The results for 2021
The year 2021 turned out to be favourable for the Belarusian economy, and its final annual figures are better than the most optimistic forecasts. Thus, the GDP growth in January-November was 2.3%, and it is obvious that by the end of the year it will stop at above 2%. In the last 10 years, higher economic growth was only recorded in the post-crisis years 2017-2018. The revival of economic activity has had a favourable effect on the financial indicators of the real economy: companies’ net profit (in January-October it reached BYN 14.4 billion versus BYN 4.9 billion a year ago) shows significant growth; the financial stability of enterprises has improved as a whole.
In 2021 some of the negative trends that previously created significant risks for the financial sector were exhausted. In the second half of the year, the foreign exchange market returned to a net sale of hard currency by households, which amounted to USD 53.4 million. Companies also generated a substantial net supply on the foreign exchange market (over USD 1.25 billion). This stabilized the exchange rate and allowed the National Bank to use domestic resources to replenish the country’s international reserves. By the middle of the year, the outflow of foreign currency and rouble deposits of households had dried up, and the market began to show a gradual increase. Also, by the end of the year the problem of an acute shortage of rouble liquidity, typical of 2020 and the first half of 2021, had completely disappeared from the agenda. At that time, due to fears for the foreign exchange market, the National Bank stopped lending roubles to banks on a permanent basis, holding only highly limited monthly auctions. By the end of the year, the situation had reversed: the National Bank was conducting auctions to borrow rouble resources from banks, with borrowing amounts reaching BYN 1.6 billion with an average rate of 0.5 percent or less per annum.
The situation in public finance was also much better than planned. Gross foreign currency reserves increased from USD 7.5 bn to USD 8.4 bn, ending the year with a target of at least USD 6 bn. The year ended with an increase of USD 920 equivalent from the IMF under the SDR allocation programme, which is the main reason for the increase of gross foreign currency reserves. The authorities were able to build up the gold reserves on the back of substantial external debt repayments and without significant sovereign borrowing on external markets. Thanks to this, the external public debt decreased by USD 400 mln, or 2.1% (source) in the first 11 months. However, a significant amount of resources (more than USD 900 mln) was received thanks to the placement of foreign currency bonds on the domestic market. The budget deficit is expected to be less than USD 1 bn, although the initially planned deficit was estimated at USD 4 bn, and during the year it was raised to above USD 6 bn. This result was possible due to increased budget revenues (especially export duties and profit tax) and budget expenditure savings (especially in general government and economic support expenditures). As a result, the government has kept the budget surplus accumulated in the past and can use it to finance the budget deficit in 2022, which is currently planned at BYN 3bn.
The determining factor for these achievements was the so-called “foreign trade miracle”: a record growth in exports with a smaller rise in imports. Over the first 10 months, exports of goods and services grew by 32% compared to 2020 and by 14% compared to 2019. Meanwhile, the foreign trade surplus in January-October exceeded USD 3.2 bn, and its annual size may become the highest in the sovereign history.
The authorities expect that the high external demand situation will continue next year and that exports will remain a key driver of economic growth. Thus, GDP growth in 2022 is projected at 2.9% with export growth of 6.3%. The contribution of domestic demand to GDP growth is expected to be more modest: real household income is expected to grow by 2% and investment growth by 3.3%.
The risks to economic growth
In this situation, the key risks for the Belarusian economy – both in terms of economic growth and financial stability – are related to the situation in the external sector. Forecasts for the global economy suggest that the period of rapid economic growth will end in 2022. In addition to the exhaustion of the effects of recovery growth, economic activity will also be negatively affected by policy normalisation by central banks in developed countries in response to the record rise in global inflation. This policy has already been initiated by the FED, which is reducing asset purchases on the market and announcing plans to raise its key rate. According to market expectations, there could be 3 or more rate hikes in 2022, reaching 0.9% by the end of the year. The past period of FED policy tightening was accompanied by capital outflows from emerging markets and pressure on their currencies. A repeat of this trend in 2022 could be even more painful because of the accumulated problems in Turkey’s financial system. A possible collapse of Turkey’s financial system also poses risks to other emerging markets (especially Brazil, and to a lesser extent Russia).
The most important risk in terms of external trade is also the sanctions pressure on Belarus by the EU, the US and other Western countries. At the same time, pessimistic estimates of the loss from sanctions have not yet materialised, and their impact on foreign trade results remains limited. Moreover, the increase of sales to the EU countries is the main driver of export growth: out of total exports growth of USD 8.4 bn in 10 months, USD 3.8 bn in the EU, USD 2.7 bn in the EEU and only USD 0.6 bn in the far-abroad countries. The most significant loss at the moment is related to the loss of exports to Germany of all crude oil produced in Belarus. Previously, such exports amounted to about 1.7 mln tonnes per year, which allowed the Belarusian authorities to receive additional export duties for the budget (about USD 100 mln for 2021). After the sanctions against Belorusneft were imposed, the authorities were forced to abandon such operations and send the produced oil for refining, while reducing imports of Russian oil. Thus, the economic development forecast for 2022 stipulates a figure of 12.5 million tonnes of oil refining at Belarusian refineries. At the same time, the sanctions have not led to a halt in the transit of Belarusian potash through Lithuania, which had previously been announced by the Lithuanian authorities as of 8 December, and which could have caused a one-step drop in Belarusian export revenues. Lithuanian transit is likely to be maintained until at least April 2022 (the time when sanctions against the Belarusian Potash Company trader started), while its continuation in the future remains questionable.
The sanctions also have a negative impact on the authorities’ plans to revive investment activity in 2022. Sanctions pressure is holding back the inflow of foreign investment into the country, not only from the West. Trade conflicts and problems on the border with the EU also reduce the attractiveness of the country for Chinese businesses, which used to view Belarus as an important hub for Chinese goods to the EU. Thus, in December there were several reports about the organization of alternative commodity routes from China to the EU bypassing the Belarusian-Polish border. The heightened uncertainty shaped by the sanctions and the responses to them has a dampening effect on domestic investments as well. Despite the external positivity, company surveys record a subdued mood in the business environment (source, source). Apparently, the authorities themselves do not expect a dramatic improvement in investment, despite the active rhetoric of officials about the need to start a new “investment cycle”. For example, the government plans for 2022 only a 3.3% increase in investments after they have fallen by more than 12% over the last two years. Hence, the authorities expect the investment-to-GDP ratio to remain low (22-23% of GDP compared to 40% at the beginning of 2010s). In the long term this situation limits the potential for economic growth. However, at the same time, the attempt to boost investments through large-scale government injections could have serious negative consequences.
The last large-scale state modernisation programme in 2012-2014 was accompanied by a significant accumulation of public debt and bank debts as well as a growing foreign trade deficit. However, it did not lead to an increase in the overall productivity of the economy (according to some estimates there was a fall in the economy between 2009 and 2016).
The preconditions for a slowdown are also observed in the IT sector, which the authorities see as a key driver of the economy in 2022 along with industry. The sector output in 2021 is better than many forecasts. In the first nine months of the year IT exports grew by 25% and by more than USD 3 billion. However, there is a growing staffing problem in the sector. As some employees have moved to neighbouring countries, the sector’s employment growth has slowed sharply; while in 2020 the number of employees in HTP companies increased by 10,000, in 2021 the number of employees in the sector increased by less than 2,000 (if we check the HTP official website). The result of 2021 is also the departure of a significant number of Belarusian start-ups (according to some studies, more than a half) and their supporting infrastructure companies to other jurisdictions. Such trends run counter to the objective of the transition of Belarusian IT from an outsourcing to a product model.
At the same time, high commodity prices, which have been observed since the second half of 2021, could be a positive factor for Belarusian exports. According to some estimates, the rise in commodity prices is not short-term and we can talk about the start of a new commodity super-cycle, which could last for several years. High commodity prices contribute to Belarusian exports, both directly (higher revenues from potash, oil products, timber and wood goods) and indirectly via demand in the Russian market. Thus, a noticeable price increase is to be expected for new annual potash contracts, which are traditionally signed at the beginning of the year. For example, the previous annual contract with Chinese customers in February 2021 was signed at USD 250/tonne, while current potash prices on the spot market stand at about USD 650/tonne.
The risks of financial instability
In addition to trade, a significant channel for the impact of sanctions on the Belarusian economy is financial, which is realized through the complication of both sovereign and corporate borrowing. In the context of a blocked international capital market, the key sources of public debt servicing are the foreign reserves and borrowings in Russia. The authorities also count on increased borrowings from China. Thus, the December decree “On development of bilateral relations of the Republic of Belarus with the People’s Republic of China” defines the target for the period 2022-2024 to attract at least USD 300 mln per year from China for servicing the public debt. However, statistics from previous years do not inspire optimism about such plans: the last untied loan was allocated in 2019, and only USD 15 mln of Chinese loans were received in the first 10 months of 2021. In the next few years, the government expects the public debt payments to increase from USD 3.1 bn in 2021 to USD 3.3 bn in 2022 and USD 4.7 bn in 2023. Under such circumstances, a noticeable deterioration in foreign trade and the domestic foreign exchange market might provoke an accelerated depletion of the country’s reserves and create risks for financial stability as a whole. Under a negative scenario, the issue of credit support from Russia and its affiliates becomes critically important. The government is working on mitigating such risks and negotiating a USD 3.5 bn loan from the Eurasian Fund for Stabilization and Development. Given the current state of bilateral relations between Belarus and Russia, a positive solution of this issue does not cause much doubt.
A significant negative aspect of the year was the dramatic acceleration of inflation: against a target of 5% for the year, inflation was consistently above 10% in the last months of 2021. A sharp rise in consumer inflation is generally characteristic of most economies around the world. For example, year-on-year consumer price growth reached 5% in the eurozone, 6.8% in the USA and over 8% in Russia. In such a situation, the authorities regard imported inflation as the main factor for domestic price increases. On that basis, the National Bank does not (unlike the Russian Central Bank) use active monetary policy against inflation, which would have the side effect of slowing down the economy. In its anti-inflationary policy, the authorities are relying more on administrative tools. For example, in December the government extended the ban on price rises for socially important goods above a certain level, while the list of such goods was shortened. If inflation remains above 10% for a long time, there is a risk of a self-sustaining inflationary spiral. The National Bank would then have to resort to a higher and longer rate hike in order to normalise it.
A favourable foreign trade environment has ensured economic growth in 2021 and has alleviated risks for the financial system. Exports are supported by high commodity prices, which, if stabilized, could trigger a commodity super-cycle. Key short- and medium-term risks are related to the effects of sanctions, which have a negative impact on foreign trade, investment and public finances, while the extent of possible losses from sanctions and their dynamics remain unknown. Significant risks to the economy are also associated with the beginning of policy tightening by central banks in developed countries.