Flash comment: Lithuania

Economic commentary by Economic Research Department October 29, 2012

Parliament elections suggest change in government

Seats in parliament, 2008 and 2012
Social Liberals Peas ants Union Liberal and Centre Union National Revival Party Independent candidates Peasant and Greens Way of Courage Electoral Action of Poles Liberal Movement Order and Jus tice Labour Party Chris tian Democrats Social Democrats
0 1 3 8 16 4 3 1 3 7 8 11 10 15 11 10 2012 2008

In the second round of parliament elections on 28 of October Social Democrats (SD) snatched the most votes and now lead with 38 seats in the parliament. Not far behind them after a very strong performance during the second round are the incumbent Christian Democrats (CD) with 33 seats in the parliament. Labour Party (LP), which was leading after the first round of elections dropped to the third place with 29 seats. As the preliminary results became clear last night, as expected three parties Social Democrats, Labour Party and Order and Justice (OJ) have agreed to form a new centre-left government. Social Democrats leader Algirdas Butkeviius is the most likely candidate to become the new Prime Minister.

th

25 10 20

29 33 38 40

45

Source: Central Electoral Com mission

30

50

Economic policy outlook

Before the elections these three parties promised significantly higher minimum monthly wage (currently 850 LTL), which will probably be st increased to 1000 LTL as of January 1 , 2013. Other propositions include VAT reliefs (reduced rate) for foodstuffs and some other necessities. VAT reliefs are unlikely to become a reality soon as they would cause a tremendous strain on public finances. The main concern is related to new governments willingness to continue important structural reforms fostering voucher system and competition in higher education system (to which SD strongly opposed), clamping down on shadow economy, increasing transparency and efficiency of state owned enterprises and procurement process, introducing more flexibility in labour markets and continuing fiscal prudence.

Government stability
There are no apparent disagreements in terms of economic policy between these three parties, although LP is likely to oppose higher business taxation and progressive income taxes. Before elections SD and OJ have strongly opposed the construction of Visaginas nuclear power plant, whereas LP was somewhat more in favour of it. However, these issues are unlikely to cause particular tensions between the parties. Nevertheless, probability of such government being formed and its later stability can be questionable. SD already were in government coalition with LP after elections in 2004, but the coalition collapsed in 2006 after LP was accused of corruption and its leader fled to Russia (there is an ongoing lawsuit regarding this matter). This was one reason why the President of Lithuania said today that she does not see LP forming a government. It was also mentioned that there are ongoing 18 investigations related to cases of purchase of votes, 10 of which are related to activities of LP. Considering this, another possibility is that there will be formed so called rainbow coalition, including SD and incumbent CD and Liberal Movement.

Nerijus Maiulis, Chief Economist + 370 5 258 2237 nerijus.maciulis@swedbank.lt

Swedbank Economic Research Department SE-105 34 Stockholm, Sweden ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46 8 5859 7720

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