The risks of financial volatility
The achieved oil and gas agreements also provide direct financial support to the Belarusian government in addition to agreeing on supplies and prices for Russian oil and gas. Thus, in April, despite the non-fulfillment of some of the formal conditions of the program matrix, Belarus received the third tranche of the loan of the Eurasian Stabilization and Development Fund (hereinafter referred to as the ESDF) in the amount of USD 300 million. This amount, along with the proceeds from the placement of bonds on the domestic market, contributed to the growth of the country’s gold and currency reserves, which, despite repaying the debt to Gazprom in the amount of USD 720 million, reached USD 5.1 billion. Apparently, soon the 4th tranche of the ESDF loan will be provided in a similar amount. In addition to these amounts, already mentioned in the Government’s plan, Russia also promised to provide an inter-budgetary loan in the amount of USD 1 billion on good terms. As a result, we can say that the issue of servicing the national debt in 2017 for the Belarusian authorities is solved. The removal of the risks of escalation of the economic conflict with Russia creates favorable conditions for entering the market with a new release of sovereign bonds. In fact, the authorities have opportunities to refinance the current issue in the amount of USD 800 million, which matures in January 2018, while its current yield is already below 4%.
There are certain risks of hasty and excessive weakening of the monetary policy of the authorities. At the moment, the refinancing rate has been reduced to 14%, which the authorities have originally considered as the lower level of the forecast for 2017. The deposit market has already reacted negatively to the yield caused by this drop: the real level of deposits, taking into account the capitalization in March, showed a slight decline. Paradoxically, the acceleration of economic growth and the growth of incomes of the population can strengthen this trend. Thus, the economic recession is currently viewed as an important factor in slowing inflation and maintaining stability in the foreign exchange market. The weakening of the Russian ruble, which could occur against the backdrop of a possible fall in oil prices and outflow of speculative capital from the Russian market, is an additional risk for the money market. By the end of the year the Ministry of Economic Development of Russia expects the rate of 68 RUR for USD, or 17% higher than its current value.
The ambiguous policy of the authorities in the field of growth of incomes of the population can also increase risks for the financial market. The promises to increase the average salary to the level of BYN 1000 until the end of the year are repeated by the authorities extremely often. March was the first month when the salary level significantly increased (+7.5%) and reached the amount of BYN 770. The preservation of such growth solely at the expense of productivity growth, which the Government insists on, looks completely unrealistic. An attempt to increase the population’s income through issuance is also unlikely to succeed — the growth of the money supply will quickly affect the currency market and provoke fundamental problems in the entire financial sector. In general, the National Bank’s position on the rejection of emission incentives and the gradual transition to the policy of inflation targeting doesn’t seem to have changed. So, a redistribution of the structure of GDP and an increase in the share of final consumption by reducing the share of investment can be the only source of rapid growth in household incomes.
This scenario also implies significant risks for the country’s monetary market. Sharp growth in household incomes can destroy the current situation in the foreign exchange market, increasing demand for currency and reducing its sale to support current consumption. This will result in a return of the market from the situation of a net supply (in April it exceeded USD 340 million) to the situation of net demand. Without additional external financing, which is unlikely to be provided by the IMF and ESDF in such a scenario, this situation will quickly lead to a weakening of the national currency. This, in turn, will create pressure on the deposit market and provoke further growth of bad debts in the banking system. In addition, insufficient level of investment demand in the GDP structure will create prerequisites for narrowing production factors and economic recession in the future. If all these risks are intensified, it will be difficult to overestimate the negative consequences for the country’s economy.
The risks of economic recession
In April, the complex agreements in the oil and gas sphere, reached earlier by Aliaksandr Lukashenka and Vladimir Putin, were legislatively recorded and started to be implemented. The increase in Russian oil supplies to the Belarusian refineries, which in the second quarter is expected to grow by 25% to the level of the first quarter, will have a positive impact on the foreign trade balance and GDP dynamics of the country. In the first quarter GDP of Belarus unusually grew by 0.3%. This achievement was unexpected even for the Government: Minister of Economy only a few weeks earlier predicted a decline at the level of 0.8-0.9%. The main driver of the growth was the industry, which was able to grow by 4.3% against the background of an improvement in the Russian market. So, in January-February 2017 in sum terms exports to Russia increased by more than 40% to the level of USD 1.73 billion in comparison with the same period of the previous year.
At the same time, there are serious doubts about the sustainability of positive dynamics and the achievement of at least average world GDP growth (according to the IMF forecast in 2017, it should be 3.5%). According to some estimates, the potential for economic growth is still negative due to structural factors and the declining efficiency of the economy. The resumed growth of bad bank debts, the level of which reached 13.7% in April, can be a sign of the continuing structural problems. There is still a significant excess of bank liquidity (more than BYN 2 billion as of early May), which is caused by the problem of weak investment demand on the part of solvent borrowers. At the same time, it is important that such a deficit is observed not as a result of an extremely rigid monetary policy, as it was in 2012, but in the situation of the return of the real interest rate on credit resources to the historically normal level (while inflation at an annual rate was 6.4% the rate in the interbank market in April was about 10%).
In the situation of the growth of bad bank debts, the authorities continue to struggle only with the consequences, without taking significant efforts to eliminate the causes of the problems. Thus, transferring corporate debts to the account of state debt and reimbursement of expenses on loans of state-owned companies at the expense of budget funds is still used. Such approach allows to avoid problems in the banking sector at the current moment, however its further use will raise risks for the state debt and create a pressure on the budget. For example, in the republican budget for 2017, the share of expenses for reimbursement of bank interest already exceeds 6% of total expenditures.
Effective structural reforms, promoted by current and potential creditors, could be a fundamental solution to the problem. Thus, in a new letter about intentions, the ESDF has concretized the list of measures to reform the public sector. In particular, in order to receive the fifth, the sixth and the seventh tranches of the loan, Belarus must develop and introduce a new method of corporate governance in 17 large state enterprises, at least 45 enterprises must be transferred to communal ownership, the procedure for transferring the communal property enterprises to trust management must be simplified. According to some sources, the approval of the list of state enterprises for presale preparation is also one of the conditions for the new IMF program.
However, the authorities are really still sticking to the tactics of delaying reforms in the public sector, which President Lukashenka stated quite clearly in his April message. The strategy of reforming the public sector, inscribed in the matrix of measures for the ESDF program and widely announced by the Government in the second half of 2016, was never adopted. Effective measures to reduce the role of the state in the operational management of state property with the reorientation of state bodies to proprietary supervision are also not being undertaken. The procedure for bankruptcy of state enterprises, widely used in 2016, hadn’t become an instrument to increase their efficiency through the search for a new owner.
Avoiding solving the problem of low effectiveness of state enterprises, the authorities consider providing more freedom for the private sector as a source of accelerated economic growth. Thus, in the near future a package of legislative acts that drastically reduces the number of administrative restrictions and the level of state control over business should be adopted. In particular, it is expected to weaken the sanitary and fire control, increase the types of activities that do not require licensing, reject the mechanism for planned inspections of organizations. Serious tax relief (the replacement of all taxes by a monthly fee of 1 base unit) is offered for trade and service organizations in rural areas and small towns. However, the effect of such measures may be too small against the background of the “toxic” problems of inefficiency in the public sector and their spread throughout the economy through a system of non-payments.
The provision of credit resources promised by the Russian authorities solves the problem of servicing the state debt for Belarus for the coming year. Improvement of the current situation on the Russian market creates prerequisites for stabilizing the economy and its small growth. At the same time, this reduces the authorities’ motivation for public sector reforms and may lead to further protraction of negotiations with the IMF. Also, the declared policy of sharp growth of incomes of the population causes the fear, because its implementation in any case will create significant risks for the financial sector.