The risks to economic independence
After a series of working meetings between the leadership of Belarus and Russia in July, the degree of tension in bilateral relations has noticeably decreased. Economic officials of both countries say that the fundamental disagreements on integration issues have been removed and further work will be carried out according to an agreed algorithm. So, over the coming months, government groups will formalize the integration program, which will be signed by the leaders of the countries at the meeting on December 8, dedicated to the 20th anniversary of the union treaty. The integration program will be supplemented by 28 roadmaps that outline its industry directions to achieve the goal of “two countries — one market”. Simultaneously with the program, a number of other intergovernmental agreements are expected to be signed, in particular the gas price agreement. Further, during 2020, it is supposed to harmonize national laws in accordance with roadmaps in such a way that mechanisms of single markets (the same energy prices, the same regulatory requirements, the same tax burden) should work as early as 2021. At the same time, the details of the future integration program still remain inaccessible to the general public, although the Prime Minister of Belarus Siarhei Rumas promises to make them public.
The issue of compensation for losses associated with the supply of low-quality oil in April-May of this year is also being resolved with the Russians. So, from September 1, the tariff for pumping Russian oil through the territory of Belarus is increased by 3.7%. Compensation deliveries of oil are also planned. Thanks to that Belarusian enterprises should reach the planned volume of oil refining by the end of 2019.
At the same time, the issues of Belarus’ obtaining promised credit resources (an intergovernmental loan in the amount of USD 600 million and the last tranche of the EFSD loan in the amount of USD 200 million) is still unresolved. Judging by the statements of Belarusian officials, the Russian authorities still link these issues with the signing of the integration program. Despite the assurance expressed earlier by the authorities, there is no progress regarding compensation for losses associated with the tax manoeuvre in the Russian oil sector. At the same time, judging by the latest critical statements by Aliaksandr Lukashenka, the Russian authorities still refuse to substantively discuss this issue.
Thus, despite some progress, it is still premature to talk about removing uncertainty on the issue of bilateral relations with Russia. Moreover, the very persistence of this uncertainty has a negative impact on the economy through the expectations of economic agents (for example, limiting the growth of confidence in the national currency) and external lenders (higher borrowing rate). At the same time, based on the current rhetoric of the parties, in the short term, Belarus does not raise issues of renunciation of key elements of economic sovereignty (national currency, tax system, etc.). The consequences in the long run can be assessed only after all legislative changes implemented as part of the integration program. Moreover, it is already obvious that the growth factor of the competitiveness of Belarusian producers in the Russian market (due to equalizing prices for resources and uniform regulation) will be largely compensated by the risks of growth in the expansion of Russian capital in Belarus.
The risks of financial instability
Despite a slight deterioration in the external sector (in the first half of the year, exports show an accelerated decline compared to imports), the situation in the foreign exchange market remains favourable for the authorities. The net currency supply is formed both by the population (in August it amounted to almost USD 108 million) and by enterprises (more than USD 190 million for the same period). This situation allows the National Bank to continue to increase its gold and foreign currency reserve, the size of which as of September 1 showed a new historic maximum — USD 8.89 billion. Buying up excess currency, the National Bank at the same time prevents excessive BYN appreciation and forms an “airbag” in case of external shocks and problems with servicing external debt.
The situation in the deposit and credit market continues to improve: after a certain surge in the beginning of the year, rates continue to fall. Given the high inflation expectations (for example, according to a National Bank survey, expected inflation in August was 13.1%, which is its highest level for the entire period of research since November 2017), such rate dynamics should seriously increase the risks of overheating credit demand. However, in practice, on the contrary, there has been a gradual slowdown in lending growth (for example, growth in consumer lending in January-July 2019 amounted to 14%, while over the same period last year it was 24%). This corresponds to the expectations of the National Bank, which predicts a slowdown in credit activity even in the event of a further fall in rates.
In general, within the framework of the Government’s expectations, the dynamics of consumer prices is also developing: inflation for July amounted to 0.2%, and on an annualized basis of 5.9%. At the same time, a significant increase in household incomes is significant inflationary risk: its real size on an annualized basis increased by 7%. The growth in average wages continues to exceed the annual plans of the Government (in July its size exceeded the level of BYN 1055, planned for the end of 2019), and is also significantly higher than productivity growth. So, in January-May 2019, real wage growth amounted to 7.9%, while labour productivity grew by only 1.2%. At the same time, the authorities are not going to stop: from September 1, it is planned to increase the tariff rate for state employees by 12.6%, the Government also continues active to increase wages in enterprises with low ones. At the beginning of the year, the National Bank already explained the acceleration of inflation with a factor in the excessive growth of household incomes at the end of 2018. Now the risks of a recurrence of the situation certainly increase. In this situation, the authorities have already begun to resort to administrative methods of combating inflation. So, in August, the Government demanded that retailers reduce trade allowances for certain groups of socially significant goods, the price increase of which exceeds the average inflation rate. In the absence of a backlash on the part of trade, the Government threatens to apply price regulation measures. In fact, the authorities are solving the short-term problem by reducing the profitability of a particular industry, the profitability of which remains at a relatively low level.
The risks to economic growth
In January-July, GDP growth accelerated to 1.3% after 0.9% a month earlier. At the same time, according to some data, in July, GDP growth in terms of year-on-year amounted to 3.7%. A key factor in this trend was growth in agriculture (+ 5.6%), which in turn is associated with an earlier start of the harvesting campaign and higher yields relative to the unfavourable 2018. Some recovery is also observed in industry, where growth in January-July amounted to 0.6% compared with 0.1% in January-June.
At the same time, despite the acceleration of economic growth, the financial situation of the real sector of the economy is not improving. So, even against the backdrop of a record drop in interest rates, the growth of bad debts in the banking sector (mainly formed precisely in the corporate sector) remains significant: they increased from 3.7% to 5.8% over the year. At the same time, the lion’s share of the growth was generated by state-owned enterprises. The average profitability in the economy remains low, and its level even declined compared to the previous year (product profitability decreased from 9.3% to 8.7%, sales profitability – from 7.5% to 7.1%). The proportion of unprofitable organizations in the economy also increased (from 15.3% to 15.6%). At the same time, taking into account the growth in the share of labour costs due to the population income growth policy (according to some data, it has already exceeded its long-term equilibrium level), the financial situation of organizations may worsen. This situation in the real sector of the economy significantly limits the potential for economic growth, since it is accompanied by both a decrease in investment activity and the inability to further increase consumer demand.
The economic policy of the authorities has not yet undergone any changes: the authorities consider further liberalization for the private sector and the creation of growth points through large public investment or a system of benefits as sources of boosting economic growth. So, despite the fears expressed by Lukashenka about the appropriateness of further liberalization, a decree to improve the licensing mechanism was adopted. As one of the incentives for revitalizing the economy, authorities are developing a plan for the development of 31 lagging regions (previously it was announced as a plan for a “new industrialization”). Currently, the plan contains about 280 investment projects in production and infrastructure (including social one), as well as 244 investment proposals. At the same time, the volumes and sources of investments are still unknown, although it was previously stated that about USD 4 billion of investments will be required to implement 100 key projects of the program.
In addition to internal factors, external risks can have a significant impact on economic growth. Against the background of the aggravation of US-Chinese trade wars in the world economy, expectations of a recession began to grow. Many analysts consider the inversion of the yield of US bonds (a situation where the yield on securities with a shorter maturity is higher than that of long-term ones) to be an important indicator of its imminent approach. So, at the end of August, the yield on two-year bonds was higher than that of 10-year bonds for the first time since 2007. Previously, the recession began in the range from 11 to 22 months after the emergence of a similar situation in the market.
Thus, despite the acceleration of the economy, the achievement of 4% GDP growth planned by the Government by the end of the year is extremely unlikely. At the same time, some government agencies no longer expect the execution of the forecast for the year: for example, according to the latest estimates of the National Bank, the economic growth this year will be 2.9%, and next year — 2.5%.
Despite the change in the rhetoric of negotiations, the format of future Belarusian-Russian relations is still uncertain. In the financial sector there is still a favourable situation, while economic growth remains sluggish. Key internal risks are associated with the weak financial condition of a significant part of organizations and the policy of the authorities on unbalanced growth in incomes.