"Estonia, Latvia and Lithuania will face greater challenges in providing for their older populations because their ageing statistics are rising rapidly and their per capita GDPs are much lower than the EU average, which will not only constrain growth in the long term but adds to fiscal pressures,” Moody's said.
"Baltic states' governments have attempted to implement a range of pension reforms to offset the fiscal pressures of this ageing trend," said Evan Wohlmann, Assistant Vice President -- Analyst and author of the report. "But according to the European Commission (EC) much more needs to be done in order to put social security funds on a sustainable footing."
Data from Eurostat indicate that the percentage of the total population that is elderly in the three states is set to increase to between 25 percent and 29 percent in 2060, from around 18 percent in 2013.
This is expected to place a fiscal burden on the Baltic region as governments try to provide for their older residents, the rating agency said.
According to the EC, Lithuania faces "medium" fiscal sustainability risks with an adjustment effort in excess of 3 percent of GDP in the long-term, mainly due to the projected ageing costs. By contrast, Estonia and Latvia face adjustments of less than 1.5 percent, reflecting smaller adjustments due to ageing costs (0.4pp in Estonia and a negative gap in Latvia).
Latvia's strong fiscal sustainability reflects the projected decline in ageing costs until 2060 as a result of its recent and planned pension reforms. Estonia's favorable sustainability metrics are a reflection of similar reform efforts and its overall lower debt burden. For comparison, ageing costs in Lithuania are projected to rise more than 2 percentage points by 2060.
Moody’s also noted in the report comparing the three Baltic states that Estonia, Latvia and Lithuania shared a number of credit strengths, including very high institutional strength, resilient government balance sheets and a robust recovery from the global financial crisis. These strengths are balanced by volatile economic growth, heightened geopolitical concerns and their demographic challenges, the rating agency said.