Risks for financial uncertainty.
In July, the next report of the IMF was published, following the post-program monitoring, carried out by the mission of the fund in April 2014. The most attention in the document is given to the risks to the economy associated with a significant current account deficit, small reserves and substantial payments on external debt servicing. At the same time it is emphasized that serious negative impact on the current situation is due to rapid growth in wages and significant emission-funded government programs. The recommendations of the Fund in this regard are traditionally radical: accelerating devaluation, freezing wages in nominal ruble terms, material cuts in government programs and tightening monetary policy of the National Bank. It is also recommended to closely monitor the situation in the banking sector, the risks of which are associated with a significant share of foreign currency loans.
Of course, the risks described were of no surprise to the authorities. Formally adopted by the end of July, the solutions (strict legal binding of wages growth to the labor productivity growth and optimization of state programs with some reduction) are in line with the recommendations of the IMF. However, their scope is clearly insufficient. In fact, the Government continues its policy of careful mitigation of monetary policy, combining administrative and market-based instruments. For example, during July the refinancing rate was again lowered (to 20.5%), the rates on the National Bank transactions were reduced, the directively set maximum rate on new loans for legal entities has shown a further fall (from 37.3% to 36.6%). Suddenly access of the corporate sector to foreign currency loans for calculations within the country was partially opened. The devaluation rate also remained almost unchanged for the past year (the growth rate of the US dollar amounting to 100-150 rubles per month), and the average salary continued showing growth in real terms (+2.9% YTD). Even with all things considered, in July, we may speak of some improvement in the financial sector: the foreign exchange market recorded net sales of foreign currency, the ruble deposits of the public show growth, the arrears on loans has reduced for the first half of the year. The stabilizing effect on the financial sector against the real strengthening of ruble and growth in domestic consumer demand had a decrease of 6.5% of the investment costs, which is probably connected with the winding down of a large-scale modernization program, as well as improvement on the potash market. The quite significant deterioration in the financial performance (consolidated budget surplus in January-June 2014 amounted to only 0.1% of GDP, while for example in the same period in 2013 it was equal to 1.9% of GDP, as well as the preservation of high inflation (already 10.2% YTD) may be considered negative.
Undoubtedly, an important role in calming down the economic actors was also played by the loans received in the summer months (first bridge loan of VTB Bank in the amount of USD 2 billion, and the first tranche of the Russian Government in the amount of USD 450 million), even if the significant portion of which was immediately spent on debt refinancing. However, the task of raising new loans still remains likely enough: the provision of the last tranche of the EurAsEC AF was once again postponed and the situation with the large privatization deals remains uncertain. So, at the end of July, an auction was failed for the sale of shares in «Grodno Azot», because of obviously inflated requirements to the investor, although previously it was reported that Gazprom, Rosneft and Evrokhim had their interest in the company.
Risks for economic independence.
Currently there are no visible achievements in expanding the number of participating countries of EAEC. If at the beginning of May Armenia and Kyrgyzstan were actively approaching the integration process (with Armenia to begin the accession process already in June), currently they are substantially less optimistic. And if in the case of Armenia, although the process is delayed (whether due to the large volume of legislative work, or because of the unresolved situation in Nagorno-Karabakh), it is expected to be finished up to the end, then the membership of Kyrgyzstan in the near future seems to be not seriously considered.
In this case, the economic body, starting from 01.01.2015, is gradually beginning to play an increasingly important role in the economy. Its unconditional bonus for Belarus is to provide preferential access to the Russian market. So, starting from 2015 the Belarusian appliances will be subsidized from the budget of the Russian Federation on equal basis with Russia, certain prospects are revealed as well in connection with the trade wars between Russia, Ukraine and the EU. In particular, the share of Belarusian producers may increase in the market of food and accessories for weapons. At the same time, sooner or later, Belarus will have to join the Russian protectionist measures, which may reduce the size of Belarusian exports, or greatly reduce the country diversification. The risks for domestic producers are also high due to the trading conditions liberalization within the Union (thus the question of creating a free trade zone with Vietnam and Israel, as well as the plans to reduce the average level of import duties are discussed).
Risks for economic recession.
According to the results recorded in June, there is a slight slowdown in the economic growth (1.2% instead of 1.5% in the first five months of the year). Thus it is necessary to mention a number of positive trends: the fall in industrial production continued to decline and is currently at the rate of 1%, the stocks are slightly decreased, the good cereal harvest should improve the dynamics in agriculture. However, in the medium term, the situation is still uncertain. Given the economic problems in Russia and the lack of large-scale structural reforms, the IMF predicts average annual GDP growth in Belarus in 2015-2019 years at the level of 2.75%. Today, the only area, where in the last few years a substantial liberalization has been achieved, is price regulation. The authorities even dared to carry out an experiment in the Mogilev region and allowed the milk producers to apply free pricing. In other areas (issues of ownership, property management, staff motivation system of state enterprises, reduction of public investment) the actions of the Government are simply a waste of time (for example, a plan for reorganization of agricultural enterprises), and sometimes even a rollback to the heavy regulation (bringing back the restrictions on wage gap between the heads and the employees of enterprises). On the example of the signed decrees on agriculture it is obvious that the most daring ideas of the Government and the industry experts (e.g. operational independence of agricultural enterprises) were rejected. The Government is further aimed at manual control of the economy.
Thus, against the peak of payments on external debt, the situation in the economy remains stable due to the timely receipt of the Russian loans. Using the reached decline, the authorities continue to loosen monetary policy in their attempt to accelerate the economic growth. In this case, the political will to serious structural reforms, without which the acceleration of the medium-term growth to the levels of the 2000s seems unlikely, is still not observed.