Risks of financial instability.
Undoubtedly, the main event of the month was the allocation by VTB of a bridge loan to the Government of Belarus in the amount of USD 2 billion. The loan was allocated to a very short period of time (until September of this year), and its sum is actually equal to the sum of credit previously promised by Russia and EurAsEC Anti-Crisis Fund in 2014. Thus, according to Russian Ambassador Alexander Surikov, an intergovernmental loan to Belarus in the amount of approximately USD 1.5 bln should be allocated in July-August, and the last tranche of the loan by EurAsEC Anti-Crisis Fund in the amount of USD 440 million should be allocated in September-October 2014. However, the continued decline in the already small gold and foreign exchange reserves forced the government to enhance the receipt of guaranteed funds and actually agree on the high-interest short-term loan. At the same time the immediate problem is not the depletion of gold and foreign exchange reserves itself in terms of the possibility of the authorities to perform their obligations, but rather the negative dynamics of reserves as an important indicator for the expectations of economic agents. Reporting of increase in the reserves, the government wants to minimize the possibility of repetition of the previous year situation (or rather of the last days of June 2013). Then after a period of easing of the monetary policy, which was accompanied by falling interest rates on Br deposits, cheaper loans and administrative reduction of the refinancing rate, the currency panic occurred. The trigger, which directly provoked getting rid of the Br, was a short period of rapid devaluation of the Br against the dollar (for the period from 20 to 28 of July 2013 the dollar rose by 1.38% from 8,670 Br to 8,790 Br. That was largely due to strengthening of the dollar on world markets, particularly against the euro). The potash war in August 2013 further worsened the situation and stepped up pressure on the Br. As a result, the foreign exchange market more or less stabilized only towards the end of 2013, and the economy had to return again to the era of super-expensive Br rate.
Currently the monetary policy is being gradually easen, although more cautiously compared to the last year (for example, the average rate on new deposits decreased to 30-32% compared with 46% at the beginning of the year). The first negative effects of this process started to emerge: the outflow of fixed-term Br deposits of individuals, the demand for the currency of the economic entities remains consistently high. This suggests that the limit of the risk-free depreciation of the Br has almost been reached. It is in order to push this limit away and avoid the fall of gold and foreign exchange reserves below the psychological mark of USD 5 billion, the resources allocated by VTB were needed urgently.
Thus, the probability of escape from the Br in the short term has fallen dramatically, and it can only be provoked by external causes (e.g. sectoral sanctions against Russia). Given the current yield on Br deposits exceeding yield on currency instruments 3-4 times in June, we can predict a further fall in the Br rate. Especially after a year break in the banking system the situation with excess liquidity is observed again, the size of this excess increases (for example, withdrawal of resources by the National Bank through bonds rose from BYR 1.3 trillion on June 11 to BYR 2.6 bln. on July 2).
In general, the financial situation in the country remains stable: the consolidated budget surplus in January-May amounted to 1% GDP, after several months of rapid growth in debt to the banks by the end of May practically remained unchanged (+0.1%). The foreign trade balance deteriorates, though, but remains at an acceptable level. The external debt gradually continues to decline. The inflation remains significant, which was 2.2% in May, and is likely to exceed the officially forecasted level of 11% by the end of the year.
Risks of economic recession.
The GDP growth continued to accelerate, and in January-May it made up 1.5% compared to the annual forecast of 3.3%. Thus all «chronic ailments», according to frankly speaking Alexander Lukashenko, remain: the volume of production in industry and agriculture is still declining (-1.3% and -4.3% compared to the same period last year, respectively), storage stocks are rising (+ BYR 986.4 billion in May), and the traditional economy flagships are showing record losses.
The first statements of members of the Government on their forecast for 2015 started to appear in mass media. And if the Prime Minister Mikhail Myasnikovich has called to use an unconventional approach to development of the forecast, the Minister of Economy Nikolai Snapkou has proposed to move away from the GDP growth target, which according to the very first preliminary plans should reach 2.2% in 2015, and focus on managing inflation. The main tools for achieving this goal, according to him, are the traditional monetary tools as well as the radical reduction of support in the public sector and increase of tariffs to the economically based levels. The probability of such a radical reversal of economic policy in the election in 2015 is very low, however, it is important that the younger generation of government officials (here the programme article of A. Lukashenko assistant Kirill Rudy may be recalled) stands for enhanced liberalization of the economic system. This inevitably creates conflicts with the overwhelming part of the old staff, which indirectly confirms the words of the Prime Minister about the «tug of war» in the Government. As a result, there is a situation, where simultaneously with statements about development of the new economy and support of competition the authorities introduce a number of import licensing positions and are quite seriously considering the introduction of the institute of special importers for some groups of goods and restriction of 15% retail share of imported goods. On the background of statements about the need to transfer management decisions in the public sector to the micro level, it is proposed to create «quality teams», which should carry out additional control at the enterprises.
In June, after more than two years of announcing, construction of the infrastructure for the future Chinese-Belarusian Technopark has been started, and the first potential resident of the park (the company Huawei) appeared. Given that there was no information in mass media about the financial participation in the construction process of the Chinese side (neither through direct funding nor through loans), one could assume that all costs were paid by the Belarusian authorities. At the same time, if earlier potential Chinese investment in enterprises in the park was evaluated as USD 30 billion, now we are talking about USD 15 billion and a possible reduced number of employees: it is assumed that the park will first employ about 25 thousand people, and only in the long term it will increase to 120 million people (originally it was planned about 600 thousand people). As a result, taking into account the complex development speed (30 years instead of 15 years as previously planned), one should not rely that the park under development might become a serious driving force for the economy of the country.
Thus, the situation in the economy by the end of June is the same: the real sector faces significant challenges, but the Government still has opportunities to ensure overall financial stability. The small positive statements from the young members of the economic block of the Government and the Office of A. Lukashenko on the need for a fundamental reform of the economic system are completely overlapped by the odious measures to combat the import and free competition.