The risks of economic recession
The main positive event of the year is the growth of the economy, which exceeded not only the forecasts of international funds (quite significantly), but also the expectations of the Government. The GDP growth for January-November 2017 amounted to 2.2%, while on an annualized basis for October-November it reached 4.6%. Almost all segments of the economy show positive dynamics: for 11 months the industry grew by 6.3%, agriculture – by 4.1%, retail turnover – by 3.3%. Investment in fixed assets increased as well: the increase reached 3.6%. The dynamics of real incomes of the population was positive as well (+ 0.9% in January-October), which in turn stimulates the growth of domestic consumption. Thus, in the third quarter of 2017, household consumption increased by 5.5% compared to the same period last year. A significant decline is observed only in housing construction: commissioning of housing fell by 13% to 3.335 million square meters.
The plans for 2018 are also quite optimistic: as a base scenario, economic growth is planned at 3.5% and increase in exports – at 5.7%, while the trade balance is expected to be almost zero. This achievement should be based on favourable foreign trade conditions, improvement of activities and capacities of modernized enterprises, revival of small and medium-sized businesses. In order to support the latter, the authorities continue to work to liberalize the legislation. The legislative acts on simplification of licensing, additional protection of investors’ rights are to be signed in the near future. The Government believes that the growth in exports of the IT sector, expected in connection with the decree of the President “On the Development of the Digital Economy”, signed in late December, will be an important factor in accelerating economic growth. This document prolongs existing tax incentives for High Technologies Park (HTP) members until 2049, simplifies document circulation for export operations for residents of the Park, introduces special legal instruments to protect the rights of employers and venture investors (convertible loan, option agreement, agreement on non-competition and prohibition of enticement), and so on. The most notorious part of the decree is devoted to crypto-currencies, ICO and smart contracts, the regulation of which is planned to be extremely liberal for the HTP members (source).
However, according to the consensus opinion of international financial institutions, GDP growth in Belarus remains unstable. The economy still remains dependent on the price of oil and other commodities, which makes it extremely vulnerable in the event of a serious change in the situation on world markets. Accumulated external public debt, which grew by 21.3% over the year and reached the level of USD 16.6 billion, also significantly restricts economic growth. Growing payments for its servicing (USD 3.7 billion in 2018 against USD 3.4 billion a year earlier) seriously limit the budget programs of the Government. The situation with bad debts in the economy remains tense. The level of bad debts by the end of the year once again slightly increased and amounted to 13% of banking assets as of December 1. Despite Aliaksandr Lukashenka’s public criticism of the directorate of state enterprises because of requests for state support (source), the authorities are unlikely to give up the practice of refinancing debts of the enterprises. Thus, there are the plans to restructure a part of debts of Belarusian Steel Works (BMZ) (for the amount of USD 70 million) and Ivatsevichy wood plant (Ivatsevichdrev) (for USD 35 million). The funding of BYN 100 million to replenish the working capital of Svetlahorsk Pulp-and-Cardboard Plant is provided. Such measures help to maintain employment, improve performance in the banking sector, but at the same time create additional pressure on the budget.
We do not expect quick results from the liberalization laws adopted at the end of the year, since a noticeable effect from them is possible only in the medium term. An objective obstacle to the rapid growth of HTP is the limit in skilled labour resources, which can only be solved by immigration from the near abroad (primarily Russia and Ukraine). Soft regulation of the crypto-currency can create problems for the country at the international level in the event of using the potential of the HTP for laundering grey incomes and avoiding taxation.
An important factor in slowing economic growth in the medium term is negative demographic dynamics: according to some estimates, the number of employed in the economy in the medium term will be reducing by 2% annually (source). The toxic public sector, where the authorities ignore even soft recommendations on reforms, is also a problem.
The risks of financial volatility
The main positive in the financial sphere is connected with a record slowdown in inflation in sovereign history. According to the results of 11 months, the growth of consumer prices in annual terms was only 4.9% (for comparison, in 2016, inflation was 10.6%, and in 2015 – 13.5%). As a result, there is a decrease in rates on the deposit and credit markets and a revival of lending to the population and business. Thus, the rate for newly issued short-term loans to the population since the beginning of the year fell from 19.3% to 9.2%. The authorities’ plans for 2018 are also ambitious enough: inflation should be kept within 6%. To this end, the policy of money supply management will continue, gradually moving to the policy of inflation targeting. As part of the introduction of the latter, the National Bank began to conduct quarterly monitoring of inflationary expectations of the population, the report on which was first published in December.
An important achievement of the year is the increase in gold and foreign currency reserves (hereinafter referred to as “gold reserves”) of the country, the level of which as of January 1, 2018 amounted to USD 7.3 billion (source). At the same time, the authorities resolved the task of uninterrupted service of the state debt, having formed a reserve for a year. Judging by the minimum forecast value of the size of gold reserves at the end of 2018, the authorities plan to use about $1.3 billion of accumulated international reserves to repay the debt. In general, the plans for financing the public debt for 2018 are fairly transparent and there should be no difficulties in their implementation. The government expects to receive USD 400 million from in the framework of the 6th and 7th tranches of the Eurasian Stabilization and Development Fund loan, USD 600 – from Eurobond issue, and USD 400 million will be raised in the domestic market.
The situation on the foreign exchange market remained stable throughout the year: the population remained the seller of the currency for the whole year, and the total net sales in the market for 11 months totalled about USD 1.4 bn. Mainly this can be explained by the reduction of the population’s currency deposits, the positive level of the foreign trade balance (USD 584.7 million for 10 months of 2017) and a generally noticeable improvement in the balance of payments (the current account deficit for 9 months decreased to minus 1.5% of GDP from the level of minus 3% of GDP a year earlier). So far, expectations of excessive inflation of people’s incomes with the use of administrative resources are not justified: the average salary in November even decreased to the level of BYN 837, or USD 419.
At the same time, one should note some worsening of the situation by the end of the year: net sales of the population in November fell to the lowest level for the year (USD 64.8 million) and became significantly lower than the net purchase of currency by resident organizations (USD 211 million). The balance of trade in goods also significantly worsened: the deficit exceeded USD 627 million in November. In part, these tendencies are seasonal, but the important factor was the revival of economic growth and the related increase in household incomes and domestic demand. Overcoming economic depression and rising prices in world markets will also stimulate inflation within the country. In addition, the planned increase in tariffs for public services will also have an impact on it. The inflation expectations are still high: they are 2.5 times higher than the official inflation. Gradually, the situation on the market of banking liquidity is also changing: the size of its excess is reduced, some banks have already faced a lack of BYN liquidity, respectively, the rates on the interbank market are rising. In connection with these, the plans of the authorities on 6%-inflation in 2018 look too optimistic.
It is necessary to pay attention to the easing of the budgetary policy of the authorities, stipulated by the law on the budget for 2018, adopted contrary to the recommendations of the IMF. Thus, the size of the budget surplus for the current year is planned at the level of BYN 733.8 million against BYN 927 billion according to the updated plan in 2017. In addition, the policy in the past year can not be called tough: according to the calculations of the IMF, the deficit of state finances (taking into account quasi-fiscal operations) reached 3% of GDP. The principle of state debt financing stipulated in the budget was also changed: if in 2017 it was announced about its repayment and refinancing in the ratio of 50/50, in plans for 2018 the repayment from the budget will be only a quarter of the amount, the remaining part should be refinanced.
The authorities are also experiencing significant problems with the financing of the pension fund. Subventions to the last of the republican budget in 2017 amounted to BYN 1.42 billion instead of the planned BYN 698 million (source). Even according to the expectations of the authorities themselves, the situation in 2018 will only worsen, and in the budget BYN 1.92 billion are planned to be allocated for the social protection fund. It is unlikely that the authorities will decide on a new increase in the pension fund and especially on the reduction of the nominal amount of pensions. The further development of the situation in a similar way will further limit the budget possibilities of the authorities.
The risks to economic independence
After reaching agreements in the oil and gas sector, relations with Russia are developing in a relatively favourable manner. Without any apparent problems, the balance of Russian oil supplies for 2018 was agreed upon in the amount requested by Belarus (24 million tons), while the issue of redirecting the transit flows of Belarusian oil products from the Baltic ports to Russia was removed from the agenda. The government of the Russian Federation does not promote the issue of the so-called integration projects, painful, for Belarusian authorities. The leaders of the Eurasian Stability and Development Fund are loyal to the issue of the allocation of the next credit tranches, two of which are expected in the first quarter of 2018.
At the same time, this situation once again reduces incentives for the diversification of the Belarusian economy: plans to achieve an equal share of exports to the EEU, EU and other countries are not actually implemented, the share of oil and oil products in the structure of foreign trade is increasing again, and the dependence of the budget on export oil taxes is increasing.
The economy of the country in December and in general for 2017 is characterized by increased growth and continued macro-stabilization. The impact of the risks of insufficient resources for servicing the national debt and excessive easing of monetary policy (in particular in the area of household incomes) remains low-key. The authorities continue to take significant steps to liberalize the conditions for the functioning of the private sector, but at the same time they are not active in reforming inefficient state enterprises.