The risks to economic growth
The situation in the global economy continues to be highly uncertain. Despite a number of positive trends (for example, employment growth in the US economy, a faster recovery in oil demand than expected and stabilization of oil price at the level of USD 40-43), leading indicators signal the beginning of the recovery process only in some of the largest countries (in particular in China, France, Australia). At the same time, for most of the world economy (including the USA, Russia and most EU countries) one can only see the slowing down of the recession. As a result, international institutions continue to worsen the forecasts of the economic recession this year. Thus, according to the European Commission, the forecast for the economic downturn in the Eurozone countries in 2020 has worsened from minus 7.7% to minus 8.7%, and growth in 2021 is expected to reach 6.1% instead of 6.3% according to the previous forecast. At the same time, there are more and more signs of a new wave of the coronavirus pandemic in countries that have previously experienced quarantine restrictions (for example, at the beginning of July repeated restrictive measures were introduced in Kazakhstan, Melbourne (Australia), Israel, and some regions of Spain). The expansion and intensification of pandemic events will delay the revitalization of economies and limit the speed of the recovery process.
In such external conditions, the decline in the Belarusian economy continues to deepen. According to the results of January-May, the decline in GDP amounted to 1.8% compared to the same period last year. A month earlier the decline was 1.3%. The contribution of the sectors to economic dynamics remains the same: the largest drop is observed in industry (minus 3.9%), which is only partially offset by growth in agriculture (plus 4.1%), construction (plus 7.2%) and the information and communications sector (plus 10.4%). At the same time, agricultural growth continues to slow down, and the dynamics of construction can hardly be considered sustainable due to the high dependence on budget financing. It is important to note that, by analogy with 2009, a greater drop can be avoided due to an increase in stocks of finished products (as of early May, their level reached 79.1% of the volume of monthly production compared to 65.2% a year earlier).
In terms of economic policy, the authorities responded to the crisis by expanding the practice of manual management of the economy. So, according to Prime Minister Raman Halouchanka, the Government is the operational headquarters, which, in the continuous monitoring mode, determines measures for targeted support of individual enterprises. At the same time, the priority support (mainly in the form of compensation of interest on loans, granting deferrals for repayment of loans and taxes) is traditionally received by chronically weak enterprises that had systemic problems even before the crisis. Thus, authorities continue to pursue a policy of preserving the existing structure of the economy, effectively creating discriminatory conditions for more viable enterprises. Thus, the amount of preferences and tax incentives for businesses provided under the decree on support to the most affected sectors of the economy (mainly to organizations in the service sector) amounted to only BYN 23 million at the beginning of July.
Moreover, if in previous years the budget was the main source of support for trouble organizations, now the authorities want to increase the role of the National Bank and commercial banks in this process. This is due to a large-scale reduction in budget revenues, which occurred due to the collapse of the economy and the loss of foreign economic income (export duties from the sale of potash fertilizers and petroleum products, as well as revenues through the so-called customs clearance mechanism). Thus, in May 2020, the revenues of the republican budget decreased by 40% compared to May 2019, and the revenues of the general budget of the general government sector decreased by 26%. As a result, by the end of 5 months, the republican budget was executed with a deficit, although in April its surplus amounted to BYN 600 million. Problems with budget execution may be aggravated even more by the increase in labour pensions by an average of 5% introduced on July 1.
In response, the government again increased the limit of direct lending to BYN 1.26 billion, although according to the initial plans it should not have exceeded BYN 740 million. Earlier, the authorities completely declared the complete abandonment of directing lending practices in 2020 as an important element in changing the principles of functioning of the public sector. The pressure on the banking sector to increase its lending activity also grew. So, Aliaksandr Lukashenka ordered the National Bank and the Government to ensure the payment of salaries at enterprises.
Judging by a number of statements by Lukashenka, state investments are also viewed as a key factor in economic growth in the next five-year period. So, it is planned to ensure economic growth at the global average level by returning to the Soviet practices the planning of the list of objects to be built and modernized over the next 5 years. There are issues of funding sources for the next large-scale program of state investments, since state-owned enterprises obviously lack their own resources, and the accumulated state reserves are necessary to service the current state debt. In such a situation, new external loans may become a key source of financing for the announced plans, which is confirmed by the statements of Prime Minister Halouchanka during his visit to Minsk Tractor Plant, the deep re-equipment of which is being discussed by the Government. Realization of such intentions of the authorities will be essentially a repetition of the modernization policy of 2012-2014, the result of which was an increase in public debt and budget expenditures for its servicing, as well as a deterioration in the financial situation at enterprises due to an increase in their debt and low return on investments.
The risks of financial instability
Against the background of the observed economic recession, Lukashenka announced the end of the five-year period of tough financial policy and the transition to its milder version. He demanded that the National Bank more actively reduce the refinancing rate and provide assistance to the Government in paying salaries. Lukashenka also ordered to stimulate the growth of banking resources through various instruments: placing deposits of the Ministry of Finance, easing regulatory requirements of the National Bank and other measures. Formally, the National Bank began to promptly execute this order, but in a very limited format — an extraordinary decision was made to reduce the refinancing rate by symbolic 0.25 percentage points. up to 7.75%. It was also decided to stop attracting banking resources to the deposits of the National Bank, which should push banks to intensify lending to the real sector and interbank lending (in fact, the flow of resources from private to state banks is stimulated). At the same time, the current statistics and research of the National Bank so far indicate rather a tightening of conditions for granting loans and a slight reduction in the volume of lending to organizations.
Active easing of monetary policy can significantly strengthen the negative trends in the financial market that have been steadily observed in recent months. Thus, at the end of June, a net purchase of foreign currency was again observed in the foreign exchange market: the net purchase of foreign currency by the population amounted to USD 77 million, by resident organizations — USD 44 million. At the same time, the population has remained a net buyer for 7 months in a row. There is also a negative situation in the deposit market — the outflow of household funds from foreign currency deposits in May amounted to about USD 70 million, with an increase in BYN deposits only by BYN 14 million. The structure of household deposits is also deteriorating — for example, in the first quarter the share of revocable deposits increased by 10 percentage points. up to 35%. An additional blow to public confidence in the banking system was evidently the decision of the authorities to introduce an interim administration at Belgazprombank, the largest private bank and the third largest bank in the country in terms of assets. The official rationale for such a step is the fight against money laundering and the withdrawal of funds from the country, but there is every reason to consider this decision as politically motivated and directed against the presidential candidate Viktar Babaryka (who headed Belgazprombank for more than 20 years). The authorities’ actions resulted in a large-scale outflow of clients’ resources from the bank (about BYN 1 billion, or about 30% of all client resources), as a result of which the National Bank was forced to provide the bank with liquidity support.
The stability risks of the banking system are also increasing in terms of the growth of non-performing debts, the size of which has increased from 4.6% to 5.7% of the total bank assets over the past 5 months. At the same time, the authorities expect the further growth of non-performing debts to the level of 7% by the end of the year, although this is below the established threshold of 10%.
The most positive event of the month was the authorities’ placing two new issues of Eurobonds totalling USD 1.25 billion. These resources weakened the risks to servicing the current national debt and allowed supporting the falling gold and foreign exchange reserves. As a result, the size of gold and foreign currency reserves increased by USD 916 million and amounted to USD 8.8 billion in June. At the same time, the demand for bonds turned out to be quite high — the preliminary subscription exceeded the amount of the final placement by almost 4 times. This allows the authorities, while maintaining the current situation, to rely on the use of this tool in the future in case of urgent need. At the same time, the cost of borrowing was quite high and amounted to 6.125% and 6.325%, depending on the placement period. For comparison, the cost of borrowing in the domestic market at the beginning of the year was 3.5–4%, and the current yield on 10-year standard US Treasury bonds fluctuates around 0.7%.
The risks to economic independence
Disagreements in relations with Russia remain sluggish. The Russian authorities are restrained in their attempts to exacerbate the current situation in Belarus. Thus, Russia did not express its indignation at the appointment of an interim administration in Belgazprombank, the main shareholders of which are Gazprom and Gazprombank. There is no pressure on Belarus to pay off the debt for the supplied gas, which continued to accumulate in June. Gazprom’s management has so far limited itself to stating that without eliminating the existing debt, negotiations on the price of gas for 2021 cannot be started. At the same time, Russia refuses to revise the current gas price, which for Belarus already exceeds the average export price of Russian gas (USD 127 per thousand cubic meters versus USD 94).
Interaction in the oil sector has entered into a regular mode: pipeline supplies of Russian oil to Belarus in the amount of 5.75 million tons are planned for the third quarter of 2020, which corresponds to the maximum capacity of Belarusian refineries. The Russian authorities do not refuse budget compensation for part of the premium paid by Belarus to Russian oil suppliers. The volume of such compensation will be determined at the end of the year, taking into account the volume of actually purchased oil and will be estimated at USD 60-70 million.
At the same time, the Belarusian authorities are not abandoning attempts to increase the amount of Russian preferences, in particular in the form of compensation for losses from the tax manoeuvre. Thus, the Ambassador of Belarus to Russia Uladzimir Siamashka once again states the issue of returning to integration negotiations after the presidential elections in Belarus. At the same time, for the first time at the official level, the Belarusian authorities recognized that the initial proposals of Russia indeed implied a significant restriction of the sovereignty of Belarus (according to Siamashka, it was proposed to transfer up to 95% of sovereign powers to the institutions of the so-called “Union State of Belarus and Russia”).
The deepening economic recession and a sharp reduction in budget revenues are forcing the authorities to begin a significant easing of monetary policy. Implementation of the announced measures while maintaining an unfavourable external environment will significantly increase the risks to financial stability. A worsening economic situation will weaken Belarus’s position on the depth of further integration with Russia.