The risk of financial instability.
The main positive news in July was the receipt at the end of the month of the next tranche of the Eurasian Fund of Stabilization and Development (hereinafter referred to as EFSD) in the amount of USD 300 million. These resources allowed to significantly increase the gold and currency reserves (hereinafter referred to as GCR) (up to USD 4,630 million) and improve their ratio with the import share of the country (up to 1.8 compared to 1.5 at the beginning of the year). The EFSR press release accompanying the tranche stated that the Belarusian authorities have complied with all the measures provided for by the matrix of economic policy measures, except for the restrictions on the state debt increase. The latter has grown since the beginning of the year by 9.3%, including the foreign debt – by 5.4% up to USD 13.1 billion. The growth of the state debt came as a result of significant deterioration in the balance of payments and its deviation from the level planned. Thus, the current account deficit (hereinafter referred to as CAD) increased from 5.8% of GDP in January-May 2015 to 10.3% of GDP for the same period this year. This is primarily due to the deterioration of the energy commodities trading results and reduction of export earnings from the sale of potash. In particular, in January-April 2016 it was USD 1 billion less mineral products exported than for the same period in the previous year, while the import share declined by USD 550 million only. To mitigate the risks associated with the current transactions status, the EFSD agreed with the Government of Belarus on an additional requirement to the economic policy: further easing of monetary policy should be carried out only in case of CAD reduction. Surprisingly, just in a couple of days after publication of this press release the National Bank arrived at a decision about the next reduction of the refinancing rate and interest rates on liquidity provision transactions. This decision conflicts with recommendations of the international experts (either EFSD or IMF) and involves a number of risks. In the context of high-level inflation and devaluation expectations in the economy (which is recognized by the regulator itself), the decline in the real income could trigger acceleration of the ruble deposits outflow. The cheapening and, respectively, the increase in ruble lending will contribute to the foreign trade indicators deterioration, which in the context of limited gold and currency reserves would lead to weakening of the ruble exchange rate and inflation acceleration.
The Belarusian authorities are obviously aware of the specified risks and expect to prevent the development of negative tendencies, thus creating more favorable conditions for the revival of business activity in the economy. There are actually certain preconditions for this: a certain reduction in inflation expectations should be stimulated by the current inflation slowing down (in June it amounted to 0.4% only, which reduced to 12.1% per annum), as well as the denomination conducted. The restricting factor for the inflationary pressure is also a significant drop in real income of the population (-7%), and a massive outflow of deposits is blocked by the severe provisions on early withdrawal. If in the end there is still a simultaneous outflow of ruble deposits and a growth of loan demand, the additional demand for rubles will be partially absorbed by the substantial excess of liquidity in the banking sector (it amounted to about BYN 800 million by the end of the month).
The level of bank liquidity should also be supported by the newly created Asset Management Agency, whereto the banks will be able to transfer the bad debts of agricultural enterprises in exchange for government securities. The agency is also aimed at reducing the level of problem assets in the banking system, which jumped by more than 7%, in June reaching the level of 13.4%. And the continuing stability of the currency market, which continues to be supported by a significant net supply of currency from the population, strengthens the hands of the authorities. Despite of the fears of many experts that the currency reserves held by the population will soon be exhausted, the net sale of foreign currency by the population reached its peak in July, exceeding USD 284 million.
In this situation, the temptation for the Government to ignore the recommendations of the creditors and try to improve the failing indicators of the economic dynamics (GDP fell by 2.5% in the first half of the year instead of the planned zero growth) turned to be too big. The success of the measures taken by the authorities will largely depend on the situation on the world market. By aggressively reducing the current risk premium at the ruble market, the Government dramatically increases the market sensitivity to any fluctuations of the external environment. For example, a significant drop in oil prices may expand the dynamics of interest rates and undermine all the initiatives of the authorities to reduce inflation.
In general, the authorities declare preservation of the financial stability policy for 2017. The priority of the Government is to reduce the inflation, which is planned at the rate of 9%. To service the financial obligations without further increasing of the state debt, the authorities are planning to ensure the proficit budget implementation. It is planned to minimize the low-priority spending in the public sector (construction, modernization, capital repairs and landscaping), which will reduce the housing commissioning plans by 12.5%. The economic growth as a whole is projected at a modest level of 1.5% of GDP.
The risk of economic recession.
The instruments of monetary policy are actively used by the authorities, but the progress in reforms aimed at improving the competitiveness of economy is still insignificant. The only important event in this regard in July may be considered the adoption of the decree on rehabilitation of distressed agricultural companies. The legislative act turned out quite ambiguous, and its effect will depend on which provisions will be actively applied in practice.
On the one hand, the decree established the mechanism of the change of owner in the problem organization, as well as the mechanism of stimulation of the head of agricultural company through transfer to him of the property share in the company, which in itself is a significant innovation for Belarus. However, at the same time, the decree allows such companies to abuse this situation during their pre-trial rehabilitation. Thus, they are allowed to apply to any debtors with an offer to restructure the debt for a period of 5 years, which may lead to a massive infringement of the economic interests of non-governmental organizations.
Many public initiatives of the authorities look extremely controversial and even voluntaristic. Thus, the Chairman of the Council of the Republic Myasnikovich suggested to punish by judicial procedure the owners of insolvent companies, resulting from the privatization of state enterprises, which obviously will have a negative impact on the investment climate of the country. The authorities are still not ready to the liquidation of inefficient enterprises. Thus, the revival (and actually the reestablishment) of the bike manufacturer “Motovelo”, which has been experiencing significant financial difficulties for a long time, is planned at the expense of resources of the state innovation funds (i.e. actually due to the reallocation of resources of the more efficient enterprises). The decision to change the “Strommashina” company specialization (e.g. switching to production of tower cranes or equipment for the potash mines, which production experience is virtually absent), is being considered on the level of the President and the Minister of Industry.
The risk for economic independence.
Although creation of the basic infrastructure of the Belarusian-Chinese innovation park “The Great Stone” is already in the final stage, the number of its residents is still numerous (only 3 residents are more or less active yet). The moderate criticism of the authorities is caused by the quality of the projects themselves, which are hardly solving the problem of transfer of high technologies to Belarus. Thus, a logistics company China Merchants Group, engaged in building of storage facilities in the park, remains the most active resident. To increase the interest of investors to the project is planned through the system of additional preferences, for which purposes the bilateral commission was created consisting of the Chinese and Belarusian experts. The newly appointed Ambassador to China Kirill Rudoi declared an offer to use the principles of international law applicable to the park, in order to ensure protection of the property investors. This practice certainly would be helpful for development of the institutional environment in the economy of the country, though the probability of its application may be still estimated as low.
Another oil and gas conflict between Russia and Belarus is close to the resolution. According to some reports, Belarus has agreed to pay off the accumulated debt to Gazprom (it already reached USD 270 million as of July), and in return Russia will restore the supply of oil to the previously agreed level. In addition, the Russian authorities are ready to consider the issue of reducing by a quarter the price of gas for Belarus, but in response they demand to revive the so-called integration projects, and actually to allow Russian capital to some Belarusian state property objects. If the authorities of Belarus are able to reach concessions on gas prices and at the same time to slow the negotiations on sale of shares of their enterprises, this will provide a substantial support for the balance of payments and reduce the likelihood of problems in the financial market.
In the context of stabilization on the foreign markets (in particular the oil prices and the Russian ruble factors), the main risks to the economy are still related to the lack of foreign exchange reserves and the growing insolvency of the real sector of economy. And while the problem of size of the gold and currency reserves is being gradually released, the authorities still do not have the answer to the question of how to increase the efficiency of the public sector. There is every reason to assume that the Government will continue the practice of administrative reallocation of resources in the economy, in order to support the problem companies hoping for a significant improvement of the external environment in the coming years.