The risks of financial volatility
By the end of March, we can state the decrease of both positive and negative trends observed in the financial sector earlier. So, in the banking market, the situation of liquidity shortage, which led to the growth of credit and deposit rates, was finally overcome. Throughout March, the National Bank did not carry out credit auctions, and in early April, excess liquidity in banks exceeded BYN 300 million. This in turn became possible due to the continued increase in population deposits. In addition to the usual increase in BYN deposits (+ 2.2% in February), for the second consecutive month, the foreign currency accumulation grew a little bit. The situation on the foreign exchange market remains favourable for BYN: the net sale of currency in February was performed by both legal entities (USD 3 million in equivalent) and the population (almost USD 160 million). The rates in the money market stabilize as well, reaching some kind of “plateau”. The National Bank at a quarter meeting refused from lowering of the refinancing rate (despite it has become a traditional measure), shifting the nearest possibility of such a step to June. The National Bank justified its decision by the fact that, despite the predictably low current inflation (4.9% year-on-year), the level of inflationary expectations of the population is still significant. Following the recommendation of the Eurasian Stabilization and Development Fund (hereinafter ESDF), there were measures to limit the growth of consumer lending, which continues to grow actively at the beginning of this year. So, for the first two months, the debt on consumer loans increased by 5.5%, for mortgage lending — by 2.2%. As a result, from May 1, the National Bank introduces a credit limit on individuals, according to which payments on loans should not exceed 40% of their income.
The main internal risks for the financial sector are still related to the possible administrative growth in the incomes of the population. Although, according to the February statistics, the average salary continued to decline and dropped to BYN 850, the authorities continue to voice ambitious plans for its growth. For example, the Ministry of Industry claims to achieve an average level of wages of the level of 1000 already in the first half of the year. Significant increments to existing salaries are also offered for employees of the Ministry of Education system (50% for educators and 20% for teachers). The policy of stimulating the incomes of the population can become even more active in case of a referendum in late 2018 — early 2019, the possibility of which is already discussed at the official level. At the same time, outstripping growth of wages over productivity growth creates serious inflationary and, accordingly, devaluation risks, which was noted by the National Bank in its last press release.
The IMF experts announced significant risks of BYN devaluation in the event of softening the policy by the authorities. They justified this by the country’s high need for foreign exchange financing against the background of a low level of its gold and currency reserves. But in February the latter grew and again exceeded the level of USD 7 billion, which became possible due to placement of Eurobonds in the amount of USD 600 million. The authorities are considering the possibility of placing sovereign bonds, including nominated in BYN, to the Asian market as well. The placement of foreign currency securities in the domestic market is quite successful: for the first quarter, the National Bank sold them for USD 265.5 million (with the placement rate rising from 3.3% to 3.8%), the Ministry of Finance — for USD 80.6 million and EUR 47.3 million. There are still negotiations on the next tranches of the ESDF loan, which, due to Belarusian authorities’ failure to achieve the parameters of the anti-crisis program, have not been provided within the expected timeframe. The claims of the ESDF to the Belarusian government are quite serious and require the authorities, among other things, to take unpopular measures: for example, to increase the level of population’s compensation of the communal services cost to 70%. If the Fund is not ready to mitigate its demands, it is quite possible to expect that these tranches will not be provided at all, just like it happened in the similar situation with the last tranche of the stabilization loan of the EurAsEC Anti-Crisis Fund in 2013.
The budget surplus is quite impressive: according to the results of two months, it reached a record level of 7.6% GDP. This is due to more favourable macroeconomic conditions in comparison to the forecasted ones (for example, the current price of a barrel of Brent crude oil is about USD 67-70 instead of the expected USD 53, RUB rate has strengthened to 56-57 RUB / USD instead of the forecasted 60.3), as well as to seasonal shift in the balance of income and expenditure. The budget surplus is a key source of servicing external debt and allows the government, as required by Aliaksandr Lukashenka, to reduce the national debt (in January-February it decreased by 1.7%). At the same time refusal to refinance debt and use only a budget surplus for these purposes will significantly reduce the potential for economic growth. Without achieving sustainable economic growth, such measures will mean a transition to a policy of tightening the belts, which is fraught with falling into the poverty trap.
The risks to economic growth
The increase in GDP in January-February 2018 amounted to impressive 5.6% with a quarterly growth rate of 2.1%. This increase is due to a number of factors: the methodological peculiarities of comparing the results to the same period of the last year (when the recession at 1% was observed), the weather factor of a colder winter, increasing GDP of the energy sector, as well as a certain revival of domestic demand. Positive dynamics is recorded in all segments of the economy, and the maximum growth rate is observed in industry (+ 10.3%), the leaders in terms of growth are machine building (+ 28.7%) and refining (+27.5). At the same time, the possibility of maintaining such dynamics in the future is doubtful: the main factors of the economic growth of 2017 are losing their relevance at the present time. So, according to experts’ forecasts, there is no serious potential for further growth in the price of oil and potash fertilizers, the GDP growth in the main trading partner countries remains very moderate (2% in Russia, 1.8% in Ukraine), the consumer lending boom is nearing completion (under the influence of measures of the National Bank and for natural reasons).
The restriction on increasing the national debt and the possible change in the management policy rises the issue of financing the state investment programs. Thus, large-scale modernization projects of the government of recent years were accompanied by an active accumulation of external debts. At the same time, the modernization failed to accelerate economic growth in the country and create sufficient sources of service for the government’s obligations: some projects (such as the modernization of dairy farms) were not fully implemented, and many implemented projects operate with low capacities usage or significant losses: for example, cement plants or Belgee plant.
The way the authorities see ways to increase the efficiency of the public sector can be seen from the results of a large meeting with President Lukashenka on the problems of the agro-industrial complex. Despite significant state investments, this sector of the economy continues to be one of the most problematic. So, about 60% of agricultural organizations are unprofitable or low-profitable, the average salary in the industry is more than 30% lower than the average in the economy. The agricultural organizations are traditionally experiencing problems with the independent financing of the sowing company: in 2018, the shortage of funds for these purposes reaches BYN 1.5 billion. Lukashenka sees the resolution of the voiced problems in increasing the discipline, which is planned to be strengthened by the vertical system of power and the increased role of law enforcement agencies in operational control of farms. In particular, it is proposed to create interdepartmental commissions from the employees of the Prosecutor’s Office, the Ministry of Internal Affairs and the State Control Committee to identify the facts of corruption and mismanagement. By analogy with Soviet practice, it is proposed to involve the police to monitor the availability and serviceability of equipment before the seeding. At the same time, no measures are being taken to economically stimulate the heads of agricultural enterprises and their employees. It is suggested to attract people into the industry by the measures like deferment of conscription to the army for young machine operators.
Another typical solution is the initiative of the authorities to create a “ministry of the future”, which should oversee the sphere of IT and can be created on the basis of the Ministry of Communications. Apparently within the ideology of the authorities, the rapid growth of this sector, where the export in 2017 exceeded USD 1.2 billion, requires the creation of a special bureaucratic apparatus that, through administrative practices, should stimulate and guide its development.
The risks to economic independence
Another “milk war”, which could begin in March on the initiative of the Russian authorities, never took place. The Ministry of Agriculture and Food has refused plans to introduce a ban on import of Belarusian dairy products since March 15, which is apparently connected with the deficit in the Russian market. For example, Russia satisfies about 25% of its demand for dairy products at the expense of imports (source), the lion’s share of which (about 86%) falls to Belarus. At the same time, there is still a certain tension in this issue between the countries. Lukashenka expressed his dissatisfaction with the unjustified claims of Russia of the quality of Belarusian products and suggested more active exploration of alternative markets. A similar opinion was later voiced by the minister of Agricultural Development of Russia Alexander Tkachev, who expects a gradual refusal to import milk against the backdrop of the development of Russian producers in 5-7 years. However, taking into account Russia’s share in the export of Belarusian agricultural products (more than 90%) and the closure of the EU market, this task is virtually impossible.
The impressive economic growth in the first months of the year is largely connected to statistical and seasonal factors, so its dynamics is unlikely to be sustainable. When solving problems of increasing the efficiency of the public sector, the authorities are still inclined to use the administrative methods, while we can state the growth of the influence of the law enforcement agencies on the economic management. Against the background of continued financial stabilization, the main risk of destabilization is a possible policy of stimulating the growth of incomes of the population.