The risks to economic growth
In April, the first forecasts of international organizations for the Belarusian economy for the current and coming years appeared. Thus, according to the World Bank, in 2020 the fall of Belarusian GDP will be 4%. the IMF predicts a contraction in the economy by 6%, EDB – by 3.3%. The restoration of economic activity is expected from 2021, but its pace will be quite sluggish. In fact, these forecasts come from the fact that Belarus will not be able to avoid a significant recession, despite the refusal to introduce restrictions due to the COVID-19 pandemic, and the dynamics of its economy will correspond to the indicators of neighbouring countries. It should be borne in mind that the current degree of uncertainty remains extremely high, and the development of the pandemic situation in a negative scenario (for example, a repeated outbreak of the virus in European countries after weakening quarantine measures) will greatly worsen economic prospects.
At the same time, official statistics do not yet capture the negative impact of the global crisis on the Belarusian economy. According to the results of March, the dynamics of GDP even slightly improved: the economic downturn for the first quarter amounted to 0.3% compared with the fall of 0.6% in the first two months. The drivers of improving the dynamics were agriculture (an increase of 5.5%), retail (+ 7.9%), construction and IT services. However, already at the end of April, the GDP indicator should change markedly, which is indicated by mood indices in the Belarusian economy, which fell to historical lows.
The Belarusian authorities have not yet formed an official vision of how deep and long the economic crisis will be. According to the deputy minister of economy, new forecast estimates of GDP change are close to the figures announced by international partners. At the same time, the political attitude has not changed yet: Aliaksandr Lukashenka requires the Government to fulfil the initial task of economic growth of 2.8%. The plans of the public sector at the micro level remain unchanged: for example, Minsk Automobile Plant (MAZ) declares its readiness to fulfil the initial plan for annual growth in production by 10%, Minsk Tractor Plant (MTZ) management also voices optimistic estimates. There is also the issue of full load of the construction sector.
At the same time, the details of the authorities’ actions to support the economy as a whole and individual sectors in particular are gradually emerging. The decree defining the so-called first package of measures to help the economy was signed with a certain delay. According to it, some of the most affected sectors (mainly the services sector) are being supported in the form of deferred tax and rent payments, the possibility of lowering local taxes, and some regulatory exemptions. At the same time, the decree doesn’t provide for direct budget assistance, which is actively discussed by relevant associations.
The government continues to work on a second and third package of anti-crisis measures. So, it is stated that the second package will contain measures to support industry and construction. Among these measures, one can expect the provision of state aid will to enterprises in exchange for preferred shares, the provision of soft loans, including for salary payments. For the most affected borrowing organizations, it is also proposed to provide state guarantees in the amount of BYN 1.2 billion, while BYN 700 million of this amount will be distributed by local authorities. In addition, the Government is strengthening support for the public sector and measures outside the framework of the decree being developed. So, once again, the limit of direct lending has been increased by BYN 120 million (it was previously planned to reset this limit from the current year).
In addition to helping the public sector, the second package will contain measures of social support for the population. We can call the key proposal an increase in unemployment benefits to the size of the living wage budget (i.e., from current BYN 30-50 to BYN 247) for people who lost their jobs in the second quarter of 2020. Moreover, in April Lukashenka criticized such proposals, stating that there were a sufficient number of vacant jobs in the economy. Measures to support incomes include the abolition by the Government of the linkage of wage dynamics to productivity growth. This restriction was lifted as part of the government’s determination not to reduce the level of salaries at state-owned enterprises even in conditions of falling production.
The risks of financial instability
The model of government actions is much like a response to the global crisis in 2008-2009: the denial of the crisis at the political level, combined with support for the public sector and domestic demand in general, which was mainly driven by housing. As a result of such a policy, Belarus in 2009 was able to show one of the best results on the dynamics of GDP in the region. Its economy grew by 0.2% in comparison to a large-scale decline in the economies of most neighbours: in Russia — by 7.8%, in Ukraine — 15.1%, in Lithuania — 14.8%, in Latvia — 17.8%. The flip side of this model was the rapid growth of external debt (both public and private), which acted as a source of financing demand in the domestic market. As a result, external public debt in 2009 more than doubled (from USD 3.6 billion to USD 8.4 billion), and the growth of gross external debt amounted to 46% (from USD 15.2 billion to USD 22.1 billion).
At the moment, the Government also declares its readiness to increase public debt and attract USD 2-2.5 billion from foreign sources specifically for financing the costs of anti-crisis measures. Such plans of the authorities exacerbate the problem of servicing the current public debt, in particular, the search for sources of refinancing. Current successes on this issue are quite modest. After the March failed attempt to place currency government bonds on the domestic market, such a placement nevertheless took place in April. However, the amount of attracted resources was significantly lower than the declared (only USD 18 million), while the cost of borrowing also increased significantly (up to 5%). The authorities were able to obtain a relatively small amount of resources through the placement on the Russian market of bonds denominated in Russian rubles (RUB 10 billion, or about USD 135 million). The authorities do not abandon plans to enter the Eurobond market, the situation in which has improved markedly in April, and the current yield on Belarusian bonds has fallen to 5.5-9%. Apparently, the Government expects that the conditions for borrowing by developing countries will become even more favourable as they overcome the bottom of the recession in the global economy.
Stimulating domestic demand may require easing monetary and fiscal policies: in particular, more active spending of previously accumulated budget surpluses (about BYN 6 billion), as well as expanding affordable lending programs. These measures, in turn, can create pressure on BYN and unwind the inflationary-devaluation spiral. At the same time, these risks so far are only hypothetical. After March troubles, in April, the situation on the country’s foreign exchange market improved markedly. The population significantly reduced the net purchase of foreign currency (from USD 279 million to USD 69.5 million), and as a result, the situation of excess supply was again observed in the market. This situation, as well as the strengthening of RUB, allowed BYN to win back a significant part of the March fall against USD and EUR. The purchase of excess currency by the National Bank also supported the country’s foreign exchange reserves, the size of which after 3 months of reduction increased by USD 96 million. The BYN weakening at the beginning of the year has not yet led to a surge in inflation. According to the results of March, its annual level accelerated to 4.9%, but remained within the framework of a 5 percent forecast.
A positive factor for both financial stability and economic growth was the conclusion of a contract with China on the sale of potash fertilizers. Earlier, in January-February, the decline in export of potash fertilizers amounted to about USD 200 million, or 39.3% compared to last year. Although the new contract price is much lower than the previous one (USD 220 per tonne versus USD 290 earlier), the restoration of the physical volume of exports will have a positive effect on the country’s trade balance and budget.
The situation in the banking sector is worse. Growth in inflation expectations simultaneously leads to both an outflow of household deposits and a surge in demand for loans. In such circumstances, taking into account the actual limitation of the maximum credit rate, banks began to massively abandon some lending programs, especially in terms of housing lending. Such a flight of banks from risks is completely inconsistent with the authorities’ plans to stimulate domestic demand. The National Bank can quickly solve the problem in one of two ways: either by increasing (or completely abolishing) the maximum allowable loan rate, or by providing banks with large-scale BYN liquidity. In this regard, attention is drawn to the new rules for refinancing banks, according to which the National Bank can issue loans to banks at a refinancing rate of up to 70% of regulatory capital or 25% of their liabilities for a period of 3 to 6 months.
The risks to economic independence
Against the background of epidemiological problems and the collapse of the global economy, a calm period began in bilateral Russian-Belarusian relations. The topic of deepening integration within the so-called “Union State” has finally left the current agenda, and there are no signs of pressure on Belarus in this matter. The issue of restructuring a loan for the construction of Belarusian Nuclear Power Plant is being resolved positively — the Russian government agreed to postpone the start of loan payments by 2 years in advance, as well as to fix the interest rate on the loan at 3.3%. Under current conditions, this means a decrease in the cost of credit for Belarus by 0.57 percentage points and total savings of about USD 600 million. In the long run the gain may turn out to be even more significant, especially in the case of accelerating USD inflation.
There is no negative reaction from the Russian authorities to the continuation of Belarus’s policy of diversifying oil supplies. So, in April Belarus continued to purchase small quantities of Norwegian and Azerbaijani oil, and the first supply of Arabian oil (about 80 thousand tons) is planned for May.
At the same time, amid falling gas prices in the world market (for example, below USD 50 per thousand cubic meters in the UK spot market), the potential for another conflict between the two countries increases — this time because of the gas price. The gas price according to the current contract with Russia (USD 127 per 1000 cubic meters) already looks much higher than market prices, which should cause attempts by the Belarusian authorities to achieve a revision of this price or the provision of discounts to it.
External and internal conditions for the Belarusian economy continue to be characterized by significant uncertainty associated with the COVID-19 pandemic. Moreover, even the basic moderate-optimistic scenario assumes a significant drop in the country’s GDP. A possible response by the authorities to support domestic demand will increase the risks to public debt and financial stability.