The risks to economic growth
The economic growth in the first three months somehow slowed down, but is still impressive: the statistics recorded an increase in GDP by 5.1% compared to the same period last year, with the planned growth for the first quarter of 2.1% and for a year — 3.5%. All segments of the economy demonstrate positive dynamics: the industry grew by 9.4%, agriculture by 1.9%, the growth of retail trade amounted to 9.7%. The construction (+ 9.5%) and investments in fixed assets (+ 21.8%) also perform well. The export of goods and services in January-February grew by almost 30% and its surplus amounted to USD 206 million.
The international organizations improved the forecasts of the economic development of Belarus as well. Thus, the IMF raised its forecast for the growth of the Belarusian economy for 2018 from 0.7% to 2.8%. In 2019 the IMF expects GDP growth of 2.4% in Belarus. Approximately the same forecast was published by the World Bank, which predicts a moderate growth of the country’s economy in the medium term. At the same time, according to the experts of the bank, the growth ceiling is limited to 3% per year, which is lower than the forecast for the Baltic countries and Poland. This is connected with the pressure from the external debt, which requires significant costs for servicing and attracting additional external financing, as well as with the structural weaknesses of the Belarusian economy.
Restrained forecasts of international funds are counter to the task of increasing the country’s GDP to the level of USD 100 billion, announced by President Lukashenka during his message to the parliament and the people. At the end of 2017, GDP at the average annual rate was only USD 54.4 billion, and its actual doubling in nominal terms is difficult to achieve without creating new growth factors. The public sector still has greatest potential for improving the efficiency of the economy, but the authorities continue to rely on administrative methods to improve the quality of their management. Thus, Prime Minister Andrei Kabyakou sees the solution of the problem of inefficient state enterprises as increasing discipline, personalizing responsibility, reducing costs, reducing the role of intermediaries in the procurement of materials and the sale of finished products. The policy of small and medium-sized business remains more liberal. The authorities are working out new methods of supporting it, including its export stimulation. At the same time, it is stated that the implementation of already adopted decisions on the reduction of state regulation of small and medium-sized businesses is delayed. For example, normative documents on licensing, sanitary control and other issues, indicated in Decree No. 7, have not yet been adopted.
The government expects the specialized economic zones, in particular the IT cluster “High Technologies Park” and the Chinese-Belarusian technological park “The Great Stone” to become additional growth points. If the first project functions quite successfully and demonstrates steady growth (although its development potential is substantially limited by the labour market), the second one can not yet boast of measurable economic results. The prospective volume of investments of more than 30 registered residents to date is estimated at USD 500 million, but only 10 of them are working on the construction of their enterprises and none has yet started to implement the declared activities. As a result, the authorities even threatened to deprive the companies, which will continue to delay the implementation of their projects, the park membership. Just compare the numbers – in 2012, the potential cost of “Great Stone” projects was announced at the level of USD 30 billion.
Once again the public got the information about the government’s development of a new industrialization plan, involving the implementation of 1,740 projects in the regions. Judging by the information provided, the plan should become a map of potential investment projects geographically based on the comparative advantages of specific regions. In fact, the list of projects is focused on attracting domestic and foreign (with an emphasis on Chinese) private investment. At the same time, the use of state investments for the implementation of such projects, which could create certain fiscal risks, has not yet been discussed.
Favourable external conditions, especially the prices on commodity markets (primarily oil) and the growth of the Russian economy are prerequisite for planned economic growth. Since the beginning of the year, the oil prices demonstrate a rather unexpected growth and by the beginning of May have reached the level of USD 75 per barrel of Brent. In addition to geopolitical tensions, a number of reasons contributed to this dynamic: OPEC countries were able to implement agreements on the reduction of production and commercial oil reserves and even began to discuss the possibility of their tightening, because of the gradual exhaustion of the most favourable shale oil deposits in the United States the breakeven price of its extraction increased (according to some estimates, it increased from USD 45 to USD 50), and the expected global demand for oil is growing as well. In this regard, the probability of oil prices’ stabilizing at the level of USD 65-70 has grown, which is a positive news for the authorities of Belarus. On the other hand, we should note the growth of volatility and uncertainty in world markets, caused primarily by the risk of increased protectionism and the outbreak of trade wars, as well as tightening of the monetary policy of the US Federal Reserve.
The risks of financial volatility
But the main external risk for Belarus is increase of the US sanctions pressure on Russia. Introduced in the first half of April, personal sanctions that affected some large Russian companies (primarily the aluminum producer “Rusal”) revealed the vulnerability of the Russian economy to the harsh actions of the US authorities. The introduced restrictions had a negative effect on the exchange rate of RUB (USD exchange rate reached RUB 65 at the peak moments against RUB 58 earlier this month), led to an increase in the country’s risk premium by 50 basis points and generally reduced the long-term investment attractiveness of the Russian economy. An immediate consequence for the Belarusian economy was a significant weakening of BYN against USD, which reached 6% in some days of the month against the level of the beginning of the month, and an average of 2.2% over the month.
The devaluation of RUB and the acceleration of price increases in Russia inevitably create additional inflationary risks, which are intensifying in recent months. Acceleration of current inflation (from 4.9% to 5.4% on an annualized basis) was already observed in March 2018, largely due to the growth of regulated prices. The National Bank also worries about real wage growth, which is much faster than labour productivity growth (13.4% against 5% in January-February). At the moment the authorities react to the increasing risks only by attempts to strengthen the administrative control of prices in some sectors. For example, the producers of dairy products are offered an agreement on the maximum price growth at the level of projected core inflation. The authorities don’t refuse from the goal of increasing the average wage to the level of BYN 1000 in the coming months.
Thanks to the policy of the National Bank on the promotion of irrevocable deposits, the weakening of BYN against USD did not have a significant impact on the money market. Rates on the deposit and credit market demonstrate a minimal dynamics, which, however, once again indicates the exhaustion of the reserve for their reduction. Moreover, the National Bank hinted at the possibility of a slight increase in the refinancing rate at a regular meeting in June, stating the admissibility of its minor fluctuations in both directions.
The surplus of the consolidated budget is still record and by the results of 3 months has exceeded 6% of GDP. It was achieved due to a significant increase in revenues of the republican budget, which increased by 31.3% compared to the level of the previous year in January-March. This in turn became possible due to the unplanned increase in oil prices: at the beginning of May the price of the barrel was USD 73-75 instead of the USD 43 used in the calculation of the budget. At the same time, the fiscal policy regarding the accumulated surplus remains rigid: all its power is planned to be used to pay off the external debt. Due to this, the government expects to achieve the 50/50 ratio in 2018 in terms of refinancing and debt repayment instead of the 75/25 planned in the medium term. At the same time, since the beginning of the year, the external debt has somewhat reduced (by USD 305 million, or 1.8%), which, however, is accompanied by a reduction in gold and foreign exchange reserves (minus USD 321 million) and accumulation of domestic foreign exchange debt.
The risks of social instability
In early April, the authorities announced the mechanism of the new Presidential decree No. 1 “On the promotion of the employment of the population”, better known as the decree on “parasites”, which caused social protests in early 2017. As a result, the potential list of “parasites” was narrowed (for example, citizens who raise children up to 7 years old or engaged in household plots) are excluded, and the process of giving the corresponding status is made as bureaucratized as possible and difficult to administer. The list of citizens with the status of “dependent” should be drawn up by December 1, and regional commissions consisting of representatives of local councils and other authorities, the Ministry of Labour, the Ministry of Communications, the Ministry of Taxes and Charges will participate in its formation. The list of services that “parasites” will pay the full tariff for includes only housing and communal services. Given the current state of the labour market in Belarus, both the very idea of a decree and its implementation can not yield significant economic returns. In fact, the authorities are once again ready to create conditions for the growth of social tension only because they are not ready to publicly acknowledge the previously committed mistake.
The main external risks for the Belarusian economy are connected with the tightening of US sanctions against Russia, which lead to a weakening of the national currency and a reduction in potential economic growth. The positive impact of rising prices on the oil market and their possible stabilization at a relatively high level is partially offset by increased risks for emerging markets due to increased protectionism and monetary tightening of the US Federal Reserve System. Internal risks are still caused by the policy of excessive growth of incomes of the population against the background of avoidance of serious structural transformations in the public sector.