The risks to economic independence
The Belarusian-Russian negotiations on compensation for losses from tax manoeuvre are still the key issue on the agenda. According to the results of the December meeting of Aliaksandr Lukashenka and Vladimir Putin, each of the parties created working groups to develop proposals for deepening economic integration. The groups included various officials of the economic bloc, MPs, representatives of the real sector. Moreover, if the Russian group plans to revise the text of the union treaty, defining outdated regulations and provisions duplicated in the EAEU agreement, their Belarusian colleagues plan to focus again on energy and tax manoeuvres.
The public position of the parties has not changed either: the Russian authorities are ready to finance the inquiries of Belarus only with the intensification of integration processes in the economy. In particular, the Minister of Foreign Affairs of Russia Sergei Lavrov again raised the issue of introduction of a single currency and the unification of tax policy. Formally, Belarus declares readiness for such steps, but only on equal terms. For example, the issue of a new currency on parity conditions, the formation of a consolidated economic policy, taking into account the features of the model of the Belarusian economy, etc.
At the same time, the Belarusian authorities are trying to put pressure on Russia by intensifying cooperation with Western countries, by intentions of searching for alternative suppliers of oil and by simply banal threats of losing “the only ally in the western direction”. At the same time, the Belarusian authorities are confident that an agreement on compensation will be reached in the first quarter of 2019. This option is considered as a baseline scenario in the next review of the IMF on the development of the Belarusian economy. Given the lack of constructive negotiations on deepening integration within the framework of the so-called “Union State”, the most realistic way to achieve such an agreement is Belarus’ receiving compensation in exchange for selling some large state-owned production assets to Russian companies. For example, an increase of the Russian share in the Belarusian refineries.
The risks of financial volatility
The lack of compensation for losses associated with a tax manoeuvre is also a major risk for financial stability in the short run. Only an increase in the price of oil purchased for refining will lead to an increase in imports from Russia of about USD 350 million. At the same time, even the IMF estimates that the current account balance in 2018 (for 3 quarters of 2018 its deficit was 1.1% of GDP) is by 2-3 % of GDP below the optimal level, at which the interests of growth and stability of external debt are balanced. Based on this, the Fund’s experts also believe that the rate of the national currency is currently overvalued by 10% (source).
The deterioration of the balance of payments also increases the risks for foreign debt, the current amount of which is assessed as excessive by the IMF. Thus, the Fund recommends reducing the state debt level from the current 56% of GDP (taking into account the size of state guarantees) to 50% of GDP, and keep it at this level in the future. Even with the IMF baseline scenario, which involves receiving compensation from Russia, the solution of this task will require a reduction in annual budget expenditures of 1.5% of GDP, which can be achieved in 2-3 years. Under the pessimistic scenario, such fiscal consolidation should be significantly more rigid, since in this case, the total budget deficit (including quasi-fiscal expenditures on support of public sector enterprises) will increase from 2.3% to 4% of GDP in 2019. In the case of a stressful situation, accompanied by the devaluation of the national currency by 30%, the size of the external public debt, according to the IMF, can even reach 96% of GDP by 2023.
The reduction in foreign exchange earnings will increase pressure on gold and foreign currency reserves, the gradual reduction of which has all chances to continue in 2019. Thus, in January their size has already decreased by USD 140 million. The risks of a further fall in gold and foreign exchange reserves may have affected the authorities’ willingness to fulfil the EFSD requirements for the last tranche of the loan. In January, a number of legislative acts were finally adopted (for example, on public discussion of draft legal acts and forecasting the consequences of their adoption), which was a condition for the EFSD program, but was previously postponed.
In addition to the risks associated with the tax manoeuvre, other external risks can have a significant impact on financial stability: first of all, possible tightening of anti-Russian sanctions and further deterioration of financial conditions for developing countries. If the likelihood of increased sanctions remains substantial (in the light of Russia’s and United States’ withdrawal from the Treaty on short and medium range missiles, we can talk about its growth), the situation in international financial markets shows a tendency to change for the better. Thus, the Fed’s decision to pause in the rate-raising policy supported the investment attractiveness of emerging markets, which should reverse the trends of the last year and lead to an improvement in the dynamics of developing economies.
In the domestic market, despite some deterioration, the situation remains controlled. The acceleration of inflation, expected at the beginning of the year, caused by rising food prices, inflationary pressures from Russia and active wage growth in recent months, is to weaken by the second half of the year according to the National Bank. Negative trends in the foreign exchange market are also limited so far: the total net demand for foreign currency in January was about USD 30 million, while the population remains its net seller. In this situation, the National Bank, despite the obvious pressure from the real sector, again kept the refinancing rate at 10%, while stating that it is likely to be fixed at the current level until the end of the year, or even to increase. In addition, the National Bank cancelled the control of the marginal level of interest rates on BYN deposits, introduced in early 2018. This measure should allow banks to more effectively respond to changes in investor sentiment, which in the current market conditions is likely to lead to a further increase in interest rates in the deposit market.
In general, we can talk about reducing the risks of substantial easing of monetary policy in connection with the approaching election campaign. Judging by the news background, the National Bank wins in the nomenclature struggle against supporters of active stimulation of economic growth by monetary and budgetary methods. In this regard, it is highly likely that the National Bank will be able to achieve a political mandate from Aliaksandr Lukashenka to further pursue policies aimed at ensuring financial stability and increasing confidence in the national currency. In particular, the redistribution of powers of state bodies in favour of the National Bank is already announced, which will be enshrined in a special legislative act.
The risks to economic growth
By the end of 2018, the dynamics of economic growth slowed down significantly, and for the year, GDP growth was 3% against the 3.5% planned by the authorities. The government explains its failure to reach the planned indicator with a decline in agriculture caused by adverse weather conditions. An optimistic estimate for GDP growth at the level of 4% in 2019 is planned to be achieved due to the growth of investments (in particular the costs of building nuclear power plant) and increasing exports.
In the review on the state of Belarusian economy, the IMF adheres to a much more restrained position. The Fund’s considers the GDP growth in 2018 to be largely opportunistic, achieved due to favourable external conditions. The growth of domestic demand, the further dynamics of which at the current rate due to the growth of wages and consumer lending is impossible without creating risks for the financial sector, was an important factor. The IMF estimates the potential for economic growth at around 2% even with the preservation of Russian energy preferences. The more active dynamics of the economy are hampered by low public sector efficiency and demographic problems. The lack of compensation for losses from tax manoeuvre will slow down GDP growth even more significantly. In order to increase the potential of the economy, the Fund’s experts recommend the Belarusian authorities to take advantage of the favourable moment and launch ambitious structural reforms aimed at transforming the social protection system and increasing the efficiency of state property management. At the same time, the authorities’ measures to tighten the financial conditions of the public sector (for example, this year it is planned to reduce lending to state programs by 35.5%), which are not accompanied by appropriate social support measures, may even harm reforms in the strategic plan, undermining confidence of the society in them.
Formally, in January, the authorities really began to create a structural reform roadmap joint with the World Bank. According to the Government, this card may later become the basis for a new program with the IMF. At the same time, the current policy of the authorities has not yet undergone significant adjustments: the planned indicators of economic development (export of goods and services, attraction of foreign investments) are still being communicated to local authorities (source), privatization plans are being reduced and remain formal. Moreover, there is a tendency of actual nationalization of previously privatized enterprises due to the blurring of shares of minority individuals. There is no any public discussion conducted by the authorities on the directions and measures of structural reforms in the public sector.
The issue of obtaining compensation for losses from the tax manoeuvre in Russia remains the key one in terms of risks to economic growth and stability of the financial system. Preserving the tough bargaining position of Russia may require the Belarusian authorities to sell certain objects of state property or consent to limit economic sovereignty. At the same time, the probability of a weakening of monetary and fiscal policy during the pre-election period is somewhat reduced against the background of strengthening the apparatus role of the National Bank.