Despite mounting geopolitical tensions and the looming threat of trade wars, Lithuania’s economy and financial system remain resilient, according to Gediminas Šimkus, chairman of the board of the Bank of Lithuania.
Still, the central bank warned Monday that potential trade conflicts between the United States and the European Union could undermine businesses’ ability to repay debts, posing a risk to Lithuania’s financial stability.
“Lithuania’s economy and financial system are resilient, but uncertainty in international trade policy may limit growth,” Šimkus told reporters while presenting the central bank’s annual financial stability review. “The complex and unpredictable external environment is the main reason behind the overall increase in financial stability risk.”
The central bank identified three key systemic risks: economic uncertainty and trade tensions, potential corrections in the commercial real estate market, and cybersecurity threats.
“The good news is that the number of risks has decreased – we no longer see a risk of housing price correction,” Šimkus said. “However, the likelihood of shocks that could negatively impact economic development and financial stability has increased.”
Trade war fears and borrowing trends
While Lithuanian households and businesses remain financially stable and are not falling behind on loan repayments, Šimkus said that their situation could worsen if the US proceeds with proposed import tariffs.
“Declining interest rates have accelerated borrowing among households and businesses,” he said. “However, access to bank credit remains difficult for some businesses, pushing them to seek alternative financing sources.”
Based on market expectations, Šimkus said the interbank interest rate Euribor is expected to fall to 1.9% by the end of the year – a positive signal for borrowers.
Nevertheless, global trade policy uncertainty has reached “historic highs”, he said, suppressing economic growth in both the eurozone and globally. According to Šimkus, this creates growing risks for Lithuania’s financial sector, particularly businesses.
Borrowing has surged amid easing monetary policy: in March, housing loans grew by 10% year-over-year, consumer loans by 24%, and business loans by 15%.
For the first time in a decade, the ratio of loans to GDP increased, but Šimkus emphasised there are currently no signs of overheating.
Real estate market faces headwinds
Šimkus pointed to risks in Lithuania’s commercial real estate market, citing an oversupply of office space, weakening demand, and high refinancing costs.
“Unlike in the eurozone, Lithuania hasn’t experienced a broad price correction in commercial real estate,” he said. “However, A-class office prices in Vilnius fell by 10% last year.”
Hybrid work continues to dampen office demand, Šimkus added. About 150,000 square meters of new office space – roughly 10% of the existing stock – are expected to be added to the market this year.
Cyber threats and limited business credit access
Cybersecurity risks are also growing, Šimkus said, especially given the geopolitical climate. While no major losses have been reported, both large and small banks remain targets.
“Cyber risk is increasingly important, and that’s a fact for all financial institutions,” he noted.
He also highlighted limited access to credit for businesses. Despite recent increases in borrowing, Lithuania remains among the EU countries with the lowest ratio of loans to GDP for nonfinancial enterprises – a trend shared with Latvia and Poland.
According to European Investment Bank data, Lithuania has one of the highest shares of businesses unable to secure bank loans.
“With restricted access to traditional finance, businesses are increasingly turning to alternatives,” Šimkus said. “The main source of corporate financing remains internal resources, while the national development bank, INVEGA, offers some support for small and medium-sized enterprises.”
Šimkus warned that businesses are “on the front lines” of the financial stability risks stemming from economic uncertainty and trade tensions.
“If trade tensions materialise, the first to be hit would be sectors heavily reliant on US exports – petroleum products, chemicals, furniture, and machinery,” he said. “Later, the indirect effects would spread to manufacturing, transport, and trade sectors.”
Still, he noted that the risk is somewhat limited, as sectors directly dependent on US exports account for just about 4% of total corporate loans.
Brighter outlook for households
The central bank painted a more optimistic picture for households. According to Šimkus, purchasing power and financial resilience among the population improved in 2023, buoyed by a 10% increase in real average wages.
Household financial liabilities rose nearly 13% over the past year, with most loans directed toward housing and consumer spending. Meanwhile, household deposits increased by 10%.
“With stronger purchasing power and falling interest rates, household borrowing has picked up,” Šimkus said.
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