Monitoring of the situation in the field of economic security of Belarus (February 2016).

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The risk of financial instability.

One of the most important events of the month was reaching an agreement with the Eurasian Fund for Stabilization and Development (hereinafter referred to as EFSD) on starting the new credit program, which was approved after a series of Belarus-Russia negotiations at the senior leadership level. It is yet not known, what kind of concessions, if any, were made by the official Minsk. However, the declared agreement should be signed in the coming weeks. According to the terms and conditions thereof, Belarus will receive the first tranche in the amount of USD 1.1 billion in 2016, as well as the following tranches of USD 500 mln., USD 300 mln. and USD 200 mln. in 2017. The amount to be allocated as the first tranche equals to the amount of obligations to EFSD for 2016, which to a great extent makes it easier to service the national debt for the current year. This is also confirmed by assigning by the Fitch Ratings agency of grade “B-” for the long-term credit rating for Belarus and grade “B” for the short-term credit rating for Belarus with a “stable” forecast. In this situation, the authorities decided to demonstrate adherence to the principles of coordination of the program with the IMF and suspended the negotiations with the Fund. At the same time, according to the unofficial information, the IMF proposed program of reforms is rather of a compromise nature and does not involve shock reforms. Moreover, according to some sources, today there is only one matter of this program left unagreed: that is the speed of refusal from cross subsidizing of the cost of services, in particular increasing the cost of housing services for the population. The Belarusian authorities insist that the 100 per cent of reimbursement of the housing services will be reached by the end of 2018, and the experts of the fund recommend to do so within a maximum of one year and a half. It is the change of tariffs for housing services, which has become the most discussed issue in the society in February. An increase in their value on average by 40-60% in terms of fall of the real income and deterioration of the employment situation apparently caused a negative reaction among the population. As a result Alexander Lukashenko accused the officials in fraud with the prices for housing services and demanded to recalculate the tariffs to make them lower. Besides the decree was announced, according to which the housing (utility) tariffs will be frozen and all decisions on their increase will be taken directly by A. Lukashenko.

Although the severity of the problems with servicing the current year external debt decreased, the IMF credit program still remains extremely important for the Belarusian authorities. Obtaining of the loan will enable Belarus to replenish the gold and foreign exchange reserves, which amount remains below the critically permissible level. At the same time a slight increase in February (+ USD 84 mln.) was provided by growth of the gold price and placement of the 7-day bonds of the Ministry of Finance, clearly intended to prevent the negative news. And the significant increase in the gold and foreign exchange reserves will increase confidence among the population and investors in the financial policy of the authorities and will be a good background for a new placement of Eurobonds, which the authorities continue hoping for. Thus, in 2016, USD 1 bln. is planned to be attracted through the sovereign bonds and USD 500 mln. is planned to be attracted through the bonds of the Development Bank. However, the authorities may decide a new placement even without the IMF loan, since the current yield on bonds in circulation (about 7.1% per annum) is sufficiently acceptable.

Favorable news for the Government was the turn in the oil market, where the oil value after the low January minimum price of USD 27.5 per barrel rose to almost USD 39 in early March. As a result, starting from the second half of February, the ruble began to strengthen against the US dollar and weaken against the Russian currency, exceeding the level of 290 BYR / RUR in early March. At the same time, according to the National Bank, it even carried out ruble interventions to prevent further strengthening of the Belarusian ruble against the US dollar, at the same time replenishing the gold and foreign exchange reserves by the currency purchased at the stock exchange. In general, such situation contributes to improvement of the results of foreign trade with Russia and decrease of trade deficit on the goods, which in January amounted to USD 46 million mln., more than covered by a surplus on trading in services.

Stabilization of the national currency should improve the situation in the deposit market, in which the outflow in the last months was recorded on both ruble and foreign currency components. The last rally of the ruble weakening and administrative pressure of the National Bank on the rates towards their reduction has led to the fact that currently the foreign currency share as part of broad monetary stock reached the historical record and exceeded 77%. At the same time the ruble equivalent of the foreign exchange deposits of the population decreased to USD 1.15 bln., and their specific share in the structure of savings amounts to not more than 15%. Such situation creates difficulties for the National Bank in controlling the money supply and, consequently, achieving the inflation target. However, on the other hand, the risk of pressure on the currency market due to sharp flow of ruble deposits into the foreign currency deposits is not so critical as in the previous years.

The key risks in the banking system at the moment are determined by a potential sharp increase in bad debts, especially in terms of foreign currency loans issued. The problem is that the official data (so at least according to the IMF experts) do not fully reflect the state of the bank debts. One of the main problems is the mechanism for determining the current value of the pledged property, which in Belarus are valued according to book value. According to the information appeared in the mass media, the National Bank recommended to the commercial banks to conduct an independent evaluation of its assets according to the international standards (in particular, a market assessment of credit resources) and to report the results to the regulator. Such verification is considered as a measure designed to dispel doubts of the IMF about the sustainability of the banking system. At the same time, if the results are negative and reveal the need for additional funding of the banks (for example, due to falling prices for residential and commercial property and therefore reduction of the level of security of the loans granted), this could trigger the accelerated outflow of foreign currency deposits from the banking system.

The risk of economic recession.

The situation in the real sector still shows no improvement: the decline in GDP was 4.3% with a substantial increase in stocks (by 6.6% up to 74.3% of the average monthly production volume). The average salary also decreased in January either in real terms (-2.6% compared to January 2015), or in US dollar terms (up to USD 328 compared to USD 406 a month earlier). In February, the Government has presented a number of programs and other legislative acts, allowing to understand how it plans to improve the situation: for example, the program “Export of Belarus”, the decree “On some issues of growing capacity and diversification of export of the goods and services”, but the main among them was the List of measures to improve the efficiency of the social and economic complex of the Republic of Belarus. The positive side of the approved document is that it declared steps towards the development of market economy in the country: ensuring the inviolability of property rights, development of competition, promotion of small and medium-sized businesses, export diversification, balanced monetary policy, development of a new mechanism of privatization and other. On the other hand, most of these measures have absolutely no concrete meaning and are a declaration of intent, formulated only in the most general terms. A part of actions look totally and completely voluntaristic, for example, the order to reduce the cost of industrial enterprises by 25% or obligations of the Government and local authorities each year to create 50 thousand of new jobs. At the same time the first indicator is already being brought to the enterprises as a binding one, regardless of the industry cost structure and the current performance of the enterprise, and is the key one in obtaining the state aid. In fact, the list of measures is essentially an anti-crisis plan of the authorities, demonstrating the contradictions accumulated in the Government, when the progressive measures of the Government, though often rather abstract ones, are being opposed by the presidential administration to the very specific, but completely anti-market measures.

The fate of the state budget is still not known, which is caused by the need to adjust the changing external conditions. Thus, according to Prime Minister Andrey Kobyakov, at an oil price of USD 30 and the Russian ruble at the level of 80 RUR / USD the Belarusian budget losses the revenues by 14%. Most of the proposed Governmental measures to increase the revenues (increase of VAT on a broad list of positions from 10% to 20%, increase the excise duties on fuel by 50%, and other) were rejected by A. Lukashenko, and the remaining ones (VAT growth in communication services from 20% to 25%, increase in excise duties on premium class cigarettes) appear to be clearly insufficient. Taking into account the limitation of resources to service the debt, the Government may not accumulate the budget deficit and are forced to cut the costs. The Government declares that low priority capital expenditures will be reduced in the first place. At the same time it seems that the social housing construction program, which has long been the driver of economic growth and an important element of social welfare, will also be reduced. At the same time, the authorities decided to create additional funds for the current social payments to the population, including provision of subsidies for reimbursement of the cost of housing services in the amount of about USD 450 million.

Conclusion.

The expected EFSD credit, the improved foreign trade performance and the turn in the oil market significantly reduce the risks of financial imbalance of the Belarusian economy. There are no preconditions for a substantial increase in the outflow of foreign currency deposits. The most acute is the issue of economic recession and worsening of the social situation among the population. The authorities were unable to reach consensus on the ways to overcome these problems. At the same time the declared liberalization of the economic system in practice is accompanied by an increase in the number of obligatory indicators and the attempts to increase the personal responsibility without granting additional powers.