The document summarizes the state of the Lithuanian economy based on a monthly newsletter from Swedbank's Economic Research Department. It finds that while corporate profits are increasing, investments in fixed tangible assets continue to decline sharply. However, improving economic indicators and increasing capacity utilization suggest investments will need to increase to boost productivity and competitiveness. Retained earnings from higher profits and tax incentives are expected to be important sources of financing the needed investment growth in 2011. Continued recovery in domestic demand and exports also point to a gradual rise in credit availability and investments.

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis and Ieva Vyšniauskaitė No. 05 • October 2010
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275. Ieva Vyšniauskaitė +370 5 258 2156.
Corporate profits and profitability are increasing,
investments will have to follow
 Investments in fixed tangible assets are still declining. The private sector’s
investments in the first half of 2010 are down 37.4% down from a year ago
and are at a level not seen since 2002. The severe contraction in the real
estate market is not the only culprit – investments in machinery and
equipment are not far above where they were 10 years ago.
 Overall spending cuts, cheaper labour, and a pickup in exports enabled
companies to increase profitability to 3.5% in the second quarter of 2010.
Profits in the first half of 2010 increased by 422.6% over the same period of
2009, but they are still 68.7% below the 2008 level.
 Improving consumer and business confidence indicators, increasing capacity
utilisation, and a stabilised economic environment will be behind the
sustainable investment growth in 2011. This will be facilitated not only by
improved credit availability, but, more important, also by retained earnings.
Feeble investments in fixed tangible
assets may dent competitiveness
In the first half of 2010, gross fixed capital formation
contributed 15.7% to GDP, which was down from
19.1% in the same period a year ago, and 26.5% in
2008. This is the lowest level since 1996.
Investments in fixed tangible assets, 1Q 2009 – 2Q 2010
-3.6
-36.8
-39
-35.2 -35.3 -37.7
0
1,500
3,000
4,500
1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010
-40
-35
-30
-25
-20
-15
-10
-5
0
Public, LTL m (ls) Priv ate, LTL m (ls)
Inv estments, % y oy (rs)
Although public sector investments in fixed tangible
assets in the first half of 2010 were 5.2% higher
than in the same period of 2009, the total amount of
investments was still declining. The pace of decline,
however, has slowed noticeably – while the yearly
drop in the first quarter of 2010 stood at 37.7%, it
subsided to 3.6% in the second quarter.
Lithuania will not be able to rely on public
investments in fixed tangible assets in 2011. The
government budget for next year proposes to cut
government investment spending by 23.8% - from
the plan of almost LTL 5 billion in 2010 down to
LTL 3.8 billion in 2011. The hardest-hit areas will be
environment protection (investments will be cut by
50.6%), health service (-34.7%), education
(-31.0%), and agriculture (-28.6%). Government
investments in transportation and communication,
which enjoy by far the biggest piece of the pie, will
decline by 9.4% - by LTL 1.37 billion- in 2011 from
LTL 1.51 billion in 2010. On the positive side,
strategically important public investments in
information technology will increase by 25.7%,
although the amount will be still relatively small –
only a little more than LTL 261 million.
The plan to cut government spending is seen as an
alternative to further cuts in social security and
public sector wages, or possible increases in taxes.
In the short term, this plan does seem like a good
trade-off, because it has no direct influence on the
most vulnerable members of society; however, in

2. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 05 • October 2010
2 (4)
the long term, this will clearly have a negative
impact on the productivity and competitiveness of
the Lithuanian economy.
The reasons behind the abrupt contraction of
investments in fixed tangible assets are well-known
– the collapse of the real estate bubble and the
cessation of credit have stopped almost all
investments in property. However, investments in
machinery and equipment have experienced similar
contraction. One of the most important factors
behind this, next to the scarcity of credit, has been
shrinking domestic demand and uncertainty about
the need of production capacities in the future.
In the first half of 2010, total investments in
machinery and equipment were down by 7.8% from
the same period in 2009, and by a staggering
53.2% from 2008.
Investments in fixed tangible assets, 2Q 2010
(annual growth)
-50 -40 -30 -20 -10 0 10 20
Acquisition of
equipment
Total
Construction of
buildings
Repairs of
equipment
Acquisition of
land
Acquisition of
buildings
The first signs of recovery in the acquisition of
equipment and machinery were visible in the
second quarter of 2010. This increase, however,
came from the public sector, which invested 20.1%
more in the first half of this year. Investments in
machinery and equipment in the private sector have
continued to decline and in the first half of this year
were 17.8% smaller than a year ago.
Growing profits and retained earnings
will be important sources of
investment
In the first half of 2010, corporate profits increased
more than fivefold from a year ago, which,
admittedly, was a very bad year. Although profits
are below the levels seen in 2008, the growth trend
is expected to continue throughout this year and
into 2011. In the 1st
half of 2010 the pre-tax profit
margin widened to 3.5% but is still below the 2005-
2008 average of 6.2%.
The best-performing industry sectors were mining
and quarrying, information and communication,
professional and scientific, and real estate activities,
where pre-tax profit margins were well above 10%.
The worst two performers – incidentally dominated
by state-owned enterprises – were the forestry and
electricity and gas supply sectors. This point to the
high level of inefficiency and dire need to reform
these enterprises (the issue we addressed in last
month’s newsletter).
Profit margins, 2Q 2010
(percent)
-3.5
-1.3
2.3
3.1
3.2
3.5
8.4
12.7
14.3
25.5
-7.0
-10 0 10 20 30
Electricity and gas supply
Forestry
Accommodation and f ood serv ice
Construction
Transport
Wholesale and retail trade
Manuf acturing
Education
Real estate activities
Inf ormation and communication
Mining and quarrying
In the manufacturing sector, pharmaceutical,
beverage, motor vehicle, electronics and textile
producers were comfortably above the industry
average.
Higher profits and retained earnings are expected
to be important investment financing alternative in
2011. Furthermore, with the first onset of the crisis,
the government introduced corporate income tax
breaks for long-term investments in machinery and
equipment, computers, and software. This had little
effect in 2009 as companies were struggling with
low demand, weak cash flows, and dried credit.
Over the next few years, however, this measure will
be a significant incentive to invest in fixed tangible
assets, especially because the tax breaks expire in
2013.
Increasing capacity utilisation and
confidence signal that investments
will have to increase
Capacity utilisation had dropped from around 75%
to 60% by the middle of 2009. Exhaustion of
inventories in 2009 and rapidly recovering exports
have caused capacity utilisation to pick up, and
some sectors have returned to pre-crisis levels.
This is especially obvious in the manufacturing of
wearing apparel and wood sectors – capacity
utilisation is already above the 2008 average.

3. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 05 • October 2010
3 (4)
However, furniture, fabricated metals, and other
non-metallic mineral products are still working at
capacities that only slightly exceed 50%. Furniture
producers were hit hard by the contraction in real
estate transactions, but this sector is now picking
up, mainly due to exports.
Capacity utilisation rates, Jan 2007 – Aug 2010
(percent)
40
50
60
70
80
2007 2008 2009 2010
Total
Wearing apparel
Wood
Furniture
Other non-metallic mineral products
Economic sentiment has been steadily improving
since the beginning of the year. Retail trade and
services indicators have moved into a positive area,
indicating that optimists outnumber the pessimists.
Not surprisingly, construction sentiment is the
weakest, as the sector will recover slowly and
probably not in the near term – inventories of
unsold stock first need to be cleared out.
Economic Sentiment Indicator, Jan 2007 – Sep 2010
-100
-80
-60
-40
-20
0
20
40
2007 2008 2009 2010
Ov erall sentiment Industry
Construction Retail trade
Services Consumer
There are more positive signs of recovery in
domestic demand and the overall economy. In
September, retail trade turnover increased by 6.1%
over the previous year. It was the first annual
increase since September 2008. Third-quarter GDP
increased by 0.6% from the previous year – this
was below expectations, but we do not think that
there are many causes for concern. Growth in
recent quarters is a little bit more volatile because
of large influence from rebuilding of inventories.
Nominal annual growth in third quarter was at
healthy 6.7%, but real GDP was lower because of
increasing prices of inventories. This was a second
consecutive quarterly growth in GDP, indicating that
recession is formally over.
After two years of negative profits Lithuanian
banking sector has moved into a positive area in
third quarter of 2010 and earned LTL 44.2 million.
During the first nine months of this year banks still
has losses of LTL 363.9 million, but that is
significantly lower than LTL 1.37 billion in the same
period a year ago.
Credit growth is still in a negative zone, but the
decline has flattened out and we expect a gradual
pick up next year. It is possible that there will be
some rebalancing of corporate credit portfolio – a
shift from real estate sector, which currently makes
up more than 30% of total credit stock, into
manufacturing and export oriented sectors. Credit
growth will largely depend on the demand from
companies with sound investment projects.
Loans to non-financial institutions, Jan 2006 – Aug 2010
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2006 2007 2008 2009 2010
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
monthly growth (r.s.) annual growth (l.s.)
Similar to 2010, EU funds will likely provide one of
the most significant boosts to investment: according
to the recently proposed budget for 2011, priority for
investments will be given to projects co-financed
with EU funds, while the absolute value of funds
allocated for investments will remain similar to
2010. In addition, we are likely to begin to see the
lagged direct and indirect results of government
stimulus plan measures (such as those aimed at
aiding companies to find new export partners, the
co-financing of R&D investments, training, and
others) adopted this and last year.

4. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 05 • October 2010
4 (4)
Pre-crisis growth, fuelled by cheap and easily
accessible credit, may have been exhilarating but
was not sustainable. The Lithuanian economy will
have to take a more sustainable path of investment
in tangible assets, which can boost productivity and
competitiveness. Not only will this have a positive
impact on GDP in the short term, it can also
increase long-term potential growth.
Nerijus Mačiulis
Ieva Vysniauskaite
Swedbank
Economic Research Department
SE-105 34 Stockholm
Phone +46-8-5859 1028
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publisher
Cecilia Hermansson, +46-8-5859 7720.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė, +370 5 268 4275.
Ieva Vyšniauskaitė, +370 5 268 4156.
Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
completeness of the report and cannot be held responsible for any error or omission in the
underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
monthly newsletter The Lithuanian Economy.