The risks to economic independence
Key problematic issues of relations with Russia are still unresolved. There is no formal progress in obtaining compensation for losses from the tax manoeuvre in the Russian oil sector. The provision of the promised intergovernmental loan and the last tranche of the loan of the Eurasian Fund for Stabilization and Development is delayed. More than 100 Belarusian meat and dairy producers are still subject to restrictive measures by the Rosselkhoznadzor (Russian agriculture regulative body). The amount of damage to the Belarusian refinery and the economy as a whole due to the supply of low-quality oil can be determined only at the end of 2019. The Russian authorities ignore the question of agreeing on a new gas protocol, which should determine the price of gas for Belarus in the coming years. Moreover, the issue of harmonization of gas prices is directly linked to decision-making on deepening integration within the framework of the so-called “Union State of Belarus and Russia”.
At the same time, the Belarusian authorities continue to hope for a warming of bilateral relations. Thus, Ambassador of Belarus to Russia Uladzimir Siamashka stated that the Russian government has an understanding of the need to compensate for losses from tax manoeuvre and the parties have already begun to substantively discuss the mechanism of such compensation (for example, through a reduction in the price of oil or in the form of intergovernmental transfers). The change in the tone of the negotiations between the authorities of Belarus and Russia was noted by the Fitch rating agency in its regular review.
Although Siamashka’s statement may once again prove to be overly optimistic (he had previously stated that the agreement on the oil issue was almost made in February this year), the Russian authorities can really make concessions to the official Minsk against the background of formal progress in integration issues. Despite the fact that the integration plan was not published in the announced timeframe (it should have been presented to the public at the end of June), Russian Prime Minister Dmitry Medvedev expressed satisfaction with the progress of the work of the integration governmental groups. According to him, the parties finally began to speak the same language and reached agreement on most of the issues. Later, the Minister of Economic Development of Russia, Maxim Orshekin, assessed the readiness of the integration program by 90%. The remaining differences, mainly related to financial and credit, budget, tax and social policies, are planned to be discussed at the next meeting of Vladimir Putin and Aliaksandr Lukashenka in the second half of July. The work of government groups should result into a set of thematic road maps (according to the Minister of Economy of Belarus Dzmitry Krutoy, there will be about 10 of them), which will be finally ready by November 1 of this year.
If the Russian authorities are really satisfied with the integration process, this should make Russia’s position on the controversial issues more loyal. As a result, the Belarusian economy will be able to count on obtaining Russian loans and improving conditions in the oil and gas sector. The potential price for the obtained preferences is still unknown. Will the Belarusian authorities once again follow the path of delaying the implementation of the announced plans?
The risks of financial instability
Due to the strengthening of the RUB and the stable value of the currency basket, the rate of BYN versus the USD in June increased by more than 3.2%. Since the dollar is the key factor in shaping the population’s expectations, favourable trends in the country’s money markets are observed. Thus, the excess supply in the foreign exchange market is recorded both from the population (by more than USD 50 million) and organizations (by USD 86 million). Growth in household savings continues in BYN segment (+ 1.5%) and in foreign currency deposits (+ 0.04%). It is important that this trend continues against the background of a certain drop in rates, which began after a small increase in the beginning of the year. The next acceleration of inflation that occurred in May did not have a noticeable impact on the money markets: because of the rise in prices for some food products, the consumer price index on an annualized basis reached 6.2%, which is significantly higher than the 5% level planned by the authorities.
Despite the problems with obtaining Russian financing (in particular, the promised intergovernmental loan in the amount of USD 600 million and the last tranche of the EFSD loan in the amount of USD 200 million), the authorities do not have any visible problems with the servicing of public debt. The country’s foreign exchange reserves, with a stable amount of foreign debt, show growth above the planned level: at the end of June, their size almost reached USD 8.3 billion, which is only slightly less than the historical maximum. In the current situation, the key source of funds for servicing the public debt was the domestic market, where the authorities were able to attract an amount of about USD 500 million from the beginning of the year (though USD 300 million of them most likely are the Development Bank money previously attracted by placing Eurobonds on the Irish Stock Exchange). Also, according to the authorities, they held a series of fruitful negotiations, which will make it possible to close the country’s need for external financing until the end of this year and form a reserve for 2020. First of all, it concerns the attraction of a loan from the Bank of China in the amount of about USD 500 million and an entering the Russian market with sovereign bonds in the amount of about USD 150-230 million.
The reverse side of the activity of the authorities in attracting foreign borrowings should be the almost inevitable growth of external public debt. An additional factor in its increase may be the authorities’ plans to change the budget policy in the coming year. So, after several years of significant budget surplus, directed to repay external public debt, the Government announces the transition in 2020 to a balanced budget policy. At the same time, additional resources are planned to be spent on increasing the income of state employees and financing investment expenditures, including in the area of housing construction. It should be noted that the relaxation of fiscal policy announced by the authorities can be accompanied by the transition of the economy to the recovery phase of the financial cycle (according to the National Bank), which is characterized by an increase in consumer and investment optimism. This situation threatens to intensify the risks, traditional for the Belarusian economy, in particular, the inflation risk and the risk to the trade balance associated with the potential growth in consumer and investment imports.
The risks to economic growth
GDP growth in Belarus in January-May has slowed and amounted to 1% against 1.4% a month earlier. At the same time, a deterioration in the dynamics is observed in all major sectors of the economy: for example, the growth in industrial production was only 0.3% (in January-April it was 1.2%), the growth in retail trade turnover slowed down from 5.9% to 5.6%, a decline in agriculture accelerated to 1.3% after 0.6% a month earlier. At the same time, the growth of real incomes continues to demonstrate a disproportionately high level and even accelerated last month (from 7.4% to 7.6%).
The main reason for such economic results was a significant reduction in exports. Thus, the volume of merchandise exports in January-May 2019 decreased by 2.7% compared to last year. The worst results were demonstrated by the export of petroleum products (minus USD 421.9 million) due to two factors: the ban on re-export of Russian petroleum products, which began to operate in November 2018, and problems with the supply of poor-quality oil to the Belarusian refineries in April-May. Negative prospects for agriculture are emerging as well: due to adverse weather conditions, this year’s crop is forecasted to be only slightly higher than last year (7.6 million tons against 7 million tons) and will not reach the planned level of 8.5 million tons.
Thus, even with the revival of oil refining after the restoration of pure oil supplies, the plans of the authorities for economic growth for 2019 are becoming less and less achievable. At the same time, not only the optimistic plan for GDP growth by 4%, but also the conservative forecast for economic growth by 2.1%, included in the budget, is under the threat of not being fulfilled. It is significant that the slowdown of the Belarusian economy is taking place against the background of improved external conditions for developing countries. The stated willingness of the US Federal Reserve to switch to a discount rate stimulates commodity markets and contributes to the flow of capital into emerging markets. In such a situation, there are questions about the political reaction of the country’s authorities to sluggish economic growth during the pre-election period.
The current situation once again actualizes the issue of the low efficiency of the Belarusian economy, especially its predominant public sector. In terms of structural reforms, the plans of the authorities for 2020 so far are limited only to a further reduction of financial support for the public sector of the economy. Thus, the government is announcing a gradual transition to a mechanism to stimulate only export operations, and is also preparing to freeze the provision of state guarantees to enterprises. At the same time, officials explain the reduction of state support by a decrease in the need for it due to the growing efficiency of the state sector of the economy. At the same time, current statistics shows the opposite situation: the financial position of the real sector of the economy remains not so good. Although the volume of net losses in January-March of the current year slightly decreased (from BYN 870 million to BYN 707 million), the share of unprofitable and low-profitable enterprises continued to grow (from 58.1% to 60.9% of all organizations in the country). The share of organizations without working capital is significant (31.8% compared to 31.9% last year). After changing the methodology of calculating problem banking assets in May 2018, the size of non-performing loans continues to grow: at the beginning of June it was 5.9% compared to 4% a year earlier. In such a situation, a simple reduction of state support without changes in management and social guarantees is fraught with further degradation of the public sector and an increase in social tensions.
The issues of relations with Russia in the oil and gas sector remain unresolved, and Russia links the very fact of their resolution with the deepening of integration projects. The current situation in the economy continues to be characterized by financial stability against the background of low economic growth and maintaining the difficult financial situation of a significant part of enterprises. In connection with the presidential electoral campaign planned for 2020, the authorities are ready to soften fiscal policy, creating additional risks for public debt and inflation.