in May 2007 since the records be- are reflected in the rapidly rising percentage gan, this indicator of the sector’s psychological of loss-making businesses in the total number state plunged down and has been posting one of construction companies. At the end of last anti-record after another since October 2008. year, such companies accounted for over 45% of all players in the sector, up by 20 percent- The outlook for the construction industry in age points year-on-year, and the situation is Lithuania is bleak as the sector is set to stay even bleaker at the moment. The view is sup- in a complete standstill for the next several ported by Panevėžio Statybos Trestas (PST), years. Residential and commercial property one of the largest construction companies in markets will become appealing to investors Lithuania. In the audited annual report 2008, only after the economy recovers and play- it identified the reluctance of banks to lend ers of the domestic market regain their opti- and unreasonably low prices quoted by de- mism. The development of engineering works velopers in construction work tendering pro- is also set to stall since the government is cedures as the main obstacles for business already buying the ‘thread’ to patch up holes in future. According to the audited results of in public finance at the expense of investment last year, the PST Group managed to achieve projects.

1 Based on BNS information.

Construction 127

17. Domestic trade 17. Domestic trade

After a hugely successful period of growth slightly cheaper goods and many discount lasting several years, domestic trade came campaigns to consumers. Although the mar- to a grinding halt last autumn. The mood in athon has continued even after the new col- nearly all types of trade companies was dis- lections were brought in, it had little effect on mal and the main indicators of the sector de- sales. While revenue from sales of products teriorated considerably. Although the annual and services was still growing in 2008, the growth in value added at constant prices was growth rate slowed down almost 2.4 times still positive (3.2%) in domestic trade, the in- compared to 2007 to 12.6% and stood at a dicator plummeted below zero in the second mere 4% in the second half of last year. half of 2008 (see Diagram 17.1). The deteriorating financial indicators also add With consumer expectations reaching record to the pessimism as pre-tax profits, which lows and macroeconomic projections worsen- reached their growth peak in 2007 (118%), ing with every month, many companies had fell by 42.7% last year mostly due to the de- to rethink their growth plans and market be- cline in the second half of the year (–62.5%). haviour. As the ‘golden age’ ended, compa- As a result, the annual profitability ratio fell nies made drastic cuts to their investment by half from 6.8% in 2007 to 3.4% in 2008. projects. Last year, capital investments in the The debt ratio soared to its highest level since sector declined by more than a quarter and 2000 reaching 0.64 (from 0.61 in 2007). fell by almost 36% in the second half of 2008 The slumping sales and relatively large liabili- (see Table 17.1). The headcount in domestic ties became an unbearable burden for some trade began contracting in the last months of representatives of the sector. Last year, do- 2008 and the process has continued this year. mestic trade saw the highest rate of bank- Nevertheless, domestic trade overtook the ruptcies as 269 trade companies went out manufacturing industry as the largest em- of business (29% of all companies that went ployer in Lithuania for the first time last year. bankrupt in the country). In the first quarter Some retailers responded to the new eco- of this year, almost 100 trade companies also nomic situation last year and began offering faced financial difficulties (22.2%).

Diagram 17.1 Value added created by domestic trade, annual change, %

20 17.4

14.0 15 13.6 5.2 12.0 10.7 9.7 3.9 10 2.6 8.7 4.0 10.8

9.4 12.2 5 10.5 9.7 9.6 6.7 3.2 0 -0.8 -0.9

-5

2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

130 Lithuanian Economic Outlook Table 17.1 Key statistical indicators of domestic trade

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 12770 13175 6880 6821 18.4 3.2 –0.9 Value added (at current prices), LTL Mio 14677 16733 8061 8764 16.7 14.0 8.7 Total production, LTL Mio 21487 24123 11901 12684 12.0 12.3 6.6 Labour productivity, LTL thou** 70.6 78.7 38.1 41.9 101.9 11.4 9.9 Number of persons employed, thou 207.8 212.7 211.4 209.0 16.4 2.4 –1.1 Average monthly earnings, LTL 1810 2092 1917 2117 93.0 15.5 10.4 Fixed investments, LTL Mio 2125 1574 1260 810 7.3 –25.9 –35.7 Foreign direct investments (end of period), 3962 4449 3962 4449 14.1 12.3 9.4 LTL Mio Sales of goods and services, LTL Mio 77718 87479 42611 44381 41.4 12.6 4.2 Gross profit, LTL Mio 13926 15697 7569 7792 38.9 12.7 2.9 Operating profit, LTL Mio 3886 3455 2080 1609 34.5 –11.1 –22.6 Profit before tax, LTL Mio 5256 3012 3449 1292 37.1 –42.7 –62.5 Assets (end of period), LTL Mio 35188 37803 35188 37803 19.8 7.4 1.2 Liabilities (end of period), LTL Mio 21311 24138 21311 24138 28.3 13.3 –3.9 Return on sales, % 6.76 3.44 8.09 2.91 89.4 – – Return on assets, % 16.41 7.93 20.27 6.71 188.8 – – Debt ratio (end of period), % 0.61 0.64 0.61 0.64 142.9 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

The indicators of the first months of this year were registered in Lithuania in the first five are also less than encouraging. In the period months of this year, down by 71% year-on- of four months, retail turnover1 declined by year. It is one of the worst indicators in the almost 30% year-on-year. The indicator has European Union as only Iceland and Latvia re- been falling for seven consecutive months. corded a steeper drop in sales of new cars. The results are slightly better if we eliminate As the summer season approaches, retailers retailers and wholesalers of motor vehicles will most likely be able to breathe a sigh of and motorcycles as well as repair shops, as relief since the decline of turnover will decel- the decline from January to April comprises erate for a while. After hitting rock bottom at about 19% then. the beginning of the year, the retail trade con- In the first half of last year, the annual change fidence indicator shot up in May and the trends in turnover of vehicles was at a similar level to of turnover are also indicating some sort of two years ago (about 28%). However, in the stabilisation (see Diagram 17.2). Improving second half of the year, the demand for cars expectations across the domestic trade in- came to a halt and turnover fell by 11.3% dustry are also reflected in the data from the year-on-year. The annual result contracted to survey of managers of retail companies: while 15.7% accordingly. In the first four months of 86% of company managers said that their this year, the said indicator more than halved turnover had declined in April, the percentage (–55.2%). The situation on the market of of pessimists fell to just 68% in May. Although brand new cars is even more desperate: ac- there are more and more encouraging signs cording to AutoTyrimai, just 3,900 new cars on the horizon, the real recovery is still far

1 Turnover of retailers and companies engaged in retail trade and wholesale of motor vehicles and motorcycles, repair shops (excluding VAT), measured at constant prices.

Domestic trade 131 Diagram 17.2 Annual change of retail trade turnover at constant prices (in percent) and retail trade confidence indicator

-20

-40

-60

2005 2006 2007 2008 2009

Retail trade confidence indicator Retail trade turnover

Source: Statistics Lithuania, authors’ calculations

away as retailers will face a number of serious increase the tax burden during the crisis de- challenges in autumn and winter. livers a severe blow to the results of domestic trade industry. The government has also prepared a number of surprises for retailers this year. Tax rates As consumption continues to plunge, retailers were changed at the beginning of the year, a have no illusions to see their results improve proposal to limit markups on food products in the immediate future. An increasing num- was adopted (and subsequently withdrawn), ber of companies are reporting that they ex- more stringent requirements to settle with pect to incur losses and see their sales fall. the suppliers were introduced; these are just a handful of decisions which had a direct ef- Turnover of Apranga, the largest clothing re- fect on the activities of retailers. Although the tail chain in the Baltic states controlled by the government actively declares that elimination MG Baltic concern, rose by 13.5% but net of red tape barriers and improvement of busi- profit shrank by 46% (to LTL 418.622 mil- ness conditions is its priority, many decisions lion) from 2007. In the first five months of ran counter to that. When the business com- this year, sales of Apranga declined by more munity opposed these hastily made decisions, than a fifth to LTL 155.6 million. It is likely the government had to make the necessary that the group’s turnover will be falling at a adjustments. Currently, authorities consider similar rate throughout 2009 and Apranga will the possibility of lifting the ban on night sales incur losses. However, these gloomy projec- of alcoholic beverages and an option of re- tions did not prevent the company from suc- ducing the excise rate for fuel due to a dra- cessfully distributing a LTL 20 million stock matic drop in fuel consumption. These un- issue (to redeem a two-year debenture issue predictable ‘twists’ in political thinking of the of the same value which matures this June). government triggered discontent of business According to the company’s press release, the people. Another decision to impose taxes on demand was triple the supply of shares and company cars or cars borrowed from other shareholders raised a total of LTL 57.6 million persons for personal needs is also very ques- through this issue. The group, which added tionable as some companies will be forced to 16 new stores (19 were opened and 3 closed) drastically reduce their car fleet. In summary, to its retail chain, says it has no plans to make it is obvious that virtually every proposal to any additional investments in 2009–2010.

132 Lithuanian Economic Outlook Some construction projects of retail centres ten stores (three of them to improve operat- were frozen due to the stagnating domes- ing efficiency and seven at the request of the tic demand and melting queues of tenants Competition Council to reduce the share of (such as Akropolis II, DomusPro, etc.). commercial space in several towns). Nevertheless, retail operators say that they Norfos Mažmena also set aside its plans to see attractive growth opportunities despite grow on foreign markets and decided to re- the downturn and do not intend to put a store its network in Lithuania instead. Turn- stop to their plans in Lithuania. Palink, which over of this company, which operates retail operates retail chains Iki and Cento, was chain Norfa, rose by 12.3% last year to al- tempted by attractive prospects to invest most LTL 1.7 billion (excluding VAT). This re- into its future. This year, the company has tail chain continues to focus on lower-income opened seven new stores and intends to add consumers and claims that prices of almost 11 retail centres to its chain. The company, all food products have been reduced by up to which belongs to the Coopernic alliance, has 15% since June. extended the holdings of retail chain Iki in Latvia, where it has acquired 17 stores of The next couple of years will be very chal- Latvian retain chain Nelda. lenging for retail centres. As the consumption fever ran out of steam, an increasing number Having opened three new stores this year, of buyers decided to shop at marketplaces Rimi Lietuva also says it considers expanding and many Lithuanians were tempted to make its investment programme. From January to purchases in Poland, where prices fell by a April, sales of the company (excluding VAT) fifth due to the zloty depreciation. Shops sell- fell by about 4% year-on-year and stood at ing building materials, furniture, household LTL 289.7 million. Turnover rose by 11% to articles and other durable goods will suffer LTL 951.6 million last year. Sales of the entire the most. We also expect that wholesale will Rimi Baltic group which operates 241 retail also be more aggressive on the market as centres in the Baltic states (11 in Latvia, 76 in an increasing number of wholesalers will try Estonia and 65 in Lithuania) were above LTL to offer their products directly to the final 4.5 billion last year, up by 13% from 2007. consumer circumventing any intermediaries. Meanwhile, Maxima LT, owned by Vilniaus Retail chains will find themselves in a fierc- Prekyba, the largest group of private compa- er battle competing on price and campaigns nies in Lithuania, which operates the largest trying to attract buyers by way of tempting retail chain in the Baltic states (228 stores) offers. Those who prefer to wait for better lost some momentum. This year, the com- times and do nothing run a risk of going out pany has opened only three retail centres in- of business before the crisis ends. stead of the planned five and closed down

Domestic trade 133

18. Transport 18. Transport

Just like almost every major sector of the Similar trends were also seen in the financial Lithuanian economy, the transport industry indicators of the transport sector. Annual rev- did not grow strongly last year. After a record enue of companies operating in the sector in- leap of 2007, value added generated by the creased by 11.4% but this double-digit year- entire sector rose by a mere 2.9% at con- ly result relied on the beginning of the year stant prices and by 11.4% at current prices since the annual growth of revenue slowed (see Diagram 18.1). down to 4.9% in the second half of 2008 (see Table 18.1). During the year, pre-tax profits Interestingly, the representatives of the slumped by a massive 70%, while the profit- sector made an excellent start to last year. ability ratio was negative in the fourth quar- In the first quarter of 2008, turnover of all ter and stood at –2.2%. The percentage of freight carried by all modes of transport (ex- loss-making companies in the total number cluding marine transport) rose by 11.8% of transport and warehousing entities jumped year-on-year in quantitative terms. Klaipėda from 40.9% in the fourth quarter of 2007 to state seaport and Būtingė terminal, which 53.3% at the end of last year. Despite the saw their cargo handling volumes rise by deteriorating financial indicators, representa- more than a third during the year, looked the tives of the sector continued to invest heavily most impressive against the background of as capital investments rose by more than a other entities of the transport sector. Railway quarter in 2008. transport also demonstrated unprecedented growth indicators as freight traffic by rail Although rail transport had its ‘slice of the pie’, jumped by almost a fifth. However, indicators road transport remained the main freight of the entire sector began to deteriorate later. carrier last year. A total of 59.4 million tonnes Growth indicators were getting increasingly of freight, or 49.2% of total cargo, was trans- modest in the second and third quarters of ported by road in 2008. Unlike in the case 2008 and even went into a negative territory of Klaipėda port and Lithuanian Railways, in the fourth quarter as freight volumes and indicators of road transport companies were turnover shrank by 15.7% and 6.6% year- no longer impressive at the beginning of last on-year respectively. year. Soaring fuel prices, decelerating growth

Diagram 18.1 Value added created by transport and storage sector, annual change, %

25 23.2

20 18.7 18.3 10.2

6.0 15 13.6 6.6 11.4 3.4 10.0 9.2 10 0.9 8.5 12.7 13.0 5 10.2 9.1 11.7 8.5

2.9 0 0.8 2003 2004 2005 2006 2007 2008 2008 II H Deflator Value added at constant prices Value added at current prices

Source: Statistics Lithuania

136 Lithuanian Economic Outlook of foreign trade flows, slower economic devel- gether with the construction industry, as the opment in most EU member states, invasion most risky one as well as much more expen- of the common market by Romanian and Bul- sive fuel compared to the neighbouring coun- garian carriers and unsustainably large fleet tries (especially Poland and Belarus). Idling of trucks led to a sluggish growth of the seg- carriers are being strangled by loan repayment concerned. In the first half of last year, ments and payments to leasing companies. both the freight volume and freight turnover Moreover, Russia is one of the key markets measured in tonne-kilometres rose by about for Lithuanian transport companies, but the 2% year-on-year. two countries have not yet signed a bilater- al agreement on VAT refunds for fuel (even Only the first quarter of last year was slightly though Lithuania already has such agree- more favourable to road transport, when the ments with as many as 40 countries). These volume of freight carried by all road vehicles factors entailed ever higher losses. Last year, rose by 5.7% and freight turnover increased the percentage of loss-making companies in by 7.7%. However, it should be noted that the land transport industry rose from 41.4% the said indicators of specialised road trans- to 55.5%. port companies (whose core activity is freight carriage) which focus more on international As already mentioned, state-run Lithuanian haulage were much more modest and stood Railways (LR) had a wonderful start to the at 1.0% and 2.7% respectively. These results year in 2008 but the projections outlined in are hardly surprising, since the above-men- the previous issue of the Lithuanian Econom- tioned negative factors were expected to have ic Outlook came true in the second half of a more adverse effect on businesses with in- the year as the volume of freight began to ternational routes. Other statistics further decline. In 2008, the company carried 54.97 support this fact: in the first quarter of last million tonnes of freight, up by just 2.7% from year, the volume of freight carried on domes- the previous year. Compared to 2007, inter- tic routes was growing almost three times as national freight volumes declined by 3.8% fast as the volume of freight on international last year to 39.6 million tonnes and domes- routes. This growth was partially supported tic freight volumes rose steeply by 24.7% to by the construction industry, which still grew 15.4 million tonnes. at a fast pace (13.5%). Moreover, the trade Last year, revenue of the company increased industry, which demonstrated a surprising by 14% to LTL 1.6 billion but net profit fell growth in retail turnover at the beginning of to LTL 109.7 million, down by 18% from LTL 2008 lasting several months in a row, has 133.6 million earned in 2007. Rapid changes quite a sizeable fleet of trucks. in the macroeconomic environment in Lithu- Unfortunately, the situation has changed ania and neighbouring markets forced the dramatically on the domestic market turn- company’s management to make several ad- ing ‘meteoritic’ rises into nightmare falls. The justments to this year’s target indicators. Ac- situation on the neighbouring markets is also cording to the latest projections (May 2009), dire. It seems that countries are simply rac- the company will incur a loss of LTL 54 million ing against each other which one will come and will see its revenue shrink by 26%. up with the bleakest outlook for the economy. Last year, Lithuanian Railways almost dou- For the transport sector, it means that more bled its investments compared to 2007 as the cargo should not be expected in the nearest volume reached LTL 780 million (two years future. In the fourth quarter of last year, the ago, the company invested LTL 419 million). volume of freight, measured in tonnes, car- It seems that LR has adopted a never-say- ried by road fell by almost a quarter year- die attitude in this difficult year as well. Even on-year, while freight turnover contracted by though the company plans to invest a lot less just 5%, which indicates that the Lithuanian than last year, it will still spend over LTL 500 carriers continue to extend their routes in an million, a rather solid amount, on moderni- attempt to conquer faraway countries (the sation. recovering Kazakhstan and emerging Uzbeki- stan markets). Compared to 2007, the largest increase last year was in the volume of oil and petroleum It is obvious that transport companies are product group, which accounts for the largest going through difficult times, to put it mild- share of total cargo (41%). Moreover, there ly. Their situation is further compounded by was also a marked increase in the volume other factors such as a changed approach of of solid mineral fuel and products of plant commercial banks which treat the sector, to- origin.

Transport 137 The volume of both local and exported petro- According to the Klaipėda port authority, the leum products grew because of the restored port alone handled 9.4 million tonnes of pe- production capacity of oil refinery Mažeikių troleum products last year, the largest quan- Nafta. In the period analysed, transported tity since the restoration of Lithuania’s inde- volumes of the refinery’s output soared 1.5 pendence, which was by 31.1% more than times to 8.5 million tonnes resulting in an in 2007. Sadly, handling of other types of 18.2% increase in the total volume of freight cargo (excluding petroleum products) grew exported from Lithuania. The flow of import- more moderately and comprised 20.5 million ed freight fell by 4.7% and transit volumes tonnes, up by just 1.5% from 2007. The port went down by 8.7%. handled 200,900 road vehicles, down by 8% from 2007, and the handling of containers In 2008, the number of railway passengers continued to grow (up by 16.1%). shrank by 2.4% compared to 2007 and stood at 5.1 million. Local routes account for 81% It should be noted that Klaipėda port handled and international for 19% of the passenger almost 12 million tonnes of transit freight in transport market. The number of passengers 2008, which accounted for 40% of total cargo travelling on local routes did not change and handling at the port. The port authority re- stood at 4.1 million. The number of passen- ported that it managed to restore the flow of gers travelling on international routes fell by transit freight close to its full capacity which 10% to 1 million. As in the previous years, had been lost following the changes in tariffs passenger transport was a loss-making ac- of Russian railways introduced in 2000. Last tivity for Lithuanian Railways but it did not year, transit through Klaipėda port rose by have a major effect on the overall results as 5.1% compared to 2007. An 8.9% increase the activity generates less than 5% of total in transit of Russian freight resulted from pe- revenue. troleum product and fertiliser handling. The Belarusian transit rose by 3.6% thanks to the According to the latest information published volumes of food and petroleum products as by Statistics Lithuania, this year will be a dif- well as fertilisers. Handling of mineral prod- ficult one forLithuanian Railways. In the first ucts and ferrous metals boosted the Kazakh- quarter of this year, the company carried 9.9 stan transit by 7.6%. There was also an in- million tonnes of freight, down by 32.5% year- crease in freight transit from/to Uzbekistan on-year. Freight volumes shrank by 39.4% (35.5%) and Estonia (54.3%), while transit on international routes and by 9.1% on local flows from/to Ukraine and Latvia went down routes (to 6.8 million tonnes and 3 million by 2.4% and 23.2% respectively. tonnes respectively). Transit accounted for a large share of international freight transport The cruise ship season in 2008 was less suc- (45.6%) and fell by 43.2% year-on-year dur- cessful for Klaipėda port than in 2007. Last ing the quarter. The biggest decline (almost year, 46 cruise ships (65 in 2007) visited the by half) was recorded by freight transport to port and brought 32,500 passengers, down the Kaliningrad Region. Of course, such a no- by 11.9% compared to two years ago. table decline was caused by the high refer- Nevertheless, last year Klaipėda seaport re- ence basis effect but it is obvious that the mained the leading port in the Baltic states downturn of the Russian economy was a fun- by total volume of handling, the volume of damental reason behind this contraction. container handling and growth rate (see Table In 2008, Klaipėda state seaport together 18.1). On the other hand, Riga port, which with Būtingė terminal handled 38.9 mil- was not affected by operations of Mažeikių lion tonnes of freight, up by 21.9% from Nafta, is clearly ahead of Klaipėda port in 2007. The seaport alone handled 29.9 mil- terms of the volumes of all types of cargo. lion tonnes of freight, while Būtingė terminal Figures presented in Table 18.1 support the handled 9.1 million tonnes, up by 9.2% and prediction made in the previous issue of the 98.1% from 2007 respectively. The above- Lithuanian Economic Outlook that the conflict mentioned recovery by Mažeikių Nafta acted between Russia and Estonia in May 2007 had as a catalyst for the growth of Klaipėda port triggered a redistribution of Russian freight and Būtingė terminal in particular last year: flows among the Baltic states (the same is crude oil and petroleum products comprised reflected in a 30% decline of freight volumes 47.3% of handled cargo and rose by 57.3% carried by Estonian railways). Therefore, we compared to 2007. believe that the pragmatic approach should

138 Lithuanian Economic Outlook Table 18.1 Cargo handling in the seaports of the Baltics in 2008

Container handling, TEU Other cargo handling, t Mio Ports 2008 Annual change, % 2008 Annual change, %

Klaipėda 373 263 16.1 29.9 9.2 Riga 207 122 –2.2 29.6 14.0 Tallinn 180 927 0.0 29.1 –19.3 Ventspils 14 148 –16.0 28.6 –7.9 Liepaja 4 227 –44.9 4.2 3.7

Source: Klaipėda state seaport dominate the relations with this country now up by 13.8% from 2007. The company has (during economic stagnation) more than ever not published its profit indicators. Bega han- before. dled 3.04 million tonnes of freight, up by In the first quarter of this year, the downturn 0.7% from two years ago. which began at the end of last year contin- Last year, Klaipėdos Konteinerių Terminalas ued at Klaipėda port. According to Statistics handled a similar volume of freight to 2007 Lithuania, Klaipėda state seaport, including but managed to boost its revenue by 12.6% to Būtingė terminal, handled 8.6 million tonnes LTL 64.65 million and earn a pre-tax profit of of freight, down by 12.8% year-on-year. The LTL 10.93 million, up by 12.1% from 2007. overall indicator of the first quarter of this year was held up by Būtingės terminal as its Last year, Klaipėdos Smeltė earned LTL 38 handling volumes rose by 7.7% year-on-year, million in revenue, up by 31.7% compared to while Klaipėda port alone handled 6.5 million two years ago. tonnes, down by 17.9% year-on-year. Unlike In 2008, sales revenue of Birių Krovinių Ter- in 2008, handling volumes contracted in all minalas reached LTL 20.07 million and pre- key groups of freight in the first quarter. Han- tax profit amounted to LTL 6.6 million. Dur- dling of liquid freight, bulk freight and general ing the year, the company handled 1.6 million freight fell by 4.4%, 18.5% and 24.5% year- tonnes of cargo. on-year respectively. Having been on the up for a number of consecutive years, the vol- This year, the prospects for Klaipėda port as ume of handled containers changed direction well as for other sectors of the transport in- this year as this freight category recorded a dustry are rather bleak. The port authority 27% fall. Compared to the first quarter of estimates that total cargo handling may de- 2008, there was a marked reduction in han- cline by 15–20% this year. Individual compa- dling of vehicles (25.4%) and freight wagons nies operating at Klaipėda port have also set (41.5%). less ambitious operating targets compared to Even though many handling companies at last year. Klaipėda port felt the first ‘aftershocks’ of the Aiming to help the railway transport sector global crisis in 2008 already, their revenue and Klaipėda port, transport ministers of rose and operations were profitable. In 2008, Lithuania and Russia signed a memorandum KLASCO, the largest company at Klaipėda of understanding in mid-May 2009 enabling port, handled 9.6 million tonnes of cargo and Lithuania to offer discount tariffs for some repeated the previous year’s record achiev- freight carried by rail in the direction of Kalin- ing the best result among port companies. ingrad and allowing Russia to increase the vol- Last year, the company’s net profit soared by ume of freight transported through Lithuania 95% to LTL 15.369 million, pre-tax profit rose according to the classification of freight used by 24.7% to LTL 18.059 million, and sales by Klaipėda port. In addition, representatives revenue increased by 8.1% to LTL 146.355 of Belarusian railways promised to cancel an million. 8–10% increase in tariffs imposed at the be- Preliminary estimates indicate that revenue ginning of this year. We believe that a tangi- of Bega stood at LTL 68.97 million last year, ble increase in the flow of Russian (or other)

Transport 139 freight should not be expected given the cur- 53.7% from the previous year), the industry rent situation since Russian ports themselves incurred a massive loss of 33.5 million last also feel shortage of freight due to weakening year. The main culprit was flyLAL-Lithuanian consumption and production. Airlines, the largest local-capital airline in Lithuania, which incurred a loss of LTL 79.9 According to Statistics Lithuania, 45,800 million last year, an almost ten-fold increase planes of Lithuanian and foreign airlines land- from 2007. ed at and took off from national airports (in Kaunas, Palanga and Vilnius) in 2008, If the results of airports and air transport of which 97.2% were flying on international were rather forgettable in the previous year, routes. Compared to 2007, the number rose the situation in the air transport sector be- by 9.6%. The number of passengers arriving came tragic in the first half of this year. Af- to and departing from the airports stood at 2.6 ter the largest Lithuanian airline flyLAL ter- million, up by 16.2% compared to 2007. The minated all flights on 17 January and went majority of passengers (99.99%) were trav- into bankruptcy, the number of direct flights elling on international routes. Freight and air from the country’s capital declined drastically. mail shipments handled by airports declined As a result, the total number of passengers by 20.7% last year to just 10,900 tonnes. served by Lithuanian airports dropped down by 29.6%. The geography of routes also be- Only Vilnius airport returned a profit last year, came distorted as the most popular flights to/ while Kaunas airport and Palanga internation- from Ireland, United Kingdom, Germany and al airport operated at a loss (due to the write- Denmark (passenger numbers declined by off of bad debts of bankrupt Aviakompanija 28.8%, 21.6%, 33% and 20% respectively) Lietuva and Orient Avia and higher costs). were hit hard. However, Riga airport benefit- As in the previous years, all Lithuanian air- ed hugely from the changes in Lithuania as ports taken together were unable to com- the number of passengers travelling to and pete with Riga airport which catered to 3.69 from Latvia increased five-fold! million passengers last year, or 1.65 million Other indicators of airports were also deplora- more than Vilnius airport managed to attract. ble in the first quarter of the year. The number Although there are 2.5 times fewer people of planes of Lithuanian and foreign airlines as living in Estonia than in Lithuania, Tallinn well as the volume of freight dropped down was hot on the heels of Vilnius airport last by more than a third. year with 1.81 million passengers. Howev- er, in terms of the number of aircraft, even Currently, there are 13 airlines operating at Tallinn was far ahead of Vilnius. The number Vilnius airport which offer flights to 16 - cit of planes arriving to/departing from the air- ies. By comparison, passengers were able to port was 37,839 in Vilnius, 41,654 in Tallinn fly to 37 destinations from Vilnius during the and 57,232 in Riga. In 2008, Tallinn airport summer season in 2008. led in terms of freight shipments as it han- The Cabinet finally showed real concern over dled 41,900 tonnes of cargo, while Vilnius the problems of Vilnius airport. On 21 May, and Riga just 5,710 tonnes and 7,710 tonnes Prime Minister Kubilius signed an order setting respectively. up a task force which has to come up by 15 It is obvious that Riga has definitively gained July with specific proposals on how to finance a victory in the battle for air transport since marketing, promotional, business risk sharing the Latvian government has a strategic ob- and other measures aimed at immediately jective to continue reinforcing Riga airport’s addressing the problems of Vilnius airport to position as the main point of transit between attract foreign and local airlines. We can only the West and the East as well the South and hope that things will at least get rolling. the North creating an infrastructure which Looking at the current growth trends of indi- would enable Riga to compete with major vidual transport sectors and the deteriorating airports in Western Europe. To that end, Riga economic situation in Lithuania and its key airport built the longest runway in the Baltic foreign trade partners, it seems that the trans- states designed for large aircraft and inter- port sector may face even more serious chal- continental flights and plans to build new air- lenges in the immediate future. The industry port terminals. could only recover if international trade flows Despite a remarkable increase in the number get going. The road transport has a potential of passengers (aircraft of Lithuanian airlines to energise the sector as it is slightly more carried 1.2 million passengers in 2008, up by flexible compared to other modes of trans-

140 Lithuanian Economic Outlook Table 18.2 Key statistical indicators of transportation and warehousing sector

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 6724 6921 3546 3574 9.7 2.9 0.8 Value added (at current prices), LTL Mio 9149 10195 4976 5436 10.2 11.4 9.2 Total production, LTL Mio 16325 17859 8844 9331 8.9 9.4 5.5 Labour productivity, LTL thou** 118.6 128.3 63.8 68.7 166.3 8.2 7.8 Number of persons employed, thou 77.2 79.4 78.0 79.1 6.1 3.0 1.4 Average monthly earnings, LTL 1816 2232 1925 2299 99.3 22.9 19.4 Fixed investments, LTL Mio 1441 1855 799 1053 8.6 28.7 31.8 Foreign direct investments (end of period), 675 569 675 569 1.8 –15.7 –5.3 LTL Mio Sales of goods and services, LTL Mio 14211 15835 7691 8069 7.5 11.4 4.9 Gross profit, LTL Mio 3055 2761 1563 1221 6.8 –9.6 –21.9 Operating profit, LTL Mio 1147 516 575 100 5.1 –55.0 –82.6 Profit before tax, LTL Mio 1056 315 534 –40 3.9 –70.2 – Assets (end of period), LTL Mio 17690 18515 17690 18515 9.7 4.7 3.2 Liabilities (end of period), LTL Mio 6599 7879 6599 7879 9.2 19.4 1.2 Return on sales, % 7.43 1.99 6.95 –0.50 51.6 – – Return on assets, % 6.46 1.75 6.24 –0.44 41.6 – – Debt ratio (end of period), % 0.37 0.43 0.37 0.43 95.2 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania port. This sector has more power to pave the tics on the balance of payments indicate that way to more active markets in Central Asia. transport companies generated the majority (nearly 60%) of total exports of services In its economic rescue plan, the Lithuanian (see Foreign trade and balance of payments). government has included measures to help Therefore, the government must extend a local exporters. We believe that the transport helping hand to local carriers. It is necessary companies should also be viewed as export- to understand that the transport sector is the ers since, for instance, the ‘lion’s share’ of backbone of the economy. However, it is ob- freight is transported on international routes vious than even state aid, if any, will not be by specialised road transport companies. Last able to rescue all players of the sector and year, freight turnover of these companies on market forces will inevitably end the exist- international routes comprised 93% of total ence of the weakest entities. freight turnover. Moreover, last year’s statis-

Transport 141

19. Information and communication technologies (ICT) 19. Information and communication technologies (ICT)

Struggling with the economic stagnation, anian ranked 35th among 134 countries. The business entities are actively looking for ways index was topped by two Nordic countries, to reduce their costs and improve competi- namely Denmark and Sweden. Among the tiveness. It is obvious that the information Baltic states, the best indicators were posted and communication technologies (ICT) sec- by Estonia, which continued to strengthen tor, which boasts rapid innovation and tech- its position among the top 20 countries, ris- nology development, still has something to ing from the 20th to 18th place. Latvia had offer. Even last year, when the financial per- the worst result out of the three Baltic states formance of economic operators was deterio- dropping down four places during the year to rating, advance information technology so- the 48th in the latest index. So Lithuania re- lutions retained their popularity in Lithuania mains to be a player in a really solid ‘league’ and this industry continued its sprint. even though its latest ranking was two places below last year’s assessment. Lithuania’s efforts to create knowledge soci- ety and improve the environment for ICT de- This high ranking of Lithuania partially result- velopment have been also visible on the in- ed from rapid ICT penetration in the national ternational arena. For that purpose, the World economy. According to the European Com- Economic Forum holds a ‘race’ for countries mission,1 the mobile penetration rate of Lith- providing an assessment of business, regula- uania stands at 149% (see Diagram 19.1), tory and infrastructure environment for ICT, or 1.5 mobile subscription plans per capita. the readiness and actual usage of information This is the second highest rate in Europe af- technologies by individuals, businesses and ter Italy. This rather high indicator of Lithu- governments in individual countries. In the ania mostly depended on the prevalence of Network Readiness Index 2008–2009, Lithu- pre-paid mobile services: subscribers to this

Diagram 19.1 Mobile penetration in EU in October, 2008, %

160

140

120

100

80 151 149 137 137 134 131 129 122 122 121 121 121 120 60 119 117 115 114 103 102 101 100 98 96 95 88 40

0 UK Italy Malta Spain Latvia Poland France Austria Ireland Finland Estonia Greece Sweden Bulgaria Belgium Slovakia Slovenia Portugal Hungary Romania Germany Lithuania Denmark Netherlands Czech Republic

Source: European Commission, The Communications Regulatory Authority of Lithuania

1 European Electronic Communications Regulation and Markets 2008 (14th Report), European Commission, 2009.

144 Lithuanian Economic Outlook Diagram 19.2 Fixed and mobile broadband penetration rate in EU in January, 2009, %

40 4.7

35 9.1 6.6 30 2.3 1.6 1.1

25 11.4 2.8 1.2 6.3 2.3 2.6 8.3

20 2.9 3.4 2.7 0.4 37.3 15 0.4 31.3 30.7 2.8 27.5 27.5 27.7 4.0 1.3 24.6 23.9 0.5 10 22.9 21.4 21.0 20.2 20.2 19.0 18.2 17.6 17.1 17.4 16.5 13.2

5 11.7 11.2 10.9 0 Italy Malta Spain Czech EU-27 Latvia Poland France Austria Ireland Cyprus Estonia Finland Sweden Belgium Bulgaria Portugal Slovakia Slovenia Romania Lithuania Republic Germany Denmark

Fixed connection technologies Mobile connection technologies

Note: Estonia did not provide broadband using mobile connection technologies penetration rate statistics for the EC survey

Source: European Commission, The Communications Regulatory Authority of Lithuania type of mobile services comprise 64.7% of tively) last year. Scandinavians are the most all mobile subscribers. According to the cal- active Internet users (80% and more). Busi- culations based on the methodology of the ness companies in Lithuania were also keen Organisation for Economic Cooperation and on using ICT innovations. According to last Development,2 Lithuanian mobile subscribers year’s data, companies with Internet access paid the lowest monthly charge for an aver- comprised 94% of the total number of non- age service basket, i.e. LTL 18.75, nearly LTL financial corporations with more than 10 em- 52 lower than the EU average. Moreover, mo- ployees, up by one percentage point on the bile subscribers in Lithuania enjoyed probably EU average. More than half of these compa- the cheapest calls in Europe paying LTL 0.24 nies used high-speed broadband Internet. per minute, almost half the EU average. In terms of fixed-line broadband Internet ac- According to Statistics Lithuania, the percent- cess penetration (see Diagram 19.2), Lithu- age of households having a personal com- ania keeps in step with Latvia. At the begin- puter doubled compared to 2004: almost one ning of 2009, this indicator stood at roughly half of Lithuanian families had a computer 17.5% in both countries, i.e. down by 5.5 last year. In the last five years, the Internet percentage points of the EU average. Esto- penetration also increased considerably in nia, meanwhile, had a better indicator than Lithuania. Compared to 2003, the percentage the EU average as the number of broadband of households with Internet access jumped lines and connections using fixed technolo- 7.5 times to 47% in 2008. Despite strong de- gies per 100 people stood at 24.6%. In terms velopment within the country, Lithuania still of the speed of broadband access using fixed- has room for improvement compared to its line technologies, Latvia stands out of the neighbours. According to Eurostat, 50% of three Baltic states for its best indicators. In people aged 16 to 74 were regularly using this country, more than 60% of all broadband the Internet in Lithuania in 2008. In this re- lines have a data transmission rate above spect, Lithuania was behind the EU average 2 MBit/s. The infrastructure of the relevant by 6 percentage points, while the gap to the speed category comprises 42% in Lithu- neighbouring Latvia and Estonia was even ania and is below 25% in Estonia. In terms wider (7 and 12 percentage points respec- of the speed of fixed-technology broadband

2 Prepared on the basis of information provided in the Annual Report 2008 of the Communications Regulatory Authority.

Information and communication technologies 145 Diagram 19.3 Income structure of communication sector by service type in 2008, %

2.3 1.2 4.4 12.8 12.3

23.4 43.6

Fixed telephony Network interconnection Mobile telephony

Internet access services Data transmission services Leased lines

Other

Source: The Communications Regulatory Authority of Lithuania

Internet, the three Baltic states lag far be- ‘holes’ in coverage and slow data transmis- hind the relevant EU indicator, where around sion for WiMAX’s standards. Nevertheless, we 75% of Internet lines ensure the transmis- can safely say that ‘the die is cast’ in Lithu- sion rate above 2 MBit/s. It is encouraging ania and we have crossed our own Rubicon that the percentage of infrastructure ensur- towards the 4G technology. ing the capacity of more than 10 MBit/s has With regard to the structural economic indica- almost reached the EU average in Lithuania tors, it should be noted that the information and comprised 13%. and communication technology sector does Lithuania has more to be proud of in terms not play a key role in the Lithuanian econo- of mobile broadband Internet penetration my. This joint industry3 contributes just about among EU member states. The penetra- 3.5% of value added generated nation-wide. tion rate is 0.6 percentage points above the Nevertheless, this economic sector kept grow- EU average and Lithuania is among top ten ing strongly in Lithuania last year, while other countries in the EU. This mobile broadband large sectors began to slow down. The tele- rate should improve even further this year communications category, which generates as the wireless Internet technology WiMAX almost two-thirds of the sector’s value added, (Worldwide Interoperability for Microwave continued to be the driving force of ICT growth. Access) operating on the basis of 4G services According to preliminary estimates, the an- was introduced in March in Vilnius. The Lithu- nual growth of the communications segment anian Radio and Television Centre (Telecen- (at constant prices) reached 17.4% last year, tre), provider of 4G broadband wireless In- up by 7.6 percentage points from the previous ternet services, promises that the high-speed year. The price component affected this indi- WiMAX 4G Internet will soon be available to cator quite strongly. In contrast to the prices people living in other major Lithuanian cities. of other goods and services in Lithuania, com- In addition to Telecentras, WiMAX services munication services became cheaper to con- in Lithuania will also be offered by Neltė and sumers by 3% on average during last year. Balticum. The mobile Internet technology, Therefore, the annual growth of telecommu- which has been making its first steps in Lith- nications stood at 10.5% at the then prices in uania, has fallen under some criticism for the 2008. At the same time, the growth of com-

3 According to Statistics Lithuania, the ICT sector covers manufacturing production meant for information processing or aimed at carrying out communication functions, trade in information technology goods and services, information technology service activities related to information processing and carrying out communication functions by electronic means (i.e. telecommunications (NACE 64.2); computer and related activities (NACE 72); rent of office machinery and apparatus, including computers (NACE 71.33)).

146 Lithuanian Economic Outlook puter and related activity, the second largest ny earned LTL 804 million in revenue, up by ICT category generating 18% of value added, 4.2% from 2007. Profits of TEO LT dropped slowed down considerably. Having jumped by by 4.2% annually to LTL 180.3 million. 16% in 2007, value added of this ICT segment rose by a mere 4.5% last year. Analysis of the mobile market shows that its growth has slowed down significantly. Al- According to the Communications Regulatory though the number of active subscribers ex- Authority, revenue of the communications ceeded five million last year, it increased by sector alone increased by 5.1% from 2007. a mere 2% compared to 2007. The flows of Although most of revenue of the communica- outgoing SMS stayed at the level of 2007, tions industry was generated by mobile and while the number of MMS even contracted fixed services (see Diagram 19.3), revenue of by 2.5% last year. In 2008, total revenue of these two categories fell by 1.7% and 3.2% mobile service providers stood at LTL 1.9 bil- respectively last year compared to 2007. The lion and was just fractionally higher than a growth in sector’s revenue was supported by year ago. Analysis of the structure of revenue the spurt of Internet access, data transmis- generated by mobile service providers shows sion (except the Internet) and interconnec- that competition among market players has tion services which boosted their revenues by been fierce for the last three years and their 22.7%, 31.2% and 8.4% respectively during respective shares of revenue have been lev- the year. However, preliminary estimates in- elling up. As a result, the share of revenue dicate that the total revenue of the commu- generated by market leader Omnitel fell by nications market fell by 5.7% year-on-year in more than 15 percentage points from 54% the first quarter of this year. in 2004 to 39.6% at the end of last year. The Modernisation processes in the communica- ‘loss’ of this mobile operator was absorbed tions sector lost some momentum in 2008. by its main rivals Bitė Lietuva and Tele2. Last Following a leap of 2006 and 2007, total in- year, the structure of revenue was similar: vestments by the communications sector de- the largest slice of the income ‘pie’, as in the clined by 16.9% compared to 2007. Invest- previous years, was taken by Omnitel and ments in electronic network infrastructure, the remaining two operators shared the rest which comprised over 80% of total invest- in nearly equal parts. Other service provid- ments, fell by a massive margin of 18.6%. ers had to be content with the crumbs, i.e. 3% of total revenue generated by the mobile The potential of the communications market services sector. abroad is also reflected in the export indicators of communication services published by In terms of the structure of active subscrib- the Bank of Lithuania. In 2008, exports of ers by operator, the leading positions were communication services stood at LTL 252.4 retained by two market leaders at the end million. A look at the export indicators of this of 2008. Omnitel and Tele2 shared 78.3% of economic sector clearly shows that the com- all mobile subscribers in nearly equal parts, petitiveness of the communication services while the market share of Bitė Lietuva fell has been weakening on international markets. slightly to 19%. In 2005 and 2006, exports of communication Looking at the prospects of the ICT sector services were growing at a double-digit rate during this crisis, it seems that this economic (up by 19.4% and 12.5% respectively), but segment is one of the few chosen ones to the growth slowed down to 5.1% in 2007 and board the ‘Noah’s ark’: information technolo- completely stopped last year. gies have become an integral part of the TEO LT continues to dominate the fixed ser- daily life of both businesses and households. vices market. The company has more than Therefore, even though the ‘tightening of the three-quarters of the domestic market in belts’ is in full swing already, services of the terms of local and long-distance calls as well ICT sector will not be among the first things as international calls. Last year, the compa- to be abandoned.

Information and communication technologies 147

20. Hotels and restaurants 20. Hotels and restaurants

2009, the year in which Vilnius is the Europe- frastructure, and human, cultural and natural an capital of culture, which promised an im- resources. The only position in which Lithua- pressive ‘yield’ for hotels and restaurants, not nia scored better than Latvia was the regula- only resulted in a sharp disappointment for the tory framework, where both countries ranked market players but pushed many of them to 30th and 32nd respectively. Estonia, mean- the brink of bankruptcy. In addition to objec- while, was in the league of its own: it was tive factors caused by the economic downturn recognised as the best performing country in (weaker demand for tourism services, higher the Baltic region which keeps in step with such variable operating costs, etc.), the situation tourism destinations as Italy, Greece and the was compounded by hectic attempts by the Czech Republic. In terms of flexibility of its Government to patch up the budget through regulatory framework and tourism business tax reforms as well as an unexpected ‘venous environment, Estonia ranked 17th and 21st thrombosis’ in air transport. These dire chal- respectively. The environment for travel busi- lenges have triggered a wave of discontent ness in Lithuania and Latvia is perceived as among the sector's companies and prompted being much worse (46th and 43rd place re- the association of hotels and restaurants to spectively). Both Lithuania and Latvia scored take action. In spring, the association held a very poorly on the last criterion (human, warning strike and prepared a list of specific cultural and natural resources) which essen- requirements for the government. Represen- tially defines the value of travel (89th and tatives of the sector wanted a 5% VAT rate 86th place respectively). Estonia also ranked to be restored for incoming tourism services relatively poorly (47th). The competitiveness claiming that it was an export service which ‘grades’ of Lithuania, which deteriorate year was subject to the relevant provisions of the by year, indicate that the authorities respon- VAT law. The association of hotels and res- sible for promoting Lithuania as a tourism taurants also protested against the amount destination fail to do their ‘homework’ prop- and calculation methodology of the property erly. Instead of looking for ways to improve tax for accommodation providers. Moreover, the regulatory framework, ensure better ac- the association demanded equal business cess to the country and add the country to conditions for companies holding alcohol and international travel itineraries, the authorities tobacco licences and non-licensed companies approach the problem from the wrong end. since the legal provisions currently in force Huge sums of money are being spent on ‘co- stipulate that the licence may be withdrawn louring the marketing paper’ disregarding the if a company fails to pay taxes to the bud- fact that the world has fewer and fewer op- get in due time. The Government tried to ad- portunities to see what it is about. dress this problem by raising the threshold The fact that the tourism sector is in need of of permissible debt to the national and social a structural reform is reflected in the -dete budgets from LTL 1,000 to LTL 10,000 and riorating performance indicators of the hotels extending the period for warning over the and restaurants industry which relies on the possible licence withdrawal to 60 days. How- sector’s success. Both in 2007 and last year, ever, the association is generally against the real value added grew by less than 2% in the licence withdrawal practice and suggests that sector (see Diagram 20.1), while the double- fines should be imposed instead for failure to digit growth in previous years, measured at pay taxes when due. the then prices, mostly relied on rising prices The difficulties encountered by the Lithuanian of catering and accommodation services. In tourism and services infrastructure were also the second half of last year, as in many other noted internationally. In the Travel and Tour- Lithuanian economic sectors, value added ism Competitiveness Index published by the at constant prices contracted slightly in the World Economic Forum, Lithuania ranked hotels and restaurants sectors but the price 49th among 133 countries. Compared to last component remained impressive. The main year’s result, the country fell down two plac- reasons were record high food prices (in mid- es and was yet again below the other two 2008, the annual inflation of food products Baltic ‘peers’. Latvia and Estonia ranked 48th fluctuated within a range of 17.3−18.6% in and 27th respectively. This travel and tour- Lithuania) and a continuously strong growth ism index covers three main areas: regulato- of labour costs. Although the headcount in- ry framework, business environment and increased symbolically (1.5%) last year and

150 Lithuanian Economic Outlook Diagram 20.1 Value added created by hotels and restaurants sector, annual change, %

18 15.0 15

12 10.5 10.3 10.5 9.2 8.0 9 13.3 6.5 4.0 1.8 3.7 6 8.9 2.2 10.7

3 6.2 4.3 5.5 6.5 1.4 1.8 0 -0.2

-3 2003 2004 2005 2006 2007 2008 2008 II H Deflator

Value added at constant prices

Value added at current prices

Source: Statistics Lithuania some people even got the pink slip in the sec- dle of summer. This year, the growth of the ond half of the year, employers continued to component of hotels and restaurants, just raise wages across the sector. Both in 2007 like the other headings in the consumer price and last year, the average wage in the sec- index, has lost momentum: after its peak re- tor went up by a fifth but still remained very corded during last year’s tourism season, it low compared to the economy’s average (just contracted almost by half and stood at just 61.7%). As the sector’s service price compo- 8.2% this April. Nevertheless, this indicator nent went up, the annual change in labour was still by 2.3 percentage points higher than productivity improved considerably in the the inflation rate. Summing up the trends in hotels and restaurants industry (see Table price movements in these industries provid- 20.1), which was negative in 2005–2007 but ing services to tourism, it is obvious that that went over 13% last year and narrowed the the motto of a ‘European quality at Lithua- gap to sprinting labour costs. nian price’ used until now to lure in economy- class travellers has become obsolete since, In 2008, the hardest blow to the attractive- for instance, the ‘Polish price’ is much better ness of the Lithuanian tourism sector was de- these days. livered by the trends of consumer price index of hotel and restaurant services. In the mid- The fact that Lithuania does not have a dis- dle of last year, when the annual inflation in- tinctive ‘face’ in international travel itinerar- dicator reached its peak at 12.7%, the annual ies is also reflected in deteriorating statistics increase in the prices of hotel and restaurant of inbound tourism.1 Last year, the number services was by more than three percent- of foreigners arriving to the country was be- age points higher than this indicator during low 102,000, down by 7.4% from 2007, and the season. The steepest increase was in the the average duration of stay contracted by prices of catering services at restaurants and 12.5%. A breakdown of foreign tourists in cafes (about 15%) as well as canteens (28%) Lithuania by region shows that the number during last summer. Changes in the prices of of visitors from Europe declined by 6.3% last accommodation services were more modest. year compared to 2007, and the biggest fall Having gone up by an average of 7% year- (15.3%) was in the last quarter of the year. on-year in spring, the cost of overnight stay The number of visitors from Spain and the even fell fractionally year-on-year in the mid- United Kingdom went down by about 40%,

1 Inbound tourism statistics when travelling is organised and services are provided by tourism companies.

Hotels and restaurants 151 Table 20.1 Key statistical indicators of hotels and restaurants sector

Ratio to the economy’s Annual growth indicator, rate, % % 2007 2008 2007 2008 2008 2008 2008 II H II H II H*

Value added (at constant prices), LTL Mio 818 833 435 434 1.2 1.8 –0.2 Value added (at current prices), LTL Mio 1112 1279 610 674 1.3 15.0 10.5 Total production, LTL Mio 1662 1932 913 1040 1.0 16.2 14.0 Labour productivity, LTL thou** 36.0 40.8 19.5 21.7 52.8 13.3 10.9 Number of persons employed, thou 30.9 31.4 31.2 31.1 2.4 1.5 –0.3 Average monthly earnings, LTL 1141 1388 1208 1419 61.7 21.6 17.5 Fixed investments, LTL Mio 192 126 116 62 0.6 –34.5 –46.5 Foreign direct investments (end of period), 263 307 263 307 1.0 16.8 19.2 LTL Mio Sales of goods and services, LTL Mio 1511 1688 811 852 0.8 11.7 5.0 Gross profit, LTL Mio 743 800 405 401 2.0 7.7 –1.0 Operating profit, LTL Mio 128 48 77 21 0.5 –62.1 –72.8 Profit before tax, LTL Mio 97 –7 60 –7.5 – – – Assets (end of period), LTL Mio 2262 2298 2262 2298 1.2 1.6 –4.5 Liabilities (end of period), LTL Mio 1524 1534 1524 1534 1.8 0.6 –8.4 Return on sales, % 6.41 –0.42 7.35 –0.88 – – – Return on assets, % 4.60 –0.30 5.39 –0.65 – – – Debt ratio (end of period), % 0.67 0.67 0.67 0.67 149.4 – –

* FDI, assets and liabilities – semiannual change ** Value added per employee at current prices

Source: Statistics Lithuania

the number of Italians and French fell by a tourism services grew at an average rate of quarter and that of Swedes by 35% in 2008. 13.6% annually, but Lithuania failed to sus- At the same time, the number of Austrian and tain this growth for a longer period. In 2007, Polish tourists in Lithuania rose by 1.7 times the annual change contracted several times and 23% respectively. Although there were to less than 2%, while last year’s results were 19% more visitors from Russia compared to slightly better as the growth of exports stood two years ago, the number of tourists from at 7.5%. However, complaints by the players the CIS region fell by 13.3% mostly due to of this sector signal that the result of 2009 a 40% contraction in the number of travel- will be poor again. lers from the neighbouring Belarus. Analysis Statistics of Lithuanian accommodation pro- of inbound tourism, when travelling is or- viders show that the number of Lithuanians ganised by tourism companies, in Lithuanian and foreigners booking accommodation rose counties shows that only the capital is being by just 2.6% last year after a much stronger introduced to the majority of tourists. About growth in 2006 and 2007 (16.2% and 15.5% 80% of all people visiting Lithuania last year respectively), and even fell by more than a stayed in Vilnius county, while the remaining fifth year-on-year in the first quarter of this 20% were shared, in almost equal parts, by year. Hotels and guest houses which accom- Kaunas and Klaipėda counties. modated about 76% of all visitors returned Statistics of the balance of payments of travel a slightly better indicator (5.3%) than the exports also show that tourism services were economy’s average. This indicator was held not developed sufficiently during the econom- up by an increase in foreign visitors (8.9%), ic upturn period. After Lithuania’s accession while the number of Lithuanians choosing to to the European Union, the value of exported stay at this type of accommodation did not

152 Lithuanian Economic Outlook Diagram 20.2 The distribution of the number of beds in hotels and rest establishments by the number of acquired stars in 2008, end of period, %

�� 3 5 6 17 �� 34

��

�

35 Unclassified

Source: Statistics Lithuania

grow during the year. The number of guests ing according to the standards of the Ramada from EU member states staying at accommo- Worldwide hotel chain and was granted a five- dation facilities in Lithuania rose by 10%. The star rating according to the Lithuanian hotel largest flow of visitors was from Poland, Ger- industry standards at the end of the year. many, Russia, Latvia, Finland and the United In Kaunas, the accommodation market was Kingdom. Statistics of the occupancy rate joined in spring by a large four-star Reval Ho- of Lithuanian hotels and guest houses show tel Neris, which underwent renovation, and a that after pretty successful years of 2007 and new-three star Magnus hotel. Three-star Old 2008, when the occupancy rate in this cat- Port Hotel, which added 46 new rooms to the egory was 45% on average, the situation de- city’s hotel market, opened its doors in the teriorated dramatically in the first quarter of first half of last year in Klaipėda. This year, this year. Preliminary estimates of Statistics the sector is set to grow in two major cities Lithuania indicate that the occupancy rate of only. After numerous delays in the last couple hotels and guest houses fell to 26.4% in the of years, five-star AAA Kempinski Hotel Vil- first quarter of 2009, down by more than nine nius is finally expected to open its doors in percentage points year-on-year. The saving Vilnius. Moreover a 101-room two-star Ehotel mode ‘imposed’ by the crisis which restricted Tennis should also begin operating in the the financial freedom of many and the sev- capital. Kaunas, meanwhile, should witness a ered air tourism ties of Lithuania with the rest start to the operations of a 98-room Europa of the world imply that the Lithuanian accom- Royale Kaunas hotel this year. modation providers should brace themselves The general trends of financial indicators of for a very lean tourism season. the hotels and restaurants sector signal very The hotel market is dominated by market bleak prospects. Having grown by a fifth on players with a three-star and four-star rating. average each year in 2006−2007, turnover These categories of hotels account for 41% of this economic activity lost steam last year and 22% of all hotels in the country respec- contracting almost by half, and the sector tively. Both three-star and four-star hotels plunged into a negative territory again (see have very similar market positions in terms Table 20.1) after a short profitable spell which of the number of rooms (see Diagram 20.2). lasted just three years (in terms of pre-tax According to Colliers International, several profits). Moreover, relatively large liabilities new market players were added to these seg- of the companies look menacing. In 2008, the ments last year. Having completed the devel- debt ratio stood at 67% and was more than opment work, Artis Centrum Hotels opened 1.5 times higher than the relevant average the door to a new conference centre in Vil- of the entire economy. This debt burden of nius, four-star Vila Valakampiai and three- the hotels and restaurants sector shows that star Algirdo hotels appeared on the market, the sector is indeed in a critical condition: it while Ramada Vilnius received a higher rank- will become increasingly difficult to manage

Hotels and restaurants 153 financial flows and remain solvent as revenue prevent an economic ‘genocide’ of this indus- continues to plummet. try, the government must listen to at least some of their demands, most importantly, Last but not least, we would like to point out find a way to fill in the vacuum in the Lithu- that the percentage of representatives of the anian air space. hotels and restaurants sector is relatively high among doomed business entities. To

154 Lithuanian Economic Outlook ANNEX Table A.1 Value added by economic activity

Value added at current prices, LTL Mio Value added at constant prices, LTL Mio Deflator, annual change, % Share, Share, NACE Activity % % NACE

2006 2007 2008 2007 II H 2008 II H 2008 2006 2007 2008 2007 II H 2008 II H 2008 2006 2007 2008 2008 II H ANNEX Total economy 74677 87904 99949 48090 52353 100 63716 69402 71496 37181 37321 100 6.3 8.1 10.4 8.5 A Agriculture and forestry 3155 3873 4393 2501 2403 4.4 2569 2911 2953 1786 1820 4.1 14.0 8.3 11.8 –5.7 A C Mining and quarrying 377 380 410 214 205 0.4 315 309 287 171 149 0.4 12.3 2.7 16.4 9.9 C D Manufacturing 14994 16692 18631 8853 9308 18.6 14096 15152 15476 7891 7708 21.6 0.9 3.6 9.3 7.6 D Manufacture of food products and 15 2559 3124 3379 1781 1850 3.4 2276 2594 2535 1420 1364 3.5 2.4 7.1 10.7 8.1 15 beverages Manufacture of textiles and wearing 17-19 1526 1616 1437 816 664 1.4 1563 1526 1341 771 629 1.9 –6.3 8.5 1.1 –0.2 17-19 apparel Manufacture of wood and paper products, 20,21,36 2569 2999 3125 1533 1535 3.1 2548 2823 2917 1422 1438 4.1 0.1 5.4 0.8 –0.9 20,21,36 furniture 23 Manufacture of refined petroleum products 1701 1015 2212 419 1047 2.2 1183 846 1437 413 765 2.0 4.1 –16.5 28.3 35.1 23 24 Manufacture of chemical products 987 1744 2300 995 1172 2.3 741 1122 1067 572 465 1.5 3.8 16.7 38.7 45.0 24 25 Manufacture of rubber and plastic products 940 966 910 509 433 0.9 999 991 937 509 456 1.3 6.2 3.6 –0.3 –4.8 25 26 Manufacture of building materials 846 950 774 530 392 0.8 810 827 689 449 340 1.0 5.9 9.9 –2.2 –2.1 26 27,28 Manufacture of metal products 835 1107 973 600 497 1.0 808 1038 841 560 422 1.2 –0.8 3.1 8.4 9.7 27,28 29 Manufacture of machinery and equipment 496 584 642 324 303 0.6 526 621 669 343 323 0.9 –0.9 –0.1 2.0 –0.6 29 Manufacture of electrical and optical 30-33 941 870 948 460 458 0.9 1167 1092 1261 575 639 1.8 2.0 –1.2 –5.6 –10.3 30-33 equipment 34,35 Manufacture of motor vehicles 701 754 929 378 455 0.9 714 761 926 381 450 1.3 2.6 1.1 1.3 2.0 34,35 E Electricity, gas and water supply 2615 2768 3177 1407 1655 3.2 2484 2512 2501 1260 1245 3.5 1.1 4.7 15.3 19.1 E F Construction 6554 8992 9964 5424 5596 10.0 5161 6254 6330 3674 3537 8.9 10.2 13.2 9.5 7.2 F G Domestic trade 12505 14677 16733 8061 8764 16.7 11382 12770 13175 6880 6821 18.4 3.7 4.6 10.5 9.7 G 50 Retail trade of motor vehicles 1818 2014 2271 1111 1178 2.3 1506 1633 1596 891 821 2.2 5.0 2.1 15.4 15.0 50 51 Wholesale trade 5475 6486 7383 3536 3899 7.4 5049 5730 5917 3063 3085 8.3 3.3 4.4 10.2 9.5 51 52 Retail trade 5173 6133 7027 3389 3659 7.0 4801 5390 5655 2916 2912 7.9 3.7 5.6 9.2 8.1 52 H Hotels and restaurants 1008 1112 1279 610 674 1.3 807 818 833 435 434 1.2 3.8 8.8 13.0 10.7 H 60-63 Transport and storage 7427 9149 10195 4976 5436 10.2 5952 6724 6921 3546 3574 9.7 5.9 9.0 8.3 8.4 60-63 60.1 Railway transport 757 864 1008 441 516 1.0 618 684 700 349 335 1.0 4.7 3.2 13.9 22.2 60.1 60.2 Other land transport 3934 4767 5166 2570 2760 5.2 2874 3235 3220 1620 1610 4.5 4.1 7.6 8.9 8.0 60.2 61 Water transport 279 328 305 168 156 0.3 262 257 248 126 121 0.3 1.3 19.8 –3.8 –3.0 61 62 Air transport 154 193 155 105 89 0.2 131 149 124 82 73 0.2 0.4 10.1 –3.5 –4.9 62 63.1 Cargo transport and storage 2302 2997 3562 1692 1915 3.6 1973 2294 2533 1329 1392 3.5 10.4 12.0 7.6 8.0 63.1 64 Post and telecommunications 2085 2286 2538 1161 1241 2.5 2137 2350 2716 1192 1370 3.8 –0.8 –0.3 –4.0 –7.1 64 J Financial intermediation 2138 3079 3468 1674 1717 3.5 1167 1220 1250 623 618 1.7 29.3 37.8 9.9 3.5 J K Real estate, other business activities 9049 10483 12119 5747 6484 12.1 7236 7686 8072 4150 4268 11.3 6.9 9.1 10.1 9.7 K 70 Real estate activities 5551 6379 7146 3415 3710 7.1 4314 4377 4486 2303 2319 6.3 10.2 13.2 9.3 7.9 70 72 Computer and related activities 479 601 693 365 388 0.7 392 455 475 270 262 0.7 4.8 8.0 10.5 9.8 72 74 Other business activities 2686 3071 3755 1707 2080 3.8 2236 2491 2731 1363 1480 3.8 1.4 2.6 11.5 12.3 74 L Public administration and defence 5213 5691 6373 3040 3436 6.4 4578 4754 4937 2448 2549 6.9 8.1 5.1 7.8 8.6 L M Education 3298 3793 4836 1788 2330 4.8 2664 2650 2737 1308 1368 3.8 12.2 15.6 23.5 24.6 M N Health and social work 2225 2667 3228 1432 1721 3.2 1443 1485 1512 808 824 2.1 23.6 16.5 18.9 17.9 N Other activities 2034 2262 2604 1203 1385 2.6 1669 1746 1796 919 944 2.5 4.2 6.2 11.9 12.1

156 Lithuanian Economic Outlook Value added at current prices, LTL Mio Value added at constant prices, LTL Mio Deflator, annual change, % Share, Share, NACE Activity % % NACE

Annex 157 Table A.2 Average number of employees in full-time units, earnings and labour productivity*

Average number of employees in full-time units, thou Average monthly earnings Labour productivity, LTL thou (personal enterprises excluded), LTL Share, Ratio Ratio % to the to the economy’s economy’s

ANNEX NACE Activity average, average, NACE % % 2006 2007 2007 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 II H II H II H II H II H II H

Total economy 1275.9 1291.5 1253.5 1292.6 1239.2 100 1577 1886 2248 1994 2312 100 58.5 68.1 79.7 37.2 42.2 100 A Agriculture, fishery and forestry 183.9 156.9 116.6 151.4 120.5 9.3 1205 1482 1786 1590 1817 79.4 17.2 24.7 37.7 16.5 19.9 47.3 A C Mining and quarrying 3.2 3.1 2.9 3.1 2.9 0.2 1996 2389 2887 2561 2947 128.4 117.9 121.8 143.2 68.2 69.8 185.4 C D Manufacturing 221.2 218.5 203.0 215.6 194.2 15.7 1466 1814 2116 1941 2177 94.1 67.8 76.4 91.8 41.1 47.9 118.9 D Manufacture of food products, beverages 15,16 45.7 45.0 44.3 45.1 43.6 3.4 1390 1721 2021 1832 2070 89.9 58.7 71.6 78.8 40.8 43.8 102.1 15,16 and tobacco 17-19 Manufacture of textiles and wearing apparel 43.1 38.0 30.6 35.7 28.1 2.4 1131 1345 1529 1430 1561 68.0 35.4 42.5 46.9 22.8 23.7 60.7 17-19 Manufacture of wood and paper products, 20,21,36 51.7 52.5 48.0 51.8 45.5 3.7 1297 1631 1900 1748 1945 84.5 49.7 57.1 65.1 29.6 33.7 84.3 20,21,36 furniture 23 Manufacture of refined petroleum products 3.4 3.5 3.3 3.5 3.2 0.3 3651 3825 3986 3947 4198 177 507.3 292.7 675.1 120.2 329.8 874.5 23 24 Manufacture of chemical products 5.3 5.5 6.1 5.5 6.1 0.5 2448 3054 3600 3245 3688 160.1 185.3 315.3 377.1 179.6 190.6 488.5 24 25 Manufacture of rubber and plastic products 7.9 8.3 8.2 8.2 8.0 0.6 1549 1969 2274 2099 2373 101.1 118.3 116.1 110.4 61.8 54.4 143.1 25 26 Manufacture of building materials 10.0 10.4 9.6 10.6 8.9 0.7 1825 2272 2527 2440 2582 112.4 84.6 91.4 80.7 50.1 44.0 104.6 26 27,28 Manufacture of metal products 15.5 16.3 14.6 16.0 13.8 1.1 1524 1996 2180 2147 2188 97.0 53.8 67.7 66.6 37.4 36.1 86.3 27,28 29 Manufacture of machinery and equipment 9.3 9.6 8.8 9.6 8.5 0.7 1655 2043 2281 2173 2359 101.5 53.2 61.0 72.7 33.6 35.9 94.2 29 Manufacture of electrical and optical 30-33 13.1 11.9 11.3 11.7 10.7 0.9 1610 1899 2271 2026 2330 101.0 71.6 73.2 83.7 39.2 42.7 108.5 30-33 equipment 34,35 Manufacture of motor vehicles 7.3 7.8 8.4 7.9 8.2 0.7 1925 2342 2876 2523 3005 127.9 96.5 96.3 110.3 47.7 55.4 142.9 34,35 E Electricity, gas and water supply 24.6 23.6 23.0 23.4 22.7 1.8 2072 2360 2738 2487 2832 121.8 106.3 117.5 138.2 60.1 73.0 179.0 E F Construction 91.2 104.1 105.4 106.0 100.7 8.1 1728 2213 2449 2377 2471 108.9 71.8 86.4 94.5 51.2 55.6 122.5 F G Domestic trade 195.6 207.8 212.7 211.4 209.0 16.4 1496 1810 2092 1917 2117 93.0 63.9 70.6 78.7 38.1 41.9 101.9 G 50 Retail trade of motor vehicles 35.0 37.9 – – – – 1328 1642 – – – – 52.0 53.2 – – – – 50 51 Wholesale trade 63.7 69.1 – – – – 1924 2275 – – – – 85.9 93.8 – – – – 51 52 Retail trade 96.9 100.8 – – – – 1223 1506 – – – – 53.4 60.9 – – – – 52 H Hotels and restaurants 28.0 30.9 31.4 31.2 31.1 2.4 947 1141 1388 1208 1419 61.7 36.1 36.0 40.8 19.5 21.7 52.8 H 60-63 Transport and storage 71.6 77.2 79.4 78.0 79.1 6.1 1523 1816 2232 1925 2299 99.3 103.8 118.6 128.3 63.8 68.7 166.3 60-63 64 Post and telecommunications 13.8 14.2 14.3 14.3 14.3 1.1 1848 2183 2432 2254 2457 108.1 151.0 160.5 177.0 81.4 86.6 229.3 64 J Financial intermediation 15.0 16.7 17.7 17.1 17.8 1.4 3177 3685 4153 3790 4205 184.7 142.2 184.6 195.6 98.0 96.5 253.4 J K Real estate; other business activities 72.7 82.1 89.6 83.8 89.2 6.9 1732 1996 2514 2121 2590 111.8 124.4 127.8 135.3 68.6 72.7 175.2 K 70 Real estate activities 16.6 19.0 – – – – 1264 1522 – – – – 334.2 335.1 – – – – 70 72 Computer and related activities 6.4 6.9 – – – – 2163 2510 – – – – 74.6 87.0 – – – – 72 74 Other business activities 41.7 47.7 – – – – 1886 2133 – – – – 64.4 64.5 – – – – 74 L Public administration and defence 77.0 79.2 81.1 79.7 81.7 6.3 2314 2492 3063 2565 3149 136.2 67.7 71.8 78.5 38.1 42.1 101.7 L M Education 146.9 143.5 145.1 149.7 146.3 11.2 1299 1539 1931 1603 2030 85.9 22.4 26.4 33.3 11.9 15.9 43.2 M N Health and social work 85.6 86.5 87.8 85.9 88.9 6.8 1502 1792 2174 1905 2287 96.7 26.0 30.9 36.8 16.7 19.4 47.6 N Other activities 45.5 47.3 43.4 42.0 40.8 3.4 1316 1541 1858 1609 1899 82.7 44.7 47.8 60.0 28.7 34.0 77.7

* Value added per employee at current prices

158 Lithuanian Economic Outlook Average number of employees in full-time units, thou Average monthly earnings Labour productivity, LTL thou (personal enterprises excluded), LTL Share, Ratio Ratio % to the to the economy’s economy’s average, average, NACE Activity NACE ANNEX % % 2006 2007 2007 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 II H II H II H II H II H II H

* Value added per employee at current prices

Annex 159 Table A.3 Fixed investments and foreign direct investment (FDI)

Fixed investments, LTL Mio Ratio of fixed investments to value added, % FDI stock, end of period, LTL Mio Share, Ratio to the Share, % economy’s % NACE Activity average, % NACE 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2008

ANNEX II H II H II H II H

Total economy 15169 20312 21633 12132 12528 100 20.3 23.1 21.6 25.2 23.9 100 28925 34601 31485 100 A Agriculture, fishery and forestry 441 447 549 270 332 2.5 14.0 11.5 12.5 10.8 13.8 57.8 170 192 269 0.9 A C Mining and quarrying 71 53 90 31 45 0.4 18.9 13.9 21.9 14.5 21.7 101.1 156 187 188 0.6 C D Manufacturing 2298 3176 2872 1764 1511 13.3 15.3 19.0 15.4 19.9 16.2 71.2 11510 12571 7326 23.3 D 15 Manufacture of food products and beverages 458 590 668 316 374 3.1 17.9 18.9 19.8 17.7 20.2 91.4 1434 1523 1554 4.9 15 17-19 Manufacture of textiles and wearing apparel 162 98 80 54 58 0.4 10.6 6.0 5.6 6.7 8.7 25.7 434 451 404 1.3 17-19 20,21,36 Manufacture of wood and paper products, furniture 352 446 466 269 194 2.2 13.7 14.9 14.9 17.5 12.6 69.0 702 777 817 2.6 20,21,36 24 Manufacture of chemical products 343 236 301 140 150 1.4 34.7 13.5 13.1 14.1 12.8 60.5 1293 2472 1413 4.5 24 25 Manufacture of rubber and plastic products 185 138 171 67 75 0.8 19.7 14.3 18.7 13.3 17.3 86.6 241 293 309 1.0 25 26 Manufacture of building materials 143 186 113 117 66 0.5 16.9 19.5 14.6 22.2 16.8 67.4 342 384 499 1.6 26 27,28 Manufacture of metal products 92 128 82 79 41 0.4 11.0 11.5 8.4 13.1 8.2 38.8 123 136 177 0.6 27,28 29 Manufacture of machinery and equipment 57 99 63 54 26 0.3 11.5 16.9 9.8 16.7 8.6 45.4 228 176 81 0.3 29 30-33 Manufacture of electrical and optical equipment 74 86 81 45 44 0.4 7.9 9.9 8.5 9.8 9.6 39.4 296 395 415 1.3 30-33 34,35 Manufacture of motor vehicles 54 63 66 37 35 0.3 7.7 8.4 7.1 9.8 7.7 32.7 440 495 530 1.7 34,35 E Electricity, gas and water supply 1565 1650 1579 1052 963 7.3 59.8 59.6 49.7 74.8 58.2 229.6 3049 3206 2354 7.5 E F Construction 580 672 473 364 208 2.2 8.8 7.5 4.7 6.7 3.7 21.9 475 549 632 2.0 F G Domestic trade 1567 2125 1574 1260 810 7.3 12.5 14.5 9.4 15.6 9.2 43.5 3085 3962 4449 14.1 G 50 Retail trade of motor vehicles 312 488 368 280 175 1.7 17.1 24.3 16.2 25.2 14.9 74.9 479 645 648 2.1 50 51 Wholesale trade 695 829 603 431 329 2.8 12.7 12.8 8.2 12.2 8.4 37.7 2056 2591 3122 9.9 51 52 Retail trade 561 808 603 549 306 2.8 10.8 13.2 8.6 16.2 8.4 39.6 550 726 680 2.2 52 H Hotels and restaurants 184 192 126 116 62 0.6 18.3 17.3 9.8 19.0 9.2 45.4 202 263 307 1.0 H 60-63 Transport and storage 1077 1441 1855 799 1053 8.6 14.5 15.7 18.2 16.1 19.4 84.1 335 675 569 1.8 60-63 64 Post and telecommunications 365 530 468 286 257 2.2 17.5 23.2 18.4 24.7 20.7 85.1 2795 3761 3972 12.6 64 J Financial intermediation 203 211 182 120 97 0.8 9.5 6.8 5.2 7.1 5.7 24.2 4604 5946 4927 15.6 J K Real estate; other business activities 3338 4471 5622 2462 2841 26.0 36.9 42.6 46.4 42.8 43.8 214.3 2265 2902 5137 16.3 K 70 Real estate activities 2836 3893 5050 2159 2573 23.3 51.1 61.0 70.7 63.2 69.3 326.5 1583 2047 3813 12.1 70 72 Computer and related activities 37 62 48 38 23 0.2 7.7 10.3 6.9 10.5 6.0 31.7 122 145 174 0.6 72 74 Other business activities 283 267 315 136 152 1.5 10.5 8.7 8.4 8.0 7.3 38.7 431 487 834 2.6 74 L Public administration and defence 2906 4481 5176 3093 3668 23.9 55.7 78.7 81.2 101.7 106.8 375.3 – – – – L M Education 124 177 157 114 95 0.7 3.8 4.7 3.3 6.4 4.1 15.0 – – – – M N Health and social work 178 242 319 140 224 1.5 8.0 9.1 9.9 9.8 13.0 45.6 – – – – N Other activities 273 444 592 262 362 2.7 13.4 19.6 22.7 21.8 26.2 105.1 – – – –

160 Lithuanian Economic Outlook Fixed investments, LTL Mio Ratio of fixed investments to value added, % FDI stock, end of period, LTL Mio Share, Ratio to the Share, % economy’s % NACE Activity average, % NACE 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2008 II H II H II H II H ANNEX

Annex 161 Table A.4 Sales and profit

Sales of goods and services, LTL Mio Profit before tax, LTL Mio Return on sales, % Share, Share, Ratio % % to the economy’s NACE Activity average, NACE % ANNEX 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 II H II H II H II H II H II H

Total economy 147175 181437 211106 99323 107266 100 9163 15892 8130 9526 1602 100 6.2 8.8 3.9 9.6 1.5 100 C Mining and quarrying 631 739 734 419 372 0.3 164 179 186 101 101 2.3 25.9 24.2 25.4 24.1 27.3 659.2 C 11 Extraction of crude petroleum and natural gas 261 282 292 157 139 0.1 99 96 103 52 55 1.3 37.8 33.9 35.1 33.3 39.4 911.6 11 D Manufacturing 42610 46071 56678 24815 27954 26.8 1900 2563 1308 1352 –144 16.1 4.5 5.6 2.3 5.4 –0.5 59.9 D 15 Manufacture of food products and beverages 8641 9927 10609 5554 5559 5.0 455 725 302 439 169 3.7 5.3 7.3 2.8 7.9 3.0 73.9 15 17-19 Manufacture of textiles and wearing apparel 2310 2375 2114 1194 1004 1.0 86 42 –20 –4 –17 –0.3 3.7 1.8 –1.0 –0.3 –1.7 –25.0 17-19 Manufacture of wood and paper products, 20,21,36 4713 5746 6378 2983 3104 3.0 165 170 –13 59 –45 –0.2 3.5 3.0 –0.2 2.0 –1.4 –5.3 20,21,36 furniture 24 Manufacture of chemical products 2788 5019 6054 2697 2921 2.9 153 481 463 305 –50 5.7 5.5 9.6 7.6 11.3 –1.7 198.5 24 25 Manufacture of rubber and plastic products 2208 2590 2391 1385 1156 1.1 110 139 84 72 35 1.0 5.0 5.4 3.5 5.2 3.1 91.7 25 26 Manufacture of building materials 1808 2155 1945 1223 939 0.9 283 335 137 195 36 1.7 15.7 15.5 7.1 15.9 3.8 183.2 26 27,28 Manufacture of metal products 1877 2481 2523 1326 1245 1.2 126 139 107 62 34 1.3 6.7 5.6 4.2 4.7 2.7 109.9 27,28 29 Manufacture of machinery and equipment 1058 1341 1234 767 618 0.6 56 52 15 36 –7 0.2 5.3 3.9 1.3 4.7 –1.1 32.5 29 30-33 Manufacture of electrical and optical equipment 2047 2002 1992 1012 938 0.9 71 197 77 47 18 0.9 3.5 9.9 3.9 4.6 2.0 100.0 30-33 34,35 Manufacture of motor vehicles 1200 1705 2069 912 1092 1.0 139 143 145 55 56 1.8 11.6 8.4 7.0 6.0 5.1 182.1 34,35 E Electricity, gas and water supply 6727 7563 9915 3767 5156 4.7 489 399 167 19 –94 2.1 7.3 5.3 1.7 0.5 –1.8 43.9 E F Construction 12045 17021 18145 10095 9987 8.6 1110 1617 1102 1043 672 13.6 9.2 9.5 6.1 10.3 6.7 157.7 F G Domestic trade 59698 77718 87479 42611 44381 41.4 2405 5256 3012 3449 1292 37.1 4.0 6.8 3.4 8.1 2.9 89.4 G 50 Retail trade of motor vehicles 11208 15269 16003 8279 7463 7.6 362 539 263 261 30 3.2 3.2 3.5 1.6 3.2 0.4 42.7 50 51 Wholesale trade 32915 42738 48188 23533 24780 22.8 1549 2451 1889 1258 722 23.2 4.7 5.7 3.9 5.3 2.9 101.8 51 52 Retail trade 15575 19712 23288 10799 12139 11.0 494 2266 860 1930 541 10.6 3.2 11.5 3.7 17.9 4.5 95.9 52 H Hotels and restaurants 1264 1511 1688 811 852 0.8 116 97 –7 60 –8 –0.1 9.2 6.4 –0.4 7.3 –0.9 –10.9 H 60-63 Transport and storage 10952 14211 15835 7691 8069 7.5 768 1056 315 534 –40 3.9 7.0 7.4 2.0 6.9 –0.5 51.6 60-63 64 Post and telecommunications 3308 3668 3922 1924 1979 1.9 644 657 494 258 174 6.1 19.5 17.9 12.6 13.4 8.8 327.1 64 K Real estate; other business activities 6870 9215 12478 5172 6352 5.9 1330 3676 1369 2509 –409 16.8 19.4 39.9 11.0 48.5 –6.4 284.9 K 70 Real estate activities 2316 3578 5407 1960 2501 2.6 649 1369 725 753 –147 8.9 28.0 38.3 13.4 38.4 –5.9 348.3 70 72 Computer and related activities 832 1103 1127 678 624 0.5 107 244 146 167 69 1.8 12.9 22.1 12.9 24.7 11.0 336.0 72 74 Other business activities 3322 3849 5091 2137 2750 2.4 500 1957 317 1522 –453 3.9 15.0 50.8 6.2 71.2 –16.5 161.5 74

162 Lithuanian Economic Outlook Sales of goods and services, LTL Mio Profit before tax, LTL Mio Return on sales, % Share, Share, Ratio % % to the economy’s NACE Activity average, NACE % ANNEX 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 II H II H II H II H II H II H

Annex 163 Table A.5 Assets and liabilities

Assets, LTL Mio Liabilities, LTL Mio Debt ratio Semiannual Share, Semiannual Share, Ratio to the change, % % change, % % economy’s NACE Activity average, % NACE 2006 2007 2008 2008 2008 2008 2006 2007 2008 2008 2008 2008 2006 2007 2008 2008

ANNEX I H II H I H II H

Total economy 126903 161786 190771 21.2 –2.7 100 55228 71712 85253 28.7 –7.7 100 0.44 0.44 0.45 100 C Mining and quarrying 880 1041 1150 6.4 3.8 0.6 177 233 262 43.3 –21.5 0.3 0.20 0.22 0.23 50.9 C 11 Extraction of crude petroleum and natural gas 527 605 655 10.1 –1.7 0.3 67 73 45 68.6 –63.4 0.1 0.13 0.12 0.07 15.5 11 D Manufacturing 27570 32554 33486 11.8 –8.0 17.6 13441 16824 17084 15.6 –12.2 20.0 0.49 0.52 0.51 114.2 D 15 Manufacture of food products and beverages 5845 6558 6969 7.2 –0.9 3.7 3026 3378 3697 15.8 –5.5 4.3 0.52 0.52 0.53 118.7 15 17-19 Manufacture of textiles and wearing apparel 1915 1950 1866 2.1 –6.3 1.0 919 982 897 4.6 –12.6 1.1 0.48 0.50 0.48 107.6 17-19 Manufacture of wood and paper products, 20,21,36 3488 4226 4862 25.2 –8.1 2.5 2003 2530 3278 31.4 –1.4 3.8 0.57 0.60 0.67 150.9 20,21,36 furniture 24 Manufacture of chemical products 2757 3936 3810 7.5 –9.9 2.0 1034 1707 1394 –7.4 –11.8 1.6 0.38 0.43 0.37 81.9 24 25 Manufacture of rubber and plastic products 1370 1741 1883 12.4 –3.7 1.0 767 1063 1098 16.1 –11.0 1.3 0.56 0.61 0.58 130.5 25 26 Manufacture of building materials 1591 2022 2184 8.5 –0.5 1.1 638 805 895 16.2 –4.3 1.1 0.40 0.40 0.41 91.8 26 27,28 Manufacture of metal products 1425 1545 1550 6.3 –5.7 0.8 801 885 831 7.4 –12.5 1.0 0.56 0.57 0.54 120.0 27,28 29 Manufacture of machinery and equipment 1043 1051 1147 18.9 –8.2 0.6 477 531 530 23.2 –19.0 0.6 0.46 0.51 0.46 103.4 29 30-33 Manufacture of electrical and optical equipment 1210 1395 1373 6.3 –7.4 0.7 601 678 625 13.7 –18.9 0.7 0.50 0.49 0.46 101.8 30-33 34,35 Manufacture of motor vehicles 724 966 1184 35.0 –9.2 0.6 261 424 511 57.5 –23.5 0.6 0.36 0.44 0.43 96.6 34,35 E Electricity, gas and water supply 19946 22014 24645 8.8 2.9 12.9 3809 4282 5774 15.0 17.2 6.8 0.19 0.19 0.23 52.4 E F Construction 8518 10593 12104 15.8 –1.3 6.3 4916 6042 6964 26.8 –9.1 8.2 0.58 0.57 0.58 128.7 F G Domestic trade 26645 35188 37803 6.2 1.2 19.8 16475 21311 24138 17.9 –3.9 28.3 0.62 0.61 0.64 142.9 G 50 Retail trade of motor vehicles 4169 5485 5424 11.6 –11.4 2.8 2472 3461 3379 14.8 –14.9 4.0 0.59 0.63 0.62 139.4 50 51 Wholesale trade 15651 20067 23105 15.5 –0.3 12.1 9906 12722 14377 18.3 –4.5 16.9 0.63 0.63 0.62 139.2 51 52 Retail trade 6825 9636 9274 –16.4 15.1 4.9 4097 5128 6382 18.9 4.7 7.5 0.60 0.53 0.69 154.0 52 H Hotels and restaurants 1903 2262 2298 6.4 –4.5 1.2 1143 1524 1534 9.8 –8.4 1.8 0.60 0.67 0.67 149.4 H 60-63 Transport and storage 13226 17690 18515 1.4 3.2 9.7 4764 6599 7879 17.9 1.2 9.2 0.36 0.37 0.43 95.2 60-63 64 Post and telecommunications 4129 5423 4897 –13.2 4.1 2.6 650 1820 2032 10.3 1.2 2.4 0.16 0.34 0.41 92.9 64 K Real estate; other business activities 16634 27946 44920 78.8 –10.1 23.5 8801 11844 17737 82.7 –18.1 20.8 0.53 0.42 0.39 88.4 K 70 Real estate activities 11644 16809 24987 66.7 –10.8 13.1 6567 8637 13763 98.4 –19.7 16.1 0.56 0.51 0.55 123.3 70 72 Computer and related activities 701 926 1073 4.6 10.8 0.6 346 415 499 7.8 11.5 0.6 0.49 0.45 0.46 104.0 72 74 Other business activities 3661 9213 17565 113.5 –10.7 9.2 1401 2112 2674 49.2 –15.1 3.1 0.38 0.23 0.15 34.1 74

164 Lithuanian Economic Outlook Assets, LTL Mio Liabilities, LTL Mio Debt ratio Semiannual Share, Semiannual Share, Ratio to the change, % % change, % % economy’s NACE Activity average, % NACE 2006 2007 2008 2008 2008 2008 2006 2007 2008 2008 2008 2008 2006 2007 2008 2008 I H II H I H II H ANNEX

Annex 165 Table A.6 Return on capital, return on assets

Return on capital, % Return on assets, % Ratio Ratio to the to the economy’s economy’s average, % NACE Activity average, NACE

ANNEX % 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 II H 2008 II H 2008 II H II H

Total economy 13.4 19.2 7.7 21.9 3.0 100 7.6 10.6 4.2 12.1 1.7 100 C Mining and quarrying 24.8 23.7 22.7 25.6 23.7 293.9 19.5 18.4 16.7 19.9 17.6 396.9 C 11 Extraction of crude petroleum and natural gas 22.4 18.9 18.0 20.2 18.6 233.7 19.4 16.7 15.6 17.8 16.6 372.5 11 D Manufacturing 13.8 17.0 7.8 17.3 –1.7 100.8 7.0 8.3 3.7 8.5 –0.8 88.5 D 15 Manufacture of food products and beverages 16.7 24.7 9.3 28.7 10.4 120.4 8.2 12.0 4.3 13.9 4.8 103.3 15 17-19 Manufacture of textiles and wearing apparel 8.7 4.2 –2.0 –0.8 –3.4 –26.2 4.5 2.1 –1.0 –0.4 –1.8 –24.7 17-19 Manufacture of wood and paper products, 20,21,36 12.1 11.0 –0.7 7.5 –5.2 –9.4 4.9 4.2 –0.3 2.8 –1.8 –6.1 20,21,36 furniture 24 Manufacture of chemical products 9.5 23.8 17.9 28.0 –3.7 232.4 6.0 13.1 11.2 15.7 –2.4 265.8 24 25 Manufacture of rubber and plastic products 19.3 21.3 11.4 21.2 9.1 148.1 8.3 8.7 4.4 8.6 3.7 104.7 25 26 Manufacture of building materials 34.9 30.2 10.8 32.2 5.6 140.7 18.9 18.0 6.4 19.3 3.3 152.5 26 27,28 Manufacture of metal products 21.9 21.0 15.2 18.0 9.3 197.3 9.8 9.0 6.6 7.8 4.2 156.5 27,28 29 Manufacture of machinery and equipment 10.2 9.6 2.5 13.7 –2.2 32.9 5.6 4.9 1.3 6.8 –1.2 30.4 29 30-33 Manufacture of electrical and optical equipment 11.0 28.0 10.5 13.1 4.9 135.8 5.3 14.4 5.2 6.7 2.6 124.9 30-33 34,35 Manufacture of motor vehicles 29.5 20.3 20.7 11.4 19.7 268.8 17.8 11.7 10.6 6.6 10.3 252.1 34,35 E Electricity, gas and water supply 3.1 2.4 0.9 0.2 –1.0 11.6 2.5 1.9 0.7 0.2 –0.8 16.7 E F Construction 34.7 40.2 22.6 47.2 25.9 292.6 14.7 16.3 9.0 19.6 10.6 214.0 F G Domestic trade 25.4 44.4 22.4 53.9 19.3 290.4 9.6 16.4 7.9 20.3 6.7 188.8 G 50 Retail trade of motor vehicles 22.6 27.9 12.5 25.9 2.9 162.3 9.1 10.6 4.5 9.7 1.0 107.6 50 51 Wholesale trade 28.8 35.8 22.5 34.8 16.5 292.2 10.4 12.9 8.2 12.6 6.1 195.5 51 52 Retail trade 19.9 73.8 29.0 108.9 41.8 376.0 8.0 28.6 9.4 44.6 11.8 223.9 52 H Hotels and restaurants 16.6 13.7 –1.0 16.2 –2.0 –12.3 6.3 4.6 –0.3 5.4 –0.7 –7.2 H 60-63 Transport and storage 9.8 10.3 3.1 9.9 –0.8 39.7 6.1 6.5 1.7 6.2 –0.4 41.6 60-63 64 Post and telecommunications 20.0 18.4 16.4 14.4 12.3 212.2 16.7 13.7 9.9 9.6 7.2 236.1 64 K Real estate; other business activities 18.8 26.1 4.9 32.5 –2.9 63.2 8.9 14.4 2.9 18.4 –1.8 68.7 K 70 Real estate activities 14.8 19.2 6.5 19.6 –2.7 84.8 6.4 8.9 2.8 9.2 –1.2 66.2 70 72 Computer and related activities 33.9 58.5 27.1 68.7 24.3 351.1 18.1 31.6 14.8 38.3 13.2 353.4 72 74 Other business activities 22.7 31.1 2.0 43.8 –5.8 25.7 14.0 23.2 1.7 33.8 –4.9 39.5 74

166 Lithuanian Economic Outlook Return on capital, % Return on assets, % Ratio Ratio to the to the economy’s economy’s average, % NACE Activity average, NACE % ANNEX 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 II H 2008 II H 2008 II H II H

Annex 167 Table A.7 Sales and exports of industry sectors

Sales of goods and services, LTL Mio Exports, LTL Mio Ratio of exports to total sales, % Share, Share, % % NACE Activity NACE 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 II H II H II H II H II H II H ANNEX C+D+E Industry 47411 52131 64049 27434 31426 100 24388 25355 34118 13232 16305 100 51.4 48.6 53.3 48.2 51.9 C+D+E C Mining and quarrying 565 616 660 348 326 1.0 226 270 275 139 128 0.8 40.0 43.8 41.7 40.0 39.1 C 10 Extraction and agglomeration of peat 93 105 111 48 54 0.2 71 85 90 38 44 0.3 76.6 80.3 81.0 79.5 81.9 10 11 Extraction of crude petroleum and natural gas 235 207 208 115 91 0.3 140 163 156 87 69 0.5 59.4 78.7 75.0 76.2 76.2 11 14 Quarrying of stone, sand and clay 236 303 341 185 181 0.5 15 22 29 13 14 0.1 6.3 7.2 8.6 7.2 7.7 14 D Manufacturing 40724 44458 54850 23603 26770 85.6 24042 24906 33571 13010 16055 98.4 59.0 56.0 61.2 55.1 60.0 D 15 Manufacture of food products and beverages 7149 8984 9764 4864 5040 15.2 2409 3234 3359 1801 1726 9.8 33.7 36.0 34.4 37.0 34.3 15 16 Manufacture of tobacco products 1286 1356 1171 672 549 1.8 1010 1044 858 504 391 2.5 78.5 77.0 73.3 75.0 71.3 16 17 Manufacture of textiles and wearing apparel 1702 1659 1453 829 690 2.3 1300 1276 1072 627 501 3.1 76.4 76.9 73.8 75.6 72.7 17 18 Manufacture of dressing 88 98 82 55 41 0.1 45 43 29 22 14 0.1 51.5 43.6 35.8 40.9 35.4 18 19 Manufacture of leather products 2265 2717 2457 1381 1151 3.8 1429 1603 1403 771 639 4.1 63.1 59.0 57.1 55.9 55.5 19 20 Manufacture of wood products (excluding furniture) 398 464 549 241 265 0.9 182 217 250 112 119 0.7 45.8 46.9 45.5 46.6 44.9 20 21 Manufacture of paper products 1040 1226 1247 659 652 1.9 160 195 155 99 76 0.5 15.4 15.9 12.4 15.0 11.7 21 22 Publishing, printing 2707 4894 6574 2631 3117 10.3 1946 3837 5279 2084 2597 15.5 71.9 78.4 80.3 79.2 83.3 22 24 Manufacture of chemical products 1814 2001 1938 1040 945 3.0 913 1033 1047 513 501 3.1 50.3 51.6 54.0 49.4 53.0 24 25 Manufacture of rubber and plastic products 1652 1989 1794 1122 876 2.8 271 314 348 167 172 1.0 16.4 15.8 19.4 14.9 19.6 25 26 Manufacture of building materials 63 86 209 45 93 0.3 42 44 154 23 66 0.4 67.1 51.4 73.5 51.3 71.1 26 27 Manufacture of basic metals 1529 2092 1635 1102 825 2.6 665 870 678 432 344 2.0 43.5 41.6 41.5 39.2 41.7 27 28 Manufacture of metal products 1001 1184 1313 666 646 2.0 531 662 763 375 373 2.2 53.1 55.9 58.1 56.3 57.7 28 29 Manufacture of machinery and equipment 40 49 246 29 120 0.4 5 4 169 2 86 0.5 12.4 7.6 68.7 7.2 71.7 29 30 Manufacture of office machinery 896 902 715 451 318 1.1 655 657 470 317 200 1.4 73.1 72.9 65.7 70.4 63.1 30 31 Manufacture of electrical equipment 839 621 493 311 260 0.8 676 486 425 247 222 1.2 80.6 78.3 86.3 79.2 85.5 31 32 Manufacture of radio, television 330 444 447 224 228 0.7 208 312 294 161 148 0.9 63.2 70.3 65.8 72.0 65.0 32 33 Manufacture of optical instruments 321 472 544 229 221 0.8 177 275 374 133 171 1.1 55.2 58.2 68.8 57.9 77.5 33 34 Manufacture of motor vehicles 830 892 1083 427 549 1.7 564 638 745 301 372 2.2 67.9 71.5 68.8 70.5 67.8 34 35 Manufacture of other transport equipment 2023 2452 2799 1290 1412 4.4 1115 1278 1520 653 744 4.5 55.1 52.1 54.3 50.6 52.7 35 36 Manufacture of furniture 375 521 503 251 186 0.8 288 401 383 187 141 1.1 76.9 77.0 76.3 74.6 75.7 36 37 Recycling of metal waste and scrap 6122 7058 8540 3483 4330 13.3 120 179 272 82 123 0.8 2.0 2.5 3.2 2.4 2.8 37 E Electricity, gas and water supply* 3497 4067 4451 2039 2288 6.9 120 179 272 82 123 0.8 3.4 4.4 6.1 4.0 5.4 E 40.1 Production and distribution of electricity* 1018 1341 2093 697 1072 3.3 – – – – – – – – – – – 40.1 40.2 Manufacture and distribution of gas 1431 1470 1806 655 874 2.8 – – – – – – – – – – – 40.2 40.3 Steam and hot water supply 177 179 189 92 96 0.3 – – – – – – – – – – – 40.3 41 Collection, distribution of water 175 177 179 88 93 0.3 – – – – – – – – – – – 41

* Exports estimate based on electricity exports data from foreign trade statistics

168 Lithuanian Economic Outlook Sales of goods and services, LTL Mio Exports, LTL Mio Ratio of exports to total sales, % Share, Share, % % NACE Activity NACE 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 2008 2006 2007 2008 2007 2008 II H II H II H II H II H II H ANNEX C+D+E Industry 47411 52131 64049 27434 31426 100 24388 25355 34118 13232 16305 100 51.4 48.6 53.3 48.2 51.9 C+D+E C Mining and quarrying 565 616 660 348 326 1.0 226 270 275 139 128 0.8 40.0 43.8 41.7 40.0 39.1 C 10 Extraction and agglomeration of peat 93 105 111 48 54 0.2 71 85 90 38 44 0.3 76.6 80.3 81.0 79.5 81.9 10 11 Extraction of crude petroleum and natural gas 235 207 208 115 91 0.3 140 163 156 87 69 0.5 59.4 78.7 75.0 76.2 76.2 11 14 Quarrying of stone, sand and clay 236 303 341 185 181 0.5 15 22 29 13 14 0.1 6.3 7.2 8.6 7.2 7.7 14 D Manufacturing 40724 44458 54850 23603 26770 85.6 24042 24906 33571 13010 16055 98.4 59.0 56.0 61.2 55.1 60.0 D 15 Manufacture of food products and beverages 7149 8984 9764 4864 5040 15.2 2409 3234 3359 1801 1726 9.8 33.7 36.0 34.4 37.0 34.3 15 16 Manufacture of tobacco products 1286 1356 1171 672 549 1.8 1010 1044 858 504 391 2.5 78.5 77.0 73.3 75.0 71.3 16 17 Manufacture of textiles and wearing apparel 1702 1659 1453 829 690 2.3 1300 1276 1072 627 501 3.1 76.4 76.9 73.8 75.6 72.7 17 18 Manufacture of dressing 88 98 82 55 41 0.1 45 43 29 22 14 0.1 51.5 43.6 35.8 40.9 35.4 18 19 Manufacture of leather products 2265 2717 2457 1381 1151 3.8 1429 1603 1403 771 639 4.1 63.1 59.0 57.1 55.9 55.5 19 20 Manufacture of wood products (excluding furniture) 398 464 549 241 265 0.9 182 217 250 112 119 0.7 45.8 46.9 45.5 46.6 44.9 20 21 Manufacture of paper products 1040 1226 1247 659 652 1.9 160 195 155 99 76 0.5 15.4 15.9 12.4 15.0 11.7 21 22 Publishing, printing 2707 4894 6574 2631 3117 10.3 1946 3837 5279 2084 2597 15.5 71.9 78.4 80.3 79.2 83.3 22 24 Manufacture of chemical products 1814 2001 1938 1040 945 3.0 913 1033 1047 513 501 3.1 50.3 51.6 54.0 49.4 53.0 24 25 Manufacture of rubber and plastic products 1652 1989 1794 1122 876 2.8 271 314 348 167 172 1.0 16.4 15.8 19.4 14.9 19.6 25 26 Manufacture of building materials 63 86 209 45 93 0.3 42 44 154 23 66 0.4 67.1 51.4 73.5 51.3 71.1 26 27 Manufacture of basic metals 1529 2092 1635 1102 825 2.6 665 870 678 432 344 2.0 43.5 41.6 41.5 39.2 41.7 27 28 Manufacture of metal products 1001 1184 1313 666 646 2.0 531 662 763 375 373 2.2 53.1 55.9 58.1 56.3 57.7 28 29 Manufacture of machinery and equipment 40 49 246 29 120 0.4 5 4 169 2 86 0.5 12.4 7.6 68.7 7.2 71.7 29 30 Manufacture of office machinery 896 902 715 451 318 1.1 655 657 470 317 200 1.4 73.1 72.9 65.7 70.4 63.1 30 31 Manufacture of electrical equipment 839 621 493 311 260 0.8 676 486 425 247 222 1.2 80.6 78.3 86.3 79.2 85.5 31 32 Manufacture of radio, television 330 444 447 224 228 0.7 208 312 294 161 148 0.9 63.2 70.3 65.8 72.0 65.0 32 33 Manufacture of optical instruments 321 472 544 229 221 0.8 177 275 374 133 171 1.1 55.2 58.2 68.8 57.9 77.5 33 34 Manufacture of motor vehicles 830 892 1083 427 549 1.7 564 638 745 301 372 2.2 67.9 71.5 68.8 70.5 67.8 34 35 Manufacture of other transport equipment 2023 2452 2799 1290 1412 4.4 1115 1278 1520 653 744 4.5 55.1 52.1 54.3 50.6 52.7 35 36 Manufacture of furniture 375 521 503 251 186 0.8 288 401 383 187 141 1.1 76.9 77.0 76.3 74.6 75.7 36 37 Recycling of metal waste and scrap 6122 7058 8540 3483 4330 13.3 120 179 272 82 123 0.8 2.0 2.5 3.2 2.4 2.8 37 E Electricity, gas and water supply* 3497 4067 4451 2039 2288 6.9 120 179 272 82 123 0.8 3.4 4.4 6.1 4.0 5.4 E 40.1 Production and distribution of electricity* 1018 1341 2093 697 1072 3.3 – – – – – – – – – – – 40.1 40.2 Manufacture and distribution of gas 1431 1470 1806 655 874 2.8 – – – – – – – – – – – 40.2 40.3 Steam and hot water supply 177 179 189 92 96 0.3 – – – – – – – – – – – 40.3 41 Collection, distribution of water 175 177 179 88 93 0.3 – – – – – – – – – – – 41

* Exports estimate based on electricity exports data from foreign trade statistics

Annex 169 Table A.8 Average income and consumption expenditure of households, per capita, LTL

Structure, Annual % change, % 2005 2006 2007 2008 2008 2008

ANNEX Disposable income 580 681 859 987 100 14.8 Income from employment 328 409 536 613 62.1 14.2 Income from self employment (excl. agricultural 79 90 105 105 10.7 0.4 economic activity) Income from self employment in agricultural 51 58 59 53 5.4 –10.2 economic activity Social transfers 131 146 183 233 23.6 27.8 Other income 41 36 35 35 3.6 0.3 Consumption expenditure 578 652 749 794 100 6.0 Food and non-alcoholic beverages 212 220 248 276 34.8 11.3 Alcoholic beverages 14 17 19 21 2.6 11.8 Tobacco 8 8 9 10 1.3 19.8 Clothing and footwear 50 57 69 68 8.5 –2.2 Housing, water, electricity, gas and other fuel 70 78 90 100 12.6 12.0 Furnishings, household equipment and routine 26 36 43 40 5.0 –7.9 maintenance of the house Health care 30 33 36 39 4.9 8.3 Transport 51 67 78 78 9.8 0.5 Communication 29 32 37 37 4.6 –0.8 Recreation and culture 27 34 41 38 4.8 –8.0 Education 7 6 6 4 0.6 –22.8 Hotels, restaurants, cafes, canteens 29 32 39 44 5.5 12.3 Miscellaneous goods and services 26 32 35 40 5.0 12.5

Table A.10 Exports by commodity group, LTL Mio

Year Total Food Mineral Chemicals Rubber Wood and Textiles Basic metals Machinery Transport Furniture Other Year products products and chemi- and plastic wood prod- and fabricated and equip- equipment goods cal products products ucts (exclud- metal ment ing furniture) products

2006 38888 5417 9193 2515 2000 1584 3228 1780 4886 3948 2208 2131 2006 2007 43192 7346 5791 3477 3430 1985 3263 2262 5589 4557 2665 2827 2007 2008 55477 8876 13704 5359 3303 1739 3046 2660 5895 4758 2642 3495 2008 2007 II H 22596 4065 2870 1956 1733 1018 1615 1137 3006 2223 1377 1595 2007 II H 2008 II H 28009 4799 6718 2752 1554 810 1547 1320 3039 2340 1291 1840 2008 II H Structure in 2008, % 100 16.0 24.7 9.7 6.0 3.1 5.5 4.8 10.6 8.6 4.8 6.3 Structure in 2008, % Annual change, 2008, % 28.4 20.8 136.7 54.1 –3.7 –12.4 –6.7 17.6 5.5 4.4 –0.9 23.6 Annual change, 2008, % Annual change, 2008 II H, % 24.0 18.0 134.1 40.7 –10.3 –20.4 –4.3 16.0 1.1 5.3 –6.3 15.4 Annual change, 2008 II H, % Balance 2007*, % –15.0 11.8 –24.2 –23.9 6.9 21.9 7.4 –33.7 –30.2 –35.4 52.3 –28.0 Balance 2007*, % Balance 2008*, % –10.8 7.1 –16.6 –7.3 6.6 22.2 4.8 –23.0 –25.0 –27.6 52.5 –25.4 Balance 2008*, %

* Foreign trade balance (at fob prices) ratio to respective sales

170 Lithuanian Economic Outlook Table A.9 Average consumption expenditure per capita in deciles, LTL

Expenditure, LTL Annual change, % Year 2005 2006 2007 2008 2006 2007 2008

I 178 197 219 249 11.0 11.3 13.6 II 265 293 332 371 10.7 13.3 11.8 ANNEX III 326 362 410 457 11.0 13.1 11.5 IV 384 426 484 539 11.1 13.6 11.2 V 443 491 566 624 10.8 15.3 10.2 VI 511 565 654 713 10.7 15.7 9.0 VII 592 657 755 822 11.0 15.0 8.8 VIII 705 784 904 969 11.2 15.2 7.2 IX 887 993 1131 1202 12.0 13.9 6.2 X 1491 1747 2031 1994 17.1 16.3 –1.8 Average 578 652 749 794 12.7 14.9 6.1 Ratios: (X/I) 8.4 8.9 9.3 8.0 – – – (IX+X)/(I+II) 5.4 5.6 5.7 5.2 – – –

* Foreign trade balance (at fob prices) ratio to respective sales

Annex 171 Table A.11 Exports of Lithuanian origin by commodity group, LTL Mio

Year Total Food Mineral Chemicals Rubber Wood Textiles Basic metals Machinery Transport Furniture Other Year products products and chemi- and plastic and wood and fabri- and equip- equipment goods cal products products products cated metal ment (excluding products furniture)

ANNEX 2006 28239 4114 9076 1781 1442 1433 2585 1151 2353 836 2076 1392 2006 2007 29498 5391 5693 2579 2786 1759 2444 1376 2321 960 2456 1732 2007 2008 38734 6109 13638 4165 2598 1455 2096 1514 1946 1021 2430 1763 2008 2007 II H 15367 3137 2826 1472 1371 907 1185 683 1136 467 1258 925 2007 II H 2008 II H 19060 3368 6680 2137 1159 665 1002 708 909 405 1166 862 2008 II H Structure in 2008, % 100 15.8 35.2 10.8 6.7 3.8 5.4 3.9 5.0 2.6 6.3 4.6 Structure in 2008, % Annual change, 2008, % 31.3 13.3 139.6 61.5 –6.8 –17.3 –14.3 10.0 –16.2 6.3 –1.1 1.8 Annual change, 2008, % Annual change, 2008 II H, % 24.0 7.4 136.4 45.2 –15.5 –26.7 –15.4 3.7 –20.0 –13.3 –7.3 –6.8 Annual change, 2008 II H, %

Table A.12 Exports and imports by region, LTL Mio

Exports Imports Share, % Change, % Share, % Change, % 2006 2007 2008 2008 2008 2008 II H 2006 2007 2008 2008 2008 2008 II H

Total 38888 43192 55477 100 28.4 24.0 53275 61504 72593 100 18.0 10.2 Total EU 24743 27967 33434 60.3 19.5 14.7 33434 42030 41600 57.3 –1.0 –9.9 EU Belgium 482 728 916 1.7 25.8 34.1 1321 1774 1742 2.4 –1.8 –20.6 Belgium Denmark 1634 1749 2589 4.7 48.0 25.1 1534 1687 1536 2.1 –9.0 –15.9 Denmark Estonia 2515 2514 3168 5.7 26.0 19.5 1639 2198 2093 2.9 –4.8 –19.2 Estonia Italy 823 981 883 1.6 –10.0 –16.4 1799 2451 2580 3.6 5.3 –1.6 Italy United Kingdom 1714 1968 2560 4.6 30.1 22.5 1418 1736 1367 1.9 –21.3 –31.4 United Kingdom Latvia 4304 5562 6457 11.6 16.1 15.2 2542 3365 3792 5.2 12.7 1.1 Latvia Poland 2361 2714 3202 5.8 18.0 16.9 5070 6533 7268 10.0 11.3 5.1 Poland Netherlands 1885 1295 1888 3.4 45.8 53.2 1988 2629 2581 3.6 –1.8 –15.7 Netherlands France 1627 1580 2677 4.8 69.4 69.3 1679 2153 2058 2.8 –4.4 –12.6 France Finland 336 570 751 1.4 31.6 13.9 1548 1721 1518 2.1 –11.8 –20.7 Finland Sweden 1749 1641 1889 3.4 15.1 12.1 1777 2302 2144 3.0 –6.9 –20.7 Sweden Germany 3345 4534 3996 7.2 –11.9 –15.6 7916 9222 8498 11.7 –7.8 –13.2 Germany CIS 8252 10567 14321 25.8 35.5 35.4 14885 13466 24750 34.1 83.8 78.8 CIS Belarus 1473 1733 2496 4.5 44.0 54.3 945 1220 1247 1.7 2.2 –5.4 Belarus Russia 4956 6473 8917 16.1 37.8 34.8 12975 11083 21855 30.1 97.2 92.0 Russia Ukraine 1006 1176 1806 3.3 53.5 44.7 722 848 1019 1.4 20.2 11.8 Ukraine EFTA 1264 1436 1750 3.2 21.9 14.4 527 633 735 1.0 16.2 52.6 EFTA Norway 724 993 1167 2.1 17.4 20.9 261 300 409 0.6 36.7 140.5 Norway Switzerland 272 118 521 0.9 339.9 295.7 222 287 277 0.4 –3.5 –5.9 Switzerland Other 4629 3222 5973 10.8 85.4 70.3 4428 5376 5508 7.6 2.5 –3.5 Other USA 1682 1109 1776 3.2 60.1 43.1 859 1356 1275 1.8 –6.0 –8.9 USA

172 Lithuanian Economic Outlook Year Total Food Mineral Chemicals Rubber Wood Textiles Basic metals Machinery Transport Furniture Other Year products products and chemi- and plastic and wood and fabri- and equip- equipment goods cal products products products cated metal ment (excluding products furniture)

2006 28239 4114 9076 1781 1442 1433 2585 1151 2353 836 2076 1392 2006 ANNEX 2007 29498 5391 5693 2579 2786 1759 2444 1376 2321 960 2456 1732 2007 2008 38734 6109 13638 4165 2598 1455 2096 1514 1946 1021 2430 1763 2008 2007 II H 15367 3137 2826 1472 1371 907 1185 683 1136 467 1258 925 2007 II H 2008 II H 19060 3368 6680 2137 1159 665 1002 708 909 405 1166 862 2008 II H Structure in 2008, % 100 15.8 35.2 10.8 6.7 3.8 5.4 3.9 5.0 2.6 6.3 4.6 Structure in 2008, % Annual change, 2008, % 31.3 13.3 139.6 61.5 –6.8 –17.3 –14.3 10.0 –16.2 6.3 –1.1 1.8 Annual change, 2008, % Annual change, 2008 II H, % 24.0 7.4 136.4 45.2 –15.5 –26.7 –15.4 3.7 –20.0 –13.3 –7.3 –6.8 Annual change, 2008 II H, %

Table A.12 Exports and imports by region, LTL Mio

Exports Imports Share, % Change, % Share, % Change, % 2006 2007 2008 2008 2008 2008 II H 2006 2007 2008 2008 2008 2008 II H

Annex 173 Table A.13 Exports by commodity group and region in 2008, %

Total Food Mineral Chemicals Rubber and Wood and Textiles Basic metals Machinery Transport Furniture Other goods products products and chemi- plastic wood products and fabricated and equip- equipment cal products products (excluding metal ment furniture) products

Total, LTL Mio 55477 8876 13704 5359 3303 1739 3046 2660 5895 4758 2642 3495 Total, LTL Mio ANNEX Total, % 100 100 100 100 100 100 100 100 100 100 100 100 Total, % EU 60.3 57.3 69.7 61.6 79.1 83.6 67.6 63.7 41.8 35.3 70.9 47.6 EU Latvia 11.6 14.4 15.5 11.2 7.8 7.5 4.8 16.0 10.4 7.3 3.8 12.2 Latvia Germany 7.2 9.6 0.2 9.0 17.6 17.9 10.8 10.0 5.2 5.8 12.4 7.0 Germany Poland 5.8 6.1 5.1 6.7 13.5 6.9 2.2 11.1 2.7 4.1 5.3 5.1 Poland Estonia 5.7 5.3 11.1 5.2 4.3 4.1 2.4 3.6 4.8 1.6 1.2 3.4 Estonia CIS 25.8 32.9 8.7 10.5 18.6 7.0 22.6 20.8 53.2 59.2 7.9 43.0 CIS Russia 16.1 29.3 0.3 4.6 11.3 5.2 16.8 13.6 35.2 27.1 6.4 33.1 Russia Belarus 4.5 2.7 0.2 3.4 4.4 0.3 2.5 3.6 8.9 21.3 0.4 5.0 Belarus Ukraine 3.3 0.5 7.7 1.2 2.3 0.5 2.5 1.0 4.6 1.4 0.7 2.7 Ukraine EFTA 3.2 1.4 3.0 1.5 1.5 7.6 5.9 3.0 2.2 1.9 11.6 4.8 EFTA Norway 2.1 1.3 0.3 1.5 0.9 7.3 5.0 2.4 2.0 1.6 8.1 4.4 Norway Other 10.8 8.3 18.7 26.3 0.8 1.8 3.9 12.6 2.8 3.6 9.6 4.7 Other USA 3.2 0.4 9.1 4.2 0.4 0.5 0.9 0.5 0.5 0.1 4.9 1.3 USA

Table A.14 FDI position by country, end of period, %

2002 2003 2004 2005 2006 2007 2008 I H LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio %

Total 13184 100 13699 100 16193 100 23896 100 28925 100 35504 100 31485 100 Total Sweden 2016 15.3 2010 14.7 2435 15.0 2644 11.1 3040 10.5 4057 11.4 5298 16.8 Sweden Germany 1264 9.6 1335 9.7 1839 11.4 2552 10.7 2793 9.7 3040 8.6 3170 10.1 Germany Denmark 2262 17.2 2374 17.3 2466 15.2 3792 15.9 4396 15.2 4491 12.6 2753 8.7 Denmark Estonia 1547 11.7 1151 8.4 1239 7.6 1777 7.4 1713 5.9 2030 5.7 2397 7.6 Estonia Netherlands 240 1.8 468 3.4 704 4.3 705 3.0 711 2.5 1496 4.2 2114 6.7 Netherlands Latvia 196 1.5 212 1.5 181 1.1 301 1.3 412 1.4 1633 4.6 1946 6.2 Latvia Poland 283 2.1 278 2.0 290 1.8 393 1.6 6493 22.4 6259 17.6 1853 5.9 Poland Finland 815 6.2 1173 8.6 1256 7.8 1526 6.4 1933 6.7 1811 5.1 1749 5.6 Finland Russia 687 5.2 796 5.8 1366 8.4 5880 24.6 1804 6.2 3467 9.8 1664 5.3 Russia Norway 389 2.9 421 3.1 461 2.8 489 2.0 766 2.6 1098 3.1 1242 3.9 Norway Cyprus 123 0.9 166 1.2 280 1.7 205 0.9 702 2.4 825 2.3 972 3.1 Cyprus USA 1142 8.7 1162 8.5 1034 6.4 654 2.7 702 2.4 677 1.9 817 2.6 USA Luxembourg 155 1.2 201 1.5 142 0.9 232 1.0 790 2.7 634 1.8 792 2.5 Luxembourg Switzerland 374 2.8 392 2.9 427 2.6 414 1.7 496 1.7 537 1.5 693 2.2 Switzerland United Kingdom 709 5.4 679 5.0 562 3.5 426 1.8 393 1.4 621 1.7 666 2.1 United Kingdom Austria 42 0.3 49 0.4 506 3.1 518 2.2 131 0.5 194 0.5 218 0.7 Austria Other 940 7.1 833 6.1 1005 6.2 1389 5.8 1651 5.7 2634 7.4 3138 10.0 Other

174 Lithuanian Economic Outlook Total Food Mineral Chemicals Rubber and Wood and Textiles Basic metals Machinery Transport Furniture Other goods products products and chemi- plastic wood products and fabricated and equip- equipment cal products products (excluding metal ment furniture) products

Table A.14 FDI position by country, end of period, %

2002 2003 2004 2005 2006 2007 2008 I H LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio % LTL Mio %

Annex 175 Table A.15 National budget and SoDra* revenue and expenditure, LTL Mio

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

NB revenue 8984 8724 9276 10572 11360 13805 16490 19781 24048 27396 NB revenue NB revenue (EU funds excluded) 8984 8724 9276 10572 11360 12415 14487 17618 20566 23914 NB revenue (EU funds excluded) Tax revenue** 8376 8033 8105 8991 9723 10649 12603 15604 18629 21787 Tax revenue** ANNEX Income tax of individuals 2576 2504 2512 2547 2666 3054 3569 4063 4558 5106 Income tax of individuals Corporate income tax*** 361 312 259 308 785 1169 1508 2290 2536 3065 Corporate income tax*** Value added tax 3467 3419 3512 3810 3823 3930 4842 6152 7824 9243 Value added tax Excises 1318 1210 1295 1706 1765 1858 2040 2375 2804 3354 Excises Property tax 247 259 285 328 308 248 249 274 288 308 Property tax Other taxes 407 330 242 292 376 391 396 451 619 711 Other taxes EU support – – – – – 1390 2003 2162 3482 3482 EU support Other revenue 608 691 1171 1581 1637 1766 1884 2014 1937 2127 Other revenue NB expenditure 9109 9468 9874 11673 12490 14561 17063 20844 24420 28685 NB expenditure Social affairs 4769 4808 5006 5337 5614 6009 6672 8587 10095 12702 Social affairs Education 2788 2704 2949 3169 3266 3642 3919 4470 5129 6278 Education Other 1982 2104 2057 2168 2347 2367 2753 4117 4966 6424 Other Economy**** 1116 1148 1164 2146 2536 2896 3986 5180 5742 6862 Economy**** Public order and safety affairs 973 933 966 1028 1091 1157 1254 1458 1647 2082 Public order and safety affairs National defence 494 611 700 847 944 934 987 1304 1741 1468 National defence Other 1756 1969 2037 2316 2305 3565 4164 4315 5194 5572 Other Payments to EU budget – – – – – 412 739 835 939 1050 Payments to EU budget SoDra revenue 4204 4405 4438 4570 4886 5564 6391 7800 9759 11217 SoDra revenue SoDra expenditure 4538 4581 4452 4461 4703 5324 6121 7245 9283 12654 SoDra expenditure

* State Social Insurance Fund ** Excluding Road tax *** Including Social tax **** Including housing and community

176 Lithuanian Economic Outlook 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

NB revenue 8984 8724 9276 10572 11360 13805 16490 19781 24048 27396 NB revenue NB revenue (EU funds excluded) 8984 8724 9276 10572 11360 12415 14487 17618 20566 23914 NB revenue (EU funds excluded) Tax revenue** 8376 8033 8105 8991 9723 10649 12603 15604 18629 21787 Tax revenue** Income tax of individuals 2576 2504 2512 2547 2666 3054 3569 4063 4558 5106 Income tax of individuals ANNEX Corporate income tax*** 361 312 259 308 785 1169 1508 2290 2536 3065 Corporate income tax*** Value added tax 3467 3419 3512 3810 3823 3930 4842 6152 7824 9243 Value added tax Excises 1318 1210 1295 1706 1765 1858 2040 2375 2804 3354 Excises Property tax 247 259 285 328 308 248 249 274 288 308 Property tax Other taxes 407 330 242 292 376 391 396 451 619 711 Other taxes EU support – – – – – 1390 2003 2162 3482 3482 EU support Other revenue 608 691 1171 1581 1637 1766 1884 2014 1937 2127 Other revenue NB expenditure 9109 9468 9874 11673 12490 14561 17063 20844 24420 28685 NB expenditure Social affairs 4769 4808 5006 5337 5614 6009 6672 8587 10095 12702 Social affairs Education 2788 2704 2949 3169 3266 3642 3919 4470 5129 6278 Education Other 1982 2104 2057 2168 2347 2367 2753 4117 4966 6424 Other Economy**** 1116 1148 1164 2146 2536 2896 3986 5180 5742 6862 Economy**** Public order and safety affairs 973 933 966 1028 1091 1157 1254 1458 1647 2082 Public order and safety affairs National defence 494 611 700 847 944 934 987 1304 1741 1468 National defence Other 1756 1969 2037 2316 2305 3565 4164 4315 5194 5572 Other Payments to EU budget – – – – – 412 739 835 939 1050 Payments to EU budget SoDra revenue 4204 4405 4438 4570 4886 5564 6391 7800 9759 11217 SoDra revenue SoDra expenditure 4538 4581 4452 4461 4703 5324 6121 7245 9283 12654 SoDra expenditure

* State Social Insurance Fund ** Excluding Road tax *** Including Social tax **** Including housing and community

Annex 177 Comments

Abbreviations ROE return on equity; RRT Communication Regulatory Authority; RST Rytų skirstomieji tinklai BMW basic monthly wage; SoDra State Social Insurance Fund; BoL the Bank of Lithuania; t ton; CAD current account deficit; toe tonne of oil equivalent; CI confidence indicator; VAT Value Added Tax; cif Cost insurance and freight – A pricing term indicating that the cost of the goods, insurance, and freight are included in the VILIBOR Vilnius Interbank Offered Rate; quoted price; VMI State Tax Inspectorate; CIPI construction input price index; VST Vakarų skirstomieji tinklai. CIS Commonwealth of Independent States; CPI consumer price index; cub. m cubic metre; Terms dal decalitre;

DI direct investment; E sector/industry – electricity, gas and water supply sector. EBIT earnings before interest and tax; Equity – equity including grants and subsidies. EBITDA earnings before interest, tax, depreciation, and amortization; Profit – profit before tax. ECB European Central Bank; Profitability or return on sales – profit before tax divided by sales, %. EFTA European Free Trade Association; Return on assets – profit before tax divided by assets, %. EIU Economist Intelligence Unit; Return on equity – profit before tax divided by equity, %. ESI economic sentiment indicator; Debt ratio – total liabilities divided by total assets, %. EU European Union; Turnover and sales – sales of goods and services. EU-15 the EU states prior 2004 May; Sales of goods and services of a sector – consolidated sales of goods and EURIBOR Euro Interbank Offered Rate; services of the companies classified to the particular sector according to their basic activity. EUROSTAT Statistical Office of the European Commission; Sales of industry sector – consolidated income from sales of the companies FDI foreign direct investment; that indicate this industry sector as the basic in their statistical reports. FEZ free economic zone; Visible export – exports of physically tangible goods, involving the export of Fed Federal Reserve System; goods at various stages of production. fob Freight on Board – a pricing term indicating that the quoted Invisible export – exports of physically intangible items such as services. price covers all expenses up to and including delivery of goods upon an overseas vessel provided by or for the buyer; FOF fund of funds Statistical data FTD foreign trade deficit; GDP gross domestic product; HICP harmonized consumer price index; Number of employed stands for average number of hired employees converted in full-time units, except for agriculture, where number of employed HMHT high- and medium-high technologies; includes self-employed persons. Number of employed in a particular sector INP Ignalina Nuclear Plant; is estimated based on the data of Statistics Lithuania and SODRA. ITC information and communication technologies; Economic Sentiment Indicator (ESI) is comprised of five constituents – arithmetic weighted average of consumer, industry, construction, trade and KTU Kaunas University of Technology; services confidence indexes. Weights of ESI constituents: industry accounts kW kilowatt; for 40%, services – 30%, consumers – 20%, construction – 5% and retail kWh kilowatt-hour; trade 5%. LDHA Lithuanian District Heating Association; LFS Labour Force Survey; LG Lietuvos geležinkeliai; Sources of statistical data m metre; M1 money aggregate measuring the amount of currency in circu- Statistical data on individual companies are obtained from the mass me- lation and deposits into checking accounts; dia – basically from Baltic News Service (BNS), ELTA and Verslo žinios daily newspaper. M2 money aggregate consisting of M1 plus savings deposits, small time deposits, and money market mutual funds; The data on the balance of payments is obtained from the Bank of Lithu- ania. MEO manufacture of electrical and optical equipment; The rest of statistical data is provided by the Statistics Lithuania and Euro- MI manufacturing industry; stat (if not otherwise indicated). MLS minimum living standard; MME minimum monthly earnings; MF mineral fuel; MN Mažeikių nafta; MW megawatt, one million of watts; NACE (Nomenclature Générale des Activités economiques dans les Communautés Européenes) – the official European Community classification for economic activities. NB national budget; OECD Organisation for Economic Co-operation and Development; PET polyethylene terephthalate; PPI producer price index; PST Panevėžio Statybos Trestas; RE real estate; RIGIBOR Riga Interbank Offered Rate; For your comments About AB DnB NORD Bankas AB DnB NORD Bankas is a member of dynamic and reliable DnB NORD banking group. It is a universal commercial bank which offers full range of banking services to private individuals and business customers. AB DnB NORD Bankas provides financial services for more than 600 000 individual and business customers in Lithuania. It is one of the country’s largest lenders to municipalities and manufacturing industry. AB DnB NORD Bankas is one of the most active participants in Lithua- nia’s debt securities market, named the Lithuania’s Best Debt House in 2006, the nomination followed by the Best Bank in Lithuania award for two years running in 2007 and 2008. The bank also provides investment and private banking services and intermediates in providing asset management, lease and insurance services. DnB NORD financial group was established by the Norway’s largest bank DnB NOR ASA and North Germany’s largest bank Norddeutsche Landesbank Girozentrale (NORD/LB) to serve customers in Denmark, Finland, Estonia, Latvia, Lithuania and Poland.