The risk of financial instability.
In February, the authorities started talking about the fundamental improvement in the country’s financial market. There are really certain grounds for such statements. Thus, the authorities have managed to switch to the policy of the currency basket cost management, and by the end of the month the ruble has even strengthened against the dollar (from 15,400 to 14,890 rubles per dollar). The net foreign exchange demand in the economy in January and most likely February significantly declined (up to USD 97 million in January after being USD 1.35 billion a month ago). According to the Chairman of the National Bank, after the reduction in January either ruble or foreign currency deposits show growth. The balance of foreign trade was significantly positive in January (+ USD 245 million.). The deficit of ruble liquidity in the banking system reduced: by the end of the month the average balance of the National Bank support was about BYR 4.5 billion against BYR 11 trillion at the peak a month ago. Even the inflation rate was relatively low (2.4%) in January, especially in comparison to the same period in Russia and Ukraine (3.9% and 3.1% respectively over the same period). And the budget surplus rate, which in January was at impressive 12.5% of GDP, greatly contrasts with the neighbours. All this allowed the National Bank to gradually remove the earlier restrictions: the ban on growth of loan portfolio for the banks was lifted; the rate of compulsory sale of foreign currency earnings was reduced to 40%; the interbank foreign exchange market was legalized again.
However, it is worth mentioning at what cost the stabilization was achieved. The tough measures of monetary policy led to sharp reduction of the ruble money supply (by 9.5% in January against December, and almost by 17% in total against October 2014) and decrease in credit debt in the economy, which inevitably provoked decrease in business activity and falling incomes among the population. Thus, the dollar equivalent of the average salary in January dropped to the level of USD 420, with significant decline observed in the field of employment.
The risk for economic independence.
The problem of gold and foreign currency reserves, which continued falling in January and struck the psychological mark of USD 5 billion, remains the same. Within this framework the assumption that the authorities will be forced to turn to Russia for emergency funding were confirmed. The mass media has disclosed the plans of the authorities to close the gap between the balance of payments to USD 2.5 billion: by issuing bonds for USD 2 billion (of which USD 1 billion in Russian rubles), which should be purchased by the Russian National Wealth Fund on non-market conditions, and the direct credit of the Government of Russia for USD 500 million. We may expect this request to be considered at the meeting of the State Council of the Union State on March 3 in Moscow. Moreover, it was planned to agree a joint Russian-Belarusian anti-crisis plan. However, the plan was reduced to the plan of development of trade and economic cooperation, covering the time interval of half a year, and the loans issue has not been raised. Later on the Russian authorities decided that the resources of the National Welfare Fund will be allocated only upon the decision of the President of Russia. Given the fact that there is no any alternative for the Belarusian authorities (the Eurobond market is closed to new offerings due to the prohibitive rates of 20%, and the possible talks with the IMF do not add optimism), they will have to negotiate with Vladimir Putin and try to reach consensus on the economic and political conditions of lending.
The risk of economic recession.
In February, the authorities released the program of action for 2015. This program is not a full-time annual document and the need for it is associated with a sharp change in the economic conditions after preparation of the budget and approval of the traditional socio-economic development for the year. The anti-crisis program generally contains no quantitative targets (it is reasonable upon high external volatility) and focuses on the basic principles and objectives of the Government for the coming year. The unquestionable priority is to ensure the macroeconomic stability, besides such key tasks announced as the stable exchange rate, reduced inflation rate and continuous servicing of the public debt. The program accumulated the ideas, which were periodically voiced in the past two years by the former Government: division of the state’s role as the owner and regulator in the public sector, and introduction of the indicative planning, and financial market development, and transition from the personal to sectoral tax benefits, as well as change of the state programs procedure. The latter is perhaps the most important measure, since foundation of the Belarusian economic model include massive government investments redistributing considerable resources in the economy. According to the plans of the Government, the state investments will focus on the key points of economic growth (i.e. their number and volume will decrease), and the access to the resources of the Development Bank, which will fully fund the state programs, will be available as well to the non-public entities on a competitive basis. In practice, the policy of the Government has already led to severe cuts in state investments (the state supported loans reduced by one-third), and they are intended to be focused on the unfinished facilities with the degree of readiness of more than 80%. Current lending to the state organizations will also be tightened and related to the dynamics of reduction of the inventory and accounts receivable.
Despite the positive features, we should point out the obvious shortcomings of the program. First of all the adequacy of the measures taken by the Government to ensure economic growth are doubtful. The basic idea of the program is that in the medium term the GDP growth will be achieved by improving the efficiency of public spending and reduction of the cost of credit, which will happen gradually as a result of the fall in inflation rate to single digits. However, in the short-term period strict measures will certainly lead to at least stagnation of the economy and very likely to its decline. Thus in January, the decline in GDP reached 0.4%, and it could be more serious, if it were not for the quick growth in construction (+ 43.6%) due to the statistical anomaly. In the industry the decline in production is observed (-6.2% compared to the last year) and a significant increase in inventories takes place (from 75.8% to 86.1% of the average monthly level of production).
However, the reduced cost of credit in the economy (which is yet to be achieved) by itself does not guarantee the acceleration of economic growth, as evidenced by the current problems of the EU countries or the “lost decades” of the Japanese economy. The ability of the Government to solve the problem of inefficient public sector, which is the source of imbalances in the economy, is doubtful. Even now we may observe the trend of division of state enterprises into those, who are really tightened by the conditions of activity and who would not be saved by the state, and those, who by virtue of their share in the economy or political importance retain favourable conditions of functioning and state support guarantees in any situation. Moreover, if a month ago there were only 30 enterprises, which are planned to be run by the Government in manual mode (including the problem of debt restructuring), but now the list has extended to 106. As a result of this approach the costs for the public sector support might indeed be reduced for a certain period, but fundamentally the problem will not be solved. Privatization as a tool to improve the efficiency of the economy is not mentioned at all in the Government program for the year. The preferred conditions are preserved for agriculture. Thus, despite the actual insolvency of most agricultural sector organizations, the Council of Ministers recommended to the large banks, including the Russian BPS-Sberbank, to finance projects on development of the dairy farms. The approaching sowing period in the agricultural sector will only by half be funded from its own resources, and the rest will be finances by the state.
The support of the Government actions by Alexander Lukashenko may be called ambiguous. The latter has already expressed dissatisfaction with the lack of economic growth and rising incomes, and appointed the former Prime Minister Mikhail Myasnikovich the Head of the monitoring group, which will develop special offers in the field of socio-economic development of the country. It is obvious that whenever possible (for example, funding from Russia) the authorities again may loosen the monetary and fiscal policies, which has repeatedly occurred in recent years.
Thus, due to strict measures of monetary, fiscal and budget policy, the authorities were able to stabilize the financial market of the country. According to the developed anti-crisis plan, the Government will continue to pursue this policy, seeking to reduce inflation and devaluation expectations in the economy. The fall of the country’s GDP, accompanied by the reduction in income and rising unemployment, was an irreversible effect of such measures. The situation with the size of the gold and foreign currency reserves remains critical; its replenishment is likely to require political and economic concessions in favour of the Russian party.