Review of the balance of payments of the Republic of Lithuania for Q4 2007 and 2007

Current account.

In Q4 2007, the deficit in the current account of the country’s balance of payments (CAD) amounted to LTL 3.3 billion accounting for 12 per cent of the GDP. Compared to Q4 2006, the CAD increased by LTL 519.2 million or 18.9 per cent. In twelve months of 2007, CAD was LTL 13.2 billion or 13.7 per cent of GDP, a year-on year increase of 50.4 per cent.

CAD and CAD to GDP ratio
	CAD, LTL million	CAD to GDP ratio (%)
2006	-8,808.87	-10.8
Q1	-1,703.25	-10.1
Q2	-1,780.83	-8.9
Q3	-2,573.56	-11.6
Q4	-2,751,23	-12,1
2007	-13,247.50	-13.7
Q1	-2,763.68	-14.0
Q2	-3,979.59	-16.8
Q3	-3,233.79	-12.4
Q4	-3,270.44	-12.0

Changes in current account balance and composite balances. Contributions to the current account changes
	2007, LTL million	2006, LTL million	Change (%)	Impact of factors (%)
Current Account Balance	-13,247.50	-8,808.87	50.4	50.4
Trade balance	-14,151.06	-11,522.04	22.8	29.9
Service balance	2,080.12	2,971.54	-30.0	10.1
Income balance	-4,093.08	-2,253.09	81.7	20.9
Current transfers balance	2,916.52	1,994.72	46.2	-10.5

Such an increase in CAD in 2007 was mainly due to an increase in foreign trade deficit and income balance deficit, while a decrease of positive balances of services was offset by an increase in positive balance of current transfers.

Foreign trade

. In Q4 2007, the country?s exports of goods grew by 14.7 per cent year on year, while imports of goods grew by 11.4 per cent. In 2007, the year-on year growth of export and import of goods was 11.2 and 14.5 per cent, respectively. The growth rate of the Lithuanian exports and imports of goods as before was mostly driven by trade in mineral products. In 2007, export of these goods went down by 35.7 per cent year on year, while import contracted by 15.5 per cent; consequently, total growth of export and import of goods, excluding mineral products, respectively was 25.9 and 23.7 per cent.

Export growth was mainly driven by an increase in the export of plastics and articles thereof, as well as ground vehicles, fertilisers, and machinery and mechanical appliances. Meanwhile, import growth was driven by an increase in the imports of ground vehicles, organic chemicals, and electrical machinery and equipment.

In 2007, according to the classifier of macroeconomic categories, growth rate of export of passenger cars and investment goods, as well as of import of passenger cars and consumer goods was the highest year on year. In 2007, intermediate goods accounted for 51.5 per cent, consumer goods for 27.7 per cent, investment goods for 10.6 per cent, passenger cars for 4.8 per cent of total export in the export structure of the above groups of goods (in 2006 they accounted for 50.6, 26.5, 9.8 and 4.3%, respectively). Intermediate goods accounted for 54.7 per cent, consumer goods for 19.7 per cent, investment goods for 17.5 per cent, passenger cars for 7.8 per cent of total export (in 2006 they accounted for 58.4, 17.8, 16.8 and 6.5%, respectively).

Changes of exports and imports of main commodity groups and contributions to the total changes 2007 compared to 2006, %
	Exports		Imports
	change	impact of factors	change	impact of factors
All goods	11.2	11.2	14.5	14.5
Investment goods	20.1	2.0	19.2	3.2
Intermediate goods	13.1	6.6	7.3	4.3
Consumer goods	16.4	4.3	26.5	4.7
Motor spirit	-33.4	-2.9	-79.6	-0.2
Passenger motor cars	25.2	1.1	36.5	2.4
Other goods	19.7	0.1	63.6	0.1

In 2007, the year-on-year export of goods from Lithuania to EU27 countries increased less than exports to CIS countries (respectively by 13.2 and 28%). In the meantime, imports of goods from EU27 climbed by 24.2 per cent, while imports of goods from CIS countries fell by 9.6 per cent. In Q4 2007, compared to Q4 2006, the growth rates have changed as follows: export of goods to EU27 countries increased by 9.5 per cent, while exports to CIS countries grew by 27.1 per cent. At the same time, import of goods from EU27 countries climbed by 12.3 per cent, while import from CIS countries went up by 8.4 per cent.

Such dynamics of the export and import of goods in 2007 led to changes within the geographical structure of Lithuania’s foreign trade. In 2007, export of goods to EU member states compared to total export of goods went up from 63.6 to 64.8 per cent, while export to CIS countries increased from 21.2 to 24.4 per cent. The EU27 share in the import structure grew from 62.8 to 68.1 per cent, while the CIS countries share decreased from 28 to 22.1 per cent.

In 2007, total foreign trade deficit grew by 23.4 per cent compared with 2006. The deficit on the balance of trade with EU27 countries grew by 54.6 per cent to form LTL 13.5 billion, while deficit on balance of trade with CIS countries went down by 56.6 per cent to LTL 2.9 billion. The largest foreign trade deficit was recorded with Russia, Germany, Poland, China, the Netherlands and Finland, while the largest trade surplus was recorded with Latvia, Norway and Estonia.

Services

. In Q4 2007, export of services decreased by 5.4 per cent year on year, while import of services grew by 8.4 per cent. Year on year, export of services increased only by 2.8 per cent in 2007, while import of services grew by 16.7 per cent. This big difference in the growth rate of export and import of services led to a significant narrowing of the total positive services balance surplus (a decrease of LTL 891.4 million) and an accompanying increase of CAD for the reviewed period.

Faster growth of import of services was due to an increase in import of transport and travel services. Year on year, export of transport services increased by 10.4 per cent, and import of transport services grew by 16.3 per cent. During the period under review, export and import of travel services respectively climbed by 1.9 and 15.5 per cent. Export of transport services accounted for 57.6 per cent of total export of services, while imports of transport services accounted for 43.6 per cent of total imports of services. Travel services export and import respectively was 28.4 and 35.4 per cent.

Export and import of railway and road transport services were growing fastest than any other type of transport services.

In 2007, export of services to EU27 countries made up 59.7 per cent of the total export of services, while import of services from EU27 countries accounted for 64.7 per cent. Exports to CIS countries, compared to total services exports, made up 31.9 per cent, while imports to CIS countries versus total services imports accounted for 24.1 per cent.

Changes of exports and imports of main types of services and contributions to the total changes 2007 compared to 2006, %
	Exports		Imports
	change	impact of factors	change	impact of factors
All services	2.8	2.8	16.7	16.7
Transport services	10.4	5.6	16.3	7.1
Travel services	1.9	0.5	15.5	5.5
Other services	-18.9	-3.3	19.9	4.1
Total transport services	10.4	10.4	16.3	16.3
Sea transport	-7.7	-0.9	18.2	4.3
Air transport	2.0	0.1	23.1	1.1
Railway transport	27.9	4.2	50.0	5.5
Road transport	14.0	7.2	42.7	14.5
Pipeline transport	-52.6	-0.5	-70.2	-8.0
Other transport services	1.7	03	-7.6	-1.1

Income

. In Q4 2007 the deficit on income balance made up LTL 808 million, an increase of LTL 526.2 million compared to Q4 2006. In twelve months of 2007, the income balance deficit reached as high as LTL 4.1 billion, a 1.8 times increase year on year. In 2007, the deficit growth was mostly influenced by higher direct investments and other investment expenditure. In 2007, reinvestments (which have been recorded in the Current Account as payments to non-residents and as part of direct investment in the Financial Account) made up LTL 2.7 billion, an increase of 44.2 per cent year on year. In 2007, dividend payments to non-residents grew by 48.7 per cent. The above data show a substantial increase in the profitability of the direct investments enterprises. Other investment expenditure (mainly interest paid on received loans) went up by 2.1 times during the period under review.

In 2007, the surplus of compensation of employees in the income balance went down by 19.8 per cent to LTL 429.5 million compared to 2006.

Current transfers

. In Q4 2007, positive surplus of non-repayable current transfers made up LTL 785 million, while in 2007 it equalled to LTL 2.9 billion (LTL 387.9 million and LTL 1.99 billion, respectively, in 2006). The size of inflow of current transfers in Lithuania was determined mainly by current remittances from individuals and transfers from the EU support funds. In 2007, the said transfers made up LTL 2.9 billion and LTL 2 billion, respectively, accounting for 3 and 2 per cent of GDP.

In twelve months of 2007, transfers from the EU support funds grew by 53.9 per cent compared to 2006, and remittances by individuals went up by 43.6 per cent.

Capital and financial accounts.

In Q4 2007, total investment flow in Capital and Financial Accounts in the Balance of Payments, excluding official reserve assets, showed net inflows of LTL 6.2 billion and LTL 16.7 billion in 2007. Total volume of net inflows was determined by net inflows of other investments, which were the main source of CAD financing. In O4 2007, foreign direct investment was used to finance 13.2 per cent of CAD, while in 2007 the share of foreign direct investment in CAD financing was 25.6 per cent.

The net flow of non-repayable capital transfers (the major source of which are the EU structural support funds and which are used to finance investment projects) made up LTL 1.7 billion in 2007, a year-on-year increase of 79.3 per cent. Last year, foreign direct investment and non-repayable capital transfers accounted for 38.6 per cent of CAD financing.

Changes in Balance of Capital and Financial Accounts and composite balances. Contributions to Capital and Financial Account changes
	2007, LTL million	2006, LTL million	Change (%)	Impact of factors (%)
Balance of Capital and Financial Accounts*	13,247.50	8,808.87	50.4	50.4
Capital Account Balance	1,725.86	963.55	79.1	8.7
Direct investments	3,388.24	4,198.61	-19.3	-9.2
Portfolio investments	-765.17	-670.00	14.2	-1.1
Financial derivatives	-5.14	-30.02	-82.9	0.3
Other investments	12,369.86	9,194.56	34.5	36.1
Official reserve assets	-2,943.97	-4,066.87	-27.6	12.8
Errors and omissions	-522.18	-780.96	-33.1	2.9

* Including errors and omissions.

Investment abroad

. In Q4 2007, investment abroad by Lithuanian economic entities made up LTL 2.9 billion, and LTL 7.7 billion in 2007 (respectively, LTL 2.4 billion and LTL 5.1 billion in 2006). In 2007, investment abroad went up 52 per cent year on year. In 2007, MFI loans to non-residents and investment into non-resident equities and debt securities by domestic economic entities accounted for the largest share of the investment outflow.

Foreign Investment in Lithuania

. In Q4 2007, total foreign investment inflow in Lithuanian was LTL 8.5 billion and LTL 22.7 billion in 2007, compared to LTL 8.2 billion and LTL 17.8 billion, respectively, in 2006.

Direct investments

. The flow of foreign direct investment (FDI) in Lithuania made up LTL 1.1 billion in Q4 2007 and LTL 4.9 billion in twelve months the same year. In 2007, FDI inflow in Lithuania went down by 2.5 per cent year on year. In 2007, taking into account the outflow of direct investment by domestic entities, net inflow of foreign direct investment made up LTL 3.4 billion, accounting for 3.5 per cent of the GDP.

As of 31 December 2007, accumulated amount of FDI in Lithuania stood at LTL 34.6 billion (EUR 10 billion) or LTL 10,279 (EUR 2,977) per capita.

In 2007, the largest foreign direct investment flow was recorded in the financial intermediation (LTL 1.5 billion), manufacturing (LTL 1.3 billion), trade and repairs (LTL 703.7 million).

As of 31 December 2007, investments into manufacturing accounted for 36.3 per cent of the total foreign direct investments in Lithuania, financial intermediation for 17.2 per cent, transport and communication for 12.8 per cent, trade and repairs for 11.5 per cent, electricity, gas and water supply for 9.3 per cent.

Biggest investors in Lithuania were Poland (18 %), Denmark (12.9 %), Sweden (11.7%), Russia (9.6%), Germany (8.6%), and Estonia (5.9%).

Investment by EU27 countries accounted for 80.3 per cent of total investments, of which investments of the EU15 old timers made up 48.9 per cent, and investments by CIS countries accounted for 10 per cent.

Portfolio investment

. In Q4 2007, net flow of these investments was positive at LTL 1.8 billion, while in twelve months of 2007 the flow was negative at LTL 765.2 million. Domestic pension funds and monetary financial institutions were the largest investors abroad. In Q4 2007, the Government placed a new Eurobond issue which consequently made total portfolio investment flow positive both in Q4 and twelve months of 2007, reflecting positive inflow of portfolio investment.

The net flow of other investment was positive at LTL 3.4 billion in Q4 and LTL 12.4 billion in twelve months of 2007. Year on year, the net flow of other investments grew 34.5 per cent. Loans from non-residents to MFIs constituted the biggest share of this type of investment flow.

Official reserve assets

. In Q4 2007, the country?s official reserve assets grew by 12.2 per cent with their flow in the Balance of Payments amounting to LTL 1.9 billion. In twelve months of 2007, the reserves went up by 19.9 per cent and their flow reached LTL 2.9 billion. At the end of 2007, accumulated official reserve assets equalled to LTL 18.2 billion (EUR 5.3 billion). In 2007, import of goods and services coverage by official reserve assets was 3.3 months (3.1 months in 2006).

The growth of official reserve assets was driven by the growth of deposits of other MFIs with the Bank of Lithuania and currency in circulation. In 2007, the aforementioned factors made up LTL 2.2 billion accounting for nearly three quarters of total reserve increase.

International investment position of the Republic of Lithuania

. As of 31 December 2007, the country’s total foreign financial assets made up LTL 45.4 billion and total international financial liabilities amounted to LTL 99.7 billion. The negative international investment position made up LTL 54.3 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world.

In Q4 2007, the country’s total foreign assets increased by LTL 4.2 billion, while international financial liabilities went up by LTL 7.5 billion. In twelve months of 2007, the country’s foreign assets increased by LTL 10 billion or 28.2 per cent, and international financial liabilities went up by LTL 23.6 billion or 31 per cent.

Composition of the International Investment Position of the Republic of Lithuania (%)
	31-12-2006	31-12-2007
A. Foreign assets	100.0	100.0
1. Direct investments	7.7	8.1
2. Portfolio investments	18.7	18.9
3. Financial derivatives	0.5	1.2
4. Other investments	30.2	31.7
5. Official reserve assets	42.9	40.1
B. Liabilities	100.0	100.0
1. Direct investments	38.0	34.7
2. Portfolio investments	15.8	13.5
3. Financial derivatives	0.1	0.1
4. Other investments	46.1	51.7

With an increase in Lithuania’s international financial liabilities its gross foreign debt grew as well. In Q4 2007, this debt rose by LTL 7.8 billion to amount to LTL 70.9 billion (73.3 % of GDP) at the end of 2007, compared to LTL 49.9 billion or 60.9 per cent of GDP at the end of 2006.