Risks of financial instability.
As a result of the month, we may state improvement of formal indicators characterizing the financial stability of the economy. Thus, a good situation in foreign trade was observed in June: trade balance amounted to USD 240 million, which, taking into account the not considered amounts of customs duties on oil products paid back to the Russian budget, is a complete balancing of the real trade balance. The current account balance and the balance of payments demonstrate a significant improvement: the deficit in January-July 2014 decreased to 7.2% as against 10.2% a month earlier. In the currency market, the National Bank continued to simultaneously buying the excess currency (net currency sales of people and organizations in July amounted to USD 256.1 mln.) and weakening of the ruble. The gold and foreign currency reserves (hereinafter referred to as GCR) demonstrate stability: their moderate reduction in July (at USD 216.8 mln. to the level of USD 6,209.2. mln.) was largely due to transfer of the part of gold to the more risky and thus more profitable assets, i.e. the reduction of reserves actually took place only on paper. By the end of August, GCR against the background of minor borrowings on the domestic market even increased (+ USD 80 million). In the banking system remains the situation of a substantial excess of ruble liquidity, which is accompanied with a fall in interest rates and an increase in deposits. The prevailing conditions allow the National Bank continue the planned easing of monetary policy: in August the refinancing rate was traditionally reduced (by 0.5 percentage points to 20%), the rates on granting and withdrawal of liquidity were reduced as well, and the maximum credit rate for businesses was also reduced to 35.2%. Even inflation, showing a significant increase from the beginning of the year, slowed down and was at the rate of 0.9% in July.
However, the situation still remains difficult with execution of the budget, which surplus in January-July 2014 was abnormally small for the given period of the fiscal year (0.6% of GDP), and even then only at the cost of low priority spending restraints. This situation puts a big question over the reality of the governmental plans to achieve a balanced budget in 2014. The fundamental causes of this phenomenon (reduction in performance and profitability in the industry) are forcing the authorities to seriously discuss the changes in the tax system in 2015. Thus, at the moment it is planned to increase the VAT rate from 20% to 22%, while lowering the income tax rate from 18% to 15%, and increase the rate of income tax for citizens from 12% to 13%. The combination of these measures is to bring additional BYR 3 trillion to the budget, and the level of tax burden on the economy will increase by 0.4% of GDP. The business community has opposed these changes, as they will cause the need to increase working capital, as well as stimulate inflation. But the government is unlikely to abandon the announced plans because it aims at ensuring the balanced budget against settlement of substantial payments on the national debt in 2015.
Risks to economic independence.
Perhaps the most discussed issue of the month is retaliatory sanctions of Russia banning food import from Europe and the United States, and the benefit of Belarus in this connection. Although some officials were quick to call the situation a «Klondike» for our country, the more precise assessment of sanctions will allow Belarus to increase export to Russia by the end of the year by USD 200-400 million, which, of course, is essential, but is obviously not a breakthrough. More substantial expansion of export is limited by the narrow resource base, moreover since the beginning of the year there is a decline in livestock and production. At the same time this gives the possibility of domestic foodstuffs substitution in the domestic market with import and processing of the imported raw materials. Thus, the authorities have already held talks on joint projects in the dairy industry with agricultural producers in Poland.
The situation with the entry into the Eurasian Economic Union (hereinafter referred to as the EAEC) of Armenia is interesting. There was an official order to the Government on the website of the President of Russia on the signing of the Treaty of Accession of Armenia with the EAEC, but there was no any further information about this in mass media. The main problem is the status of Nagorno-Karabakh. Full accession of Armenia to its recognized borders, as proposed by Kazakhstan, assumes full equipment of customs at the border with Nagorno-Karabakh, which was completely rejected by Armenia itself. Entry in the EAEC of Armenia with Nagorno-Karabakh will certainly exacerbate tension in the region and will negatively affect the image of the union. In general, as far as the Russian-Ukrainian conflict escalates, the Customs Union and the future EAEC have actually rapidly become politicized and less perceived as a purely economic institution. The dissatisfaction with the actual involvement in the conflict with the major countries producing 60% of world GDP was openly expressed by the President of Kazakhstan Nursultan Nazarbayev. Moreover, even cautious Nazarbayev announced the possibility of Kazakhstan leaving EAEC due to the sovereignty threat to his country. Although the likelihood of such event is still low, the cooling of relations between the allies is apparent.
Risks of economic recession.
According to the results of January-July 2014, the Statistical Service of Belarus recorded an increase in economic growth from 1.2% to 1.6%, which is largely due to the good harvest and the early start of grain harvesting. In general, the dynamics of economic growth is rather uneven across all sectors. If the mining industry, chemical industry and production of petroleum products show good growth (+ 27.3% + 15.1% and + 4.6% compared to the last year, respectively), in most industries negative tendency is maintained in comparison to the previous year, and in the engineering field the situation is even worse (-20.3%).
Over the past year, members of the Government have repeatedly stated that small and medium businesses should act as a possible driver to enhance the economic growth, but the most favoured nation treatment was still provided only for large SOEs. A positive sign of transition from words to action is a credit program in the amount of BYR 300 billion, provided by the Development Bank for small and medium businesses. The experts of commercial banks are also involved in taking decisions on allocation of conditional cheap credit under this program, which is an innovative practice for Belarus. However, the amount of resources allocated cannot be compared with the same allocated for the agriculture. And a number of other activities of the authorities (non-adoption of a plan of cross-subsidization in the housing only in 2017, the development of recommendations to encourage employees of agricultural enterprises) indicate that the general line remains the same: to maintain the existing economic system with introduction of slight changes only.
Thus, financial stabilization may be outlined in the Belarusian economy by the end of summer months in 2014. The causes for concern at the beginning of the year related to the risks, associated with the need to service the external debt, substantially declined. This has been achieved by improving the results of foreign trade, stabilizing expectations of economic agents and attracting the borrowed resources from Russia. At the same time the observed economic growth is clearly insufficient to catch-up development and is based on the activation of a number of industries, due to the good economic and political situation. Strengthening of dependence on Russia within the EAEC in a state of conflict with the West makes the prospects of accelerating economic growth even more vague.