The risks to economic growth
The main background for the development of the country’s economy is the active external demand, thanks to which monthly exports in July reached their maximum values since the summer of 2012. The foreign trade surplus for 7 months exceeded USD 2 billion, or 5.5% of GDP. Due to external demand, the growth of the country’s economy continues to significantly exceed the forecasts of the authorities and the estimates of international funds. Thus, in January-August, GDP growth amounted to 3% and only slightly decreased in comparison with the previous reporting period. Slowdown in GDP dynamics by 0.3 percentage points is mainly due to a drop in agricultural output (by 4.6%), caused by a low grain harvest. At the same time, the growth of industry as the main driver of the economy remains significant (an increase in output by 8.6% with an increase in exports by 39% in 8 months).
At the same time, there is an increased likelihood that foreign trade conditions for the Belarusian economy may remain favourable even after the end of the period of recovery growth in the world economy. Such a development of the situation is possible in the event that prices for energy products stabilize at the high levels reached in recent months. Thus, against the background of the energy crisis in China and the EU, the price of gas on the European spot market exceeded USD 1000 per thousand cubic meters and on some days reached USD 2000. The key reason for the crisis was the intensification of programs for the transition to a green economy, accompanied by a sharp reduction in coal use. According to some forecasts, the continuation of the policy of reducing carbon emissions will lead to an increase in the demand for gas, which will displace its fair price upwards. This, in turn, will act as an important factor in supporting oil prices, the level of which broke through the value of USD 80 per barrel of Brent by the beginning of October. For the Belarusian economy, the high level of prices for energy products will create the potential for growth in exports to Russia, as well as competitive advantages in other markets due to preferential prices for purchased Russian gas (the contract price for Belarus in 2022 will be USD 128 per thousand cubic meters). There are also conditions for the growth of prices for potash fertilizers due to the increase in the cost of alternative types of fertilizers (for example, nitrogen). Thus, spot prices for potash in September reached 10-year highs and exceeded USD 700 per tonne, while the current annual contracts of Belaruskali have an average price of USD 250 per tonne.
At the same time, Western sanctions can significantly weaken the export opportunities of the economy. There may be difficulties for a wide range of exporters: both for those directly affected by the sanctions and for those using imported components in their production. Taking into account the negative potential of sanctions, the World Bank in the latest review sharply lowered the forecast for the Belarusian economy for 2022 — from an increase of 1.9% to a fall of 2.8%. The authorities also recognize the possibility of a negative impact of sanctions on the economy. Thus, the forecast of GDP growth for the next year, published by the authorities, contains 2 scenarios: a target scenario of economic growth by 2.9% and a negative scenario of growth by 1% in case of implementation of sanctions risks. At the same time, the authorities declare about the intensification of the policy of countering sanctions. In particular, they are supposed to reorient exports to Russia and African countries, replace the purchase of Western components with their own developments. The adoption of joint anti-sanction measures on behalf of the EAEU countries is also announced. The Naftan refinery is a vivid example of how to circumvent the sanctions — despite the US sanctions in effect since June and the refusal of large Russian companies to supply oil to it, the refinery has no noticeable difficulties with raw materials and continues to operate normally. In the current situation, the ban on transshipment of Belarusian potash fertilizers through Lithuanian ports, announced in December, has the most significant shock potential for the economy. The possibility of maintaining the current export volume of Belarusian potash transporting by other routes is a big question.
Despite favourable foreign trade conditions and record exports, there has been no noticeable improvement within the economy in terms of investment and consumer optimism. Retail trade continues to stagnate — the growth of retail sales for 8 months amounted to only 0.5%. The subsidence also persists in terms of investment costs — minus 8.1% in January-August. At the same time, even according to the optimistic scenario of the authorities for the next year, the increase in investment should be only 3.3%. In fact, we can talk about the failure of the authorities’ plan for the beginning of a “new investment cycle” as the main driver of the economy’s acceleration.
It is highly likely that the government’s announced reform of the administration and taxation of small businesses will also negatively affect economic activity, at least in the transformation period. The reform greatly narrows the opportunities for businesses to operate in the format of individual entrepreneurs (the number of which in Belarus currently amounts to 270 thousand), and in most cases, multiplies the tax burden on them (according to some calculations, 2.5-3 times). With these measures, the authorities stimulate the transition of individual entrepreneurs either to the format of self-employed without the right to use hired labour, or to the format of small organizations, the tax burden on which is also increasing.
In the medium term, the growth prospects of the economy are significantly undermined by the growing migration from the country. There is no reliable statistics on this process, but, for example, only according to the data of the Polish authorities, about 150 thousand citizens of Belarus have migrated to this country recently. At the same time, a significant part of the outflow of personnel falls on the high-performance IT sector — according to some estimates, the outflow of personnel already reaches up to 15% of those employed in the industry. However, according to official statistics, the number of people employed in this sector is still growing, although the growth rate has fallen compared to previous years. At the same time, according to official statistics, a significant decrease in employment is observed in education (minus 12.7 thousand people employed) and medicine (minus 6.6 thousand) — areas that are the most important factors in the development of human capital in the country.
The risks of financial instability
Against the background of favourable foreign trade and economic growth, trends of gradual improvement are also observed in the country’s financial sector. For the third month in a row the population acts as a net seller of foreign exchange and the size of the sale is increasing — in September it amounted to more than USD 180 million. It can be said that the foreign exchange market is returning to a historically normal situation, when the population sells more foreign currency than buys. This situation can be explained by the spending by citizens of foreign exchange transfers from abroad, received in cash. The purchase of surplus currency allowed the National Bank to maintain reserves at the achieved level (about USD 8.5 billion), despite payments on external debts (in September in the amount of USD 240 million) and the absence of significant new borrowings.
The situation in the country’s deposit market is also improving. BYN deposits are showing slight growth, while the outflow of foreign currency deposits of the population is slowing down (in September it amounted to only USD 27 million, or about 0.7%). As a result, there is an improvement in the situation with BYN liquidity in the banking system — rates and volumes of transactions in the interbank market have dropped, banks have begun to reduce deposit rates. In early October, the National Bank even held a deposit auction, at which it attracted more than BYN 1 billion from banks at an average rate of 3% per annum.
The stabilization of financial markets allowed the National Bank to begin steps to normalize monetary policy: the National Bank announced that from the beginning of October, weekly auctions to provide liquidity to banks would be held instead of the auctions held earlier once a month at a fixed rate. As a result, at the first new auction, banks generally did not place applications for loans from the National Bank due to the lack of demand for BYN resources.
At the same time, the potential for a decrease in the market value of money is strongly limited by high inflationary expectations and growing risks of inflation, which has consolidated above 9% in recent months. So, according to the EDB forecast, in the coming months due to the factor of a bad harvest, inflation in the country may exceed 10%, which will force the authorities to raise the refinancing rate. Significant potential and import inflation is due to rising commodity prices on the world market and accelerating consumer price growth in Russia. Possible attempts by the authorities to increase credit support for the public sector may also contribute to the growth of inflationary pressure. One of the tools of the supporting state enterprises may become the Development Bank: the authorities have recently announced several decisions on increasing its resources. Thus, according to the draft of the updated law on guaranteeing deposits of the population, the resources of the Agency for guaranteed compensation of deposits are planned to be invested in bonds of the Development Bank.
In the context of the normalization of the current situation, there are significant risks in the medium term due to the need to service external debts against the background of sanctions uncertainty and insufficient foreign exchange reserves of the country. Due to these factors, the rating agencies S&P and Moody’s have affirmed negative outlook for Belarus’ credit ratings.
The risks to economic independence
After a month after agreeing on programs for deepening integration within the framework of the so-called “union state” of Russia and Belarus, the text of these documents has not been made public. At the same time, judging by the published summaries of the programs and numerous statements by officials of the two countries, the programs are unlikely to contain really breakthrough steps in economic integration. Thus, the agreed programs do not imply tasks and measures for the formation of a common budget, currency and tax system. Basically, the programs operate with such concepts as harmonization and unification in terms of regulation of certain areas of the economic system. Perhaps the most significant are the possible steps to connect Belarusian entities to the Russian accounting and control systems, as well as the mutual opening of financial markets. At the same time, the issues of forming common energy markets, important for the Belarusian side, remained unresolved. So, the decision on when and on what conditions the single gas market will function was postponed until July 2022, with the signing of the corresponding agreement only available by December 1, 2023.
The adoption of the “union programs” in such an emasculated form suggests that Russia has removed from the agenda the issue of truly deep economic integration within the framework of the so-called “union state”. The downside of this situation is the absence at the current time of decisions on significant financial support for the Belarusian economy. So, the loan promised by the Russian authorities turned out to be small (USD 630 million), and the possible term for its allocation will be extended until the end of 2022.
A favourable external environment is still a key factor in economic growth and maintaining financial stability. At the same time, the rise in prices for energy products will help maintain a foreign trade surplus even after the recovery growth of the world economy is exhausted. The main risk is still connected with the sanctions, which could seriously worsen the conditions for exports and complicate the servicing of the external public debt in the medium term.