The risks to economic growth
In addition to the global crisis associated with the coronavirus pandemic, the political crisis resulting from the presidential elections is becoming an important factor for the Belarusian economy.
After the disastrous second quarter, the situation in the global economy is currently developing according to a rather optimistic scenario. The recovery processes in July were already recorded in most of the largest economies, and expectations about a further recovery in the V-shaped model increased. Oil prices are showing stronger growth than previously expected — for example, in July, the price of Brent crude oil stably consolidated above USD 42 per barrel. The fall down of the Russian economy in the second quarter turned out to be significantly better than expected (8.5% against the expected 10%). The leading indicators signal the transition of the Russian economy into a phase of active recovery in July. At the same time, the risks associated with super-soft financial policies in the United States and other countries began to increase significantly. Thus, in July, the US recorded a sharp upward reversal of inflationary trends. This, in turn, led to an increase in the yield on US bonds and created the preconditions for capital outflow from risky assets, incl. from emerging markets.
The scale of the impact of the political crisis on the country’s economy is not yet clear and largely depends on the way it is resolved. However, in any case, it will be accompanied by a deterioration in the economic expectations of the population and business, which will result in pressure on consumer and investment demand. The forceful scenario of retaining power will be accompanied by international economic sanctions and will lead to a significant deterioration of the investment climate in the country. The prospects of the Belarusian IT sector will also seriously deteriorate. The dynamics of IT will stagnate or even become negative. For example, some of the largest companies are already announcing plans to relocate key employees. Large-scale strikes by state-owned enterprises can also be a blow to the budget and GDP if they are implemented.
At the same time, the current dynamics of GDP is much better than experts’ expectations. Thus, the economic downturn in the first half of the year slowed down from 1.8% to 1.7% of GDP. The IT sector, agriculture and construction remain the key drivers of the economy, while the decline in industry is 3.1%. A deeper decline in industrial production and the economy as a whole was avoided due to the policy of increasing warehouse stocks. Their level as of early July amounted to 78.1% of monthly production, which is a record value for this month since 2014. According to some calculations, without continuing to “work for the warehouse”, the fall in the economy in the first half of the year would have been 5%, since the aggregate demand during this period decreased by 20%. At the same time, the use of such a practice will constrain economic growth in the future, since enterprises will have to sell off accumulated balances as demand recovers. In addition, investment in finished products significantly puts pressure on the current financial condition of enterprises, which already often experience problems with working capital.
At the same time, the authorities are optimistic about the dynamics of the economy both in the current and next year. So, by the end of 2020, the authorities expect the economy to reach zero growth, and the target GDP growth in 2021 is 3.5%. The authorities see the sources of such growth in the recovery of external demand (this should provide 1.9 pp of GDP growth) and more active support for domestic demand, including by strengthening protectionism. At the same time, the issue of how the current government is going to solve the traditional problems of the Belarusian economy, in particular the low efficiency of the large-scale public sector, is still unresolved.
The risks of financial instability
To support the economy during the current crisis, the Belarusian authorities continue to soften their financial policy. If earlier the easing concerned mainly monetary policy (the National Bank reduced the refinancing rate and weakened regulatory norms), now a significant weakening is observed in terms of budgetary policy. Thus, according to the results of the half-year, there is a sharp increase in the budget deficit to BYN 1.78 billion. The authorities plan to further increase the deficit, and according to their estimates, by the end of the year it may reach BYN 5 billion. The rapid growth of the deficit is explained both by a reduction in revenues (primarily income tax, income from dividends and export duties), and by the need to finance additional costs (in particular, health care systems and to support the economy). The unused budget balances accumulated over previous years, the size of which at the beginning of the year amounted to about BYN 4 billion, should become the key source of budget financing. At the same time, as early as 2021, the authorities declare a return to a deficit-free budget. In fact, the basis of the current policy of the authorities is the maximum use of resources in the short term, counting on the revival of economic activity from the beginning of 2021. At the same time, budget expenditures for the next year are optimistically planned based on the growth of the economy by 3.5%.
The measures of the National Bank in the field of monetary policy gradually began to manifest themselves in the credit market. The strongest changes are observed in the interbank lending market, caused by the National Bank’s refusal to attract banking resources to its deposits. As a result, the volume of transactions in the interbank market increased sharply (in July the total volume of transactions amounted to BYN 1.9 billion compared to BYN 960 million in June), and the average rate fell to 4.83%. At the same time, a sharp increase in lending to the economy, including the public sector, despite some concerns, has not yet been recorded.
A significant easing of monetary policy creates inflationary risks, which are further exacerbated by rising inflationary expectations amid the political crisis. It is the surge in inflationary expectations that the National Bank explains the refusal to cut the refinancing rate at its regular meeting. At the same time, the regulator focuses on the reduction of savings by the population in an organized form — this is evidenced by a simultaneous decrease in the size of deposits and an increase in the purchase of cash currency. Thus, the net purchase of foreign currency by the population in July amounted to USD 215 million, of which almost USD 69 million was a net purchase of foreign currency in cash.
In fact, the inevitable international sanctions following the results of the presidential elections create additional risks for the national debt, since the government’s access to the world financial market may be worsened or even blocked. The risks of such a scenario have already been announced by the S&P agency, hinting about the possibility of revising the credit rating of Belarus for this reason. At the same time, the expectations of the introduction of sanctions have already affected the quotations of the Belarusian Eurobonds, the current yield on which has grown close to the level of 10%.
At the same time, in the short term, the authorities retain the ability to neutralize emerging shocks and maintain financial stability at the expense of accumulated gold and foreign currency reserves. The size of the latter even slightly increased over the past month (albeit mainly due to the growth in the cost of gold) and amounted to USD 8.86 billion on August 1. At the end of the year, according to the authorities’ calculations, the level of gold and foreign currency reserves should be no less than the planned USD 7.3 billion, from which one can conclude that the authorities plan to actively use the gold reserves for current payments on external debt.
The risks to economic independence
The deterioration of relations with the West sharply narrows the room for manoeuvre for the Belarusian authorities in negotiations with Russia on deepening integration within the Union State. At the same time, there is no doubt that the Russian authorities will actively use the current situation to advance their own integration agenda. The issue of the package signing of the remaining 2 out of 30 integration roadmaps related to the general tax policy and policy in the fuel and energy sector is being updated again. Moreover, Russia may increase the pressure to sign the 31st roadmap, which implies the creation of common supranational bodies and a single currency. The Belarusian authorities will be forced to soften their position on other problematic issues — in particular, to pay off the accumulated debt for gas, which already exceeds USD 250 million, to resolve the situation with Belgazprombank.
The key factor seriously aggravating the problems of the Belarusian economy is the political crisis that erupted after the next presidential elections. The development of the situation according to the scenario of retention of power by force creates serious threats to the development of economic potential, servicing the state debt and maintaining economic sovereignty.