Bank of Lithuania
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The rise in interest rates has not led to more difficulties for companies to repay loans – they remain financially resilient. On the other hand, there has been a significant decline in the number of enterprises that have applied to banks, and business is mainly financed by internal resources. The economic stagnation has reduced the demand for production and companies’ profits, but enterprises are more optimistic about future prospects. According to the latest Survey of Enterprises, a recovery in demand is forecasted by enterprises, and they intend to further increase wages and the number of employees.

“This year again did not spare challenges for Lithuania’s business – negative economic trends gave rise to a drop in profits for most companies, especially industry, which led to an increase in production prices or reduction in production volume. However, even in the context of an economic freeze, the financial health of companies remains relatively good, they remain financially resilient and are rather optimistic about the future,” says Arnoldas Bytautas, Senior Economist at the Macroprudential Analysis Division of the Bank of Lithuania.

Nearly half (45%) of the surveyed enterprises claimed that demand for their production decreased this year. Lower demand was felt by companies in industry (50%), trade (49%) and construction (48%). The trends in the services sector were slightly better: according to 36% of companies in the sector, demand decreased, while 32% said that demand for their services had actually increased.

In a difficult economic environment, more than half of the respondent enterprises earned less profit. To mitigate the negative effects, they increased the prices of goods and services (41% of enterprises) or reduced output (35% of enterprises). The challenges of the economic environment also affected plans to attract new employees – stagnation was recorded, while major companies, as well as ones in the industrial and service sector, reduced the number of employees faster than they recruited new employees.

Enterprises have also made efforts to improve the working conditions of their employees by raising wages. Almost 60% reported an increase in employee salaries over the past year (by 12% on average). Nearly as many (58%) enterprises expect to increase wages by an average of 11% over the next 12 months. As demand recovers, more companies intend to recruit new employees: 21% are planning to do so, while 12% of companies expect to dismiss employees.

Enterprises expect both external and domestic demand to grow in the coming years, while price growth will subdue. In the coming years, more companies expect an increase in exports rather than a decrease (10 percentage point difference). In the largest exporting sector – industry – this indicator stood at 17 percentage points, the highest since 2020. Companies are optimistic and expect to increase domestic demand by 5% on average. Next year we can expect lower price growth than in recent years. Compared to 2022, the number of enterprises planning to raise the prices for their products and services halved, from 46% to 23%. On average, prices are expected to rise by 3%.

The investment plans of enterprises have slightly improved compared to the previous year: 59% will invest as much as last year and 17% will increase their investment volume (last year 11% of enterprises planned to expand). Internal resources become an essential source of financing for activities: as many as 53% of companies indicated that internal resources finance a very significant part of the company’s activities (more than 60%), compared to 22% last year. At the same time, the importance of loans from banks and other credit institutions is diminishing.   The proportion of enterprises not benefiting from loans offered by credit institutions increased from 60% (last year) to 72% (this year). The majority (63%) of enterprises not benefiting from loans offered by credit institutions indicated that there was simply no need to borrow, reflecting a decline in demand for loans. The proportion of companies experiencing difficulties in borrowing and the proportion of rejected loan applications did not increase during the year, but the number of rejected applications from small enterprises went up. The most common reasons for rejecting applications are poor assessment of the company’s financial condition and insufficient collateral.

The enterprises that borrowed remain financially resilient and have sufficient funds both to ensure further performance and fulfil existing obligations. Adequate companies’ liquid reserves would allow them to continue operating without external assistance for some time: almost half could continue to operate for at least six months and another third – from three to six months.

One in ten companies experienced a delay in repaying a loan due to higher interest rates, while in the industrial sector, the share of such enterprises stood at 20%. Compared to 2022, there has been a decrease in the number of enterprises that were late or did not pay their bills at all to other enterprises (from 43% to 28%).

The probability of bankruptcy did not change over the year: like in 2022, 42% of all businesses believe that the number of bankruptcies could grow in the coming years. The share of construction companies expecting bankruptcy decreased significantly from 54% (last year) to 40% (this year). In the industrial sector, on the contrary, the mood became somewhat gloomier: 44% of businesses expect more bankruptcies (compared to 37% in 2022).