The risks to economic security
Surprisingly, the compromise on Russian oil supplies may not be long. At the moment, Russian oil supplies are carried out according to the schedule approved by the governments of Belarus and Russia. So, by the end of the year Russia will supply 24 million tons of oil to Belarus, which even assumes a certain increase in the volume of its supplies. However, the problem may be prompted by Vladimir Putin’s proposal to link the volume of oil supplies with Belarus’ obligation to use Russian ports when exporting oil products. At the moment, the Belarusian oil traders use the ports of Lithuania and Latvia to supply their products to the European market. The proposed change in logistics does not meet the Belarusian interests both for economic and political reasons. Even a 50% discount on the Russian railway services does not provide economic benefits from the use of St. Petersburg ports. The latter, moreover, are freezing in winter and can’t guarantee the quality of services like Baltic competitors. Therefore, one shouldn’t expect easy agreement of the Belarusian authorities with the initiative of Mr. Putin. The situation will depend on the willingness of the Russian authorities to start another aggravation of relations with the closest ally against the background of the approaching presidential elections.
The risks of economic recession
The economy continues to grow — GDP growth for the first 7 months was 1.1%. The main driver of the achieved result was the industry, which grew by 6%. According to experts’ expectations, in the second half of the year the growth in the industry may somehow slow down, as the factor of the low comparative base of the beginning of 2016 will disappear. At the same time, there is a significant potential for improving the formal indicators in agriculture — nominally, its fall since the beginning of the year was 4.9%. However, in many respects it is caused by the late start of grain harvesting, which this year should exceed last year’s level (7.8 million tons against last year’s 7 million tons). The levelling of this purely statistical factor should lead to an acceleration in the growth of nominal GDP in the coming months. Moreover, the positive impact on it should be improved by forecasts of economic growth in Russia.
The authorities forecast even more significant acceleration of the economy for 2018. According to the developed forecast of economic development, the Government plans the economic growth of 3.4% next year. The positive outlook is built on the expectation of export growth (primarily to Russia), as well as growth in domestic investment and consumer demand. In the sectoral context, the main growth should be provided by industry, agriculture and construction spheres. The Government considers the implementation of Chinese projects as an important condition for accelerating industrial growth, in particular, the opening of a new BelGee plant, which has not yet been launched and will be able to produce 25,000 cars, in 2018. The growth in construction sphere should provide a mechanism for mortgages, which will become possible after the changes in legislation and further falling rates in the credit market. At the same time, the GDP growth announced by the Government clearly implies the development of the situation according to the most favorable scenario. The budget planning is once again based on a more modest forecast of economic growth, corresponding to a conservative scenario. Obviously, the government wants to avoid the situation of sequestering budget spending due to overly optimistic expectations about economic activity and growth of budget revenues.
At the same time, the government doesn’t plan any fundamental changes in economic policy. On the contrary, despite numerous announcements of decisions to reduce the role of the state in the economy, we can state the expansion of administrative management practices. So, for the first time in the last 5 years, a conference call with the direct participation of Aliaksandr Lukashenka on the harvesting of grain was held. The government actively criticizes local authorities for the insufficient number of new jobs created. In addition, this indicator is planned to be included in the integrated system of key indicators for managers at all levels. The government wants to increase innovation in the economy through the development and adoption of a comprehensive forecast of scientific and technological progress. The authorities haven’t used bankruptcy mechanisms for inefficient enterprises, and their reorganization is mainly accompanied by restructuring of debts, including by accumulating state debt. The issues of modernization of state enterprises due to the use of budgetary and administrative banking resources are discussed again. In conditions of poor quality of investment decisions of the state machinery, this may lead to further accumulation of bad debts in the economy.
The risks of financial volatility
In August, the National Bank once again, this time quite unexpectedly, decided on another reduction in the refinancing rate and rates for liquidity provision operations to banks (to 11.5% and 13% respectively). The authorities explain this decision by the intention to keep inflation at a relatively low level (on an annualized basis the inflation stabilized at 6-6.5%, and by the end of July a still deflation was recorded, even though a seasonal one) as well as by a favorable situation in the foreign exchange market. So, in July the net sale of currency by legal entities and the population was observed, although the size of the latter dropped to the minimum value since the beginning of the year (USD 108.5 million from the population and USD 42.2 million from legal entities-residents). The situation of a significant excess of BYN liquidity is observed in the banking system, which, despite the drop in nominal rates, does not yet record a significant increase in credit demand. Thus, the increase in BYN lending to organizations since the beginning of the year was just over 2%.
At the same time, it is obvious that the risks accompanying the current easing of monetary and credit policy nevertheless increase. This is apparently due to a decrease in the rate of change in the refinancing rate from the usual 1 pp. up to 0.5 percentage points. The key alarm signal is the reduction (albeit insignificant (by 0.23%) in BYN deposits of the population, which is observed for the first time in the last year and a half. The significant share of doubts about the long-term stability of the national currency is also evidenced by the dynamics of the share of long-term irrevocable deposits. Despite the much higher profitability of such deposits compared to short-term deposits (11.3% per annum against 8.4% per annum), their share in the last six months practically didn’t increase (to 23.5% in June 2017 compared to 23% in December 2016). Apparently, the current rate on deposits is already approximately at the level of inflationary expectations.
At the same time, additional inflationary pressure may be caused by the growth of incomes of the population, for the stimulation of which the authorities actively use, among other things, administrative methods, giving the state enterprises plans for increasing wages. As a result of this policy, the average wage reached the level of BYN 827.5, while the decrease in real incomes of the population slowed to 0.8%. As part of increasing the incomes of employed in the budgetary sector, it is planned to raise the 1st rate tariff rate by 6.5% from September 1. Gradually, lending to the population activates (+ 10.2% from the beginning of the year), which in turn stimulates the growth of retail turnover. The growth of the latter is traditionally accompanied by an outstripping increase in consumer imports and creates additional demand for the foreign exchange market. Certain risks for the stability of the financial sector can also create increased volatility in the currencies of the EEA countries (primarily the Russian ruble), expected by the experts of the Eurasian Development Bank in the second half of 2017.
The combined effect of these factors may lead to a weakening of the national currency and an increase in inflationary expectations. An effective response to this development of the situation may be either a tightening of monetary policy, or a return to the practice of spending gold and foreign currency reserves. As for the first way to solve a potential problem, there are certain doubts about the political possibility of raising the refinancing rate. In numerous statements and forecasts of the economic authorities, the reduction of credit rates to the “normal” level is seen as an important condition for accelerating economic growth and improving the financial condition of the real sector. Accordingly, even a temporary refusal from the given dynamics may turn out to be politically unacceptable for the country’s top leaders.
In addition, the authorities’ willingness to assume additional financial risks may increase against the background of the continued growth of the country’s gold and foreign currency reserves, which as of August 1 exceeded USD 6.66 billion. In addition to substantial summer borrowings, in September the government should also receive another Russian loan in the amount of USD 700 million. Despite the fact that the accounting for the loan will be carried out in US dollars, the specified amount is allocated in Russian rubles, therefore, it will not be possible to directly turn it to gold and foreing currency reserves. However, the ability to use it to refinance liabilities to the Russian government will reduce current requirements for the use of gold reserves.
Conclusions
The political need to implement the five-year plans forces the authorities to gradually return to the usual administrative methods of managing the economy. Continuing the policy of administrative growth of incomes of the population and reduction of rates in the money market, the Belarusian authorities once again risk falling into the trap of excessive mitigation of monetary policy. This, in turn, will reduce the safety margin of the financial system and increase the sensitivity of the economy to external shocks, primarily related to the dynamics of commodity prices.
