Macroeconomic Forecast Lithuania

Our view that Lithuania's foreign currency reserves will begin to decline this year is playing out nicely, after latest data show that international reserves at the central bank fell to US$6.86bn in June, down from a peak of US$8.65bn in February. We currently forecast foreign reserves of US$7.50bn (or 2.6 months of import cover) in 2012, after foreign reserves reached US$8.21bn at the end of 2011. Renewed balance of payments pressures and the central bank's strict adherence to its currency board with the euro, mean that defending the de facto euro peg at times of heightened financial market volatility is beginning to cost the central bank dearly.

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