The risks to economic security
In May more news than ever were connected to the Chinese factor in the Belarusian economy. Thus, the decree, which provides new serious preferences for residents of the Belarusian-Chinese innovation park “The Great Stone” was signed. According to officials, the authorities tried to accumulate in the park the entire set of preferences that occur in similar free zones around the world, and create the most favorable conditions for investment. As a result, the set of privileges granted is unprecedented for Belarus and, in general, for the countries of the Eurasian Economic Union (hereinafter referred to as the EAEC). The most impressive is the list of tax preferences: the residents of the park are completely exempt from land tax and real estate tax, they receive exemption from income tax in the first 10 years after its appearance, and subsequently pay this tax at a twice reduced rate. They are also exempt from customs duties and VAT on the acquisition of goods and services for the implementation of investment projects. In addition, they were given the opportunity to pay contributions to the Fund for Social Protection of the population based on the average salary in the country, and not on the actual salary of employees.
The residents of the “Great Stone” won’t bare the costs of the Belarusian system of cross subsidization: they will purchase gas and electricity at price without generating profit for energy and gas supply organizations. The administrative preferences will help residents to reduce the costs for cooperation with the Belarusian bureaucratic apparatus: the implementation of administrative procedures for residents will be carried out on the principle of “one station” located directly in the park. The investors were given the opportunity to stay in Belarus visa-free for up to 180 days, the procedure of registering foreign employees will be simplified as well. At the same time, the authorities took the responsibility not to aggravate the conditions according to the decree during the entire period of the park’s functioning (i.e., until 2062). The authorities also simplified the conditions for obtaining the status of a resident: the list of activities of the park has been expanded, and the minimum amount of investment has been reduced from USD 5 million to USD 500 thousand (however, the restriction on their implementation for 3 years has been added).
The authorities were forced to use such large-scale measures because of the weak interest in the park from the side of potential investors. As of May 1, only 9 residents were registered in the park. However, in May this number increased by 4 organizations, and by the end of the year it should increase to 20 according to the calculations of the authorities. However, even if the measures taken by the authorities lead to a serious increase in investment (both Chinese and European) in the park, it will still entail certain risks for the economic system. Providing such impressive tax benefits will negatively affect the Belarusian budget in the future, and an increase in the park’s staff will lead to a further increase in the deficit of the pension fund. In addition, a significant difference in the conditions for doing business will discourage economic activity in other regions of Belarus and lead to a gradual flow of investment to the park. It is not surprising that the heads of the industrial and logistic complex “Bremino-Orsha” when considering the development of the economy of the Orsha district (an increased interest to it arose after mass protests in March) asked Prime Minister Andrei Kabyakou to provide them a system of benefits similar to ones in the “Great Stone”.
The risks of economic recession
Apparently, the authorities are making a serious bet on Chinese credit resources as a source of accelerating economic growth. In May, there was a number of reports about plans to modernize specific enterprises at the expense of Chinese loans. Among these enterprises there are oil refineries (for the purpose of their modernization, aimed at increasing the depth of processing to 90-92% and the increased yield of light oil products, it is planned to raise up to USD 1 billion Chinese resources, machine building enterprises (for modernization of MAZ and BATE USD 500 million are required, for Gomselmash — USD 645 million, for Amkodor’s subsidiaries — USD 340 million), and other large industrial facilities. The government plans to invest BYN 17.5 billion in modernization of the industry by 2030, while Chinese resources are considered to be key there.
In general, it seems that the authorities are once again looking for the possibility of implementing a large-scale modernization of traditional industry, which should improve the efficiency of the public sector and become a substitute for structural reforms. It is indicative that the Government began talking about the active involvement of Chinese credits after Aliaksandr Lukashenka’s visit to the forum “One Belt and One Way”, dedicated to the Chinese mega-project of the new Silk Road.
On the one hand, in case of implementation such policy, the probability of economic destabilization due to a sharp softening of budgetary and quasi-fiscal policies at least will not increase. At the same time, there is an issue of conditions to attract Chinese loans. Granting them under government guarantees will create additional pressure on sovereign debt. In case the implemented modernization does not lead to increased efficiency (as an example we can recall the modernization of cement plants at the expense of Chinese resources or the re-equipment of the woodworking industry), payments on loans will seriously limit budget expenditures and increase the risks of sovereign default. Getting tied loans, the impact of which on economic growth is much weaker, is not so profitable. Moreover, cases of poor performance of services by Chinese contractors and supplies of poor-quality equipment are quite often. In addition, large-scale Chinese credit lines for Belarusian enterprises were opened earlier: for USD 16 billion in 2012 and for USD 7 billion in 2015. However, the demand for these resources was limited, and they were not completely used because of a shortage of efficient self-supporting projects. In this regard, it is not yet clear what has dramatically changed over this time: whether the conditions for granting possible loans have improved or whether the readiness of the Belarusian authorities to increase potential state debt and risk future financial stability has increased.
Meanwhile, according to the assessment of financial funds and expert centers, the potential for economic growth in the coming years is low (for example, according to the assessment of the Eurasian Development Bank, it is 1-1.2% per year. Most of the international financial organizations forecast the economic downturn in Belarus this year: the EBRD — by 0.5%, the IMF — by 0.8%, the WB — by 0.4%. At the same time, official statistics shows economic growth for the second month in a row. For January-April, it was 0.5% compared with 0.3% a month earlier. This achievement is connected with the activity on foreign markets, especially in Russia. Thus, the foreign trade turnover for this period in money terms increased by 20%, and exports to Russia — by almost 38%. However, according to the experts, this recovery is limited, and in the future it will slow down. Serious structural limitations in the Belarusian economy, one of which is the growth of bad debts in the banking sector (the last April reached the level of 14.2% against 13.7% a month earlier will also be restraining economic growth.
The risks of financial volatility
Like before, the main achievements of the authorities are concentrated in the financial sector. Despite numerous fears about the gradual exhaustion of the population’s currency savings, on the market still experiences a substantial net supply. In April, it was observed from the part of both the population (USD 258.5 million) and organizations (USD 125.6 million), and its total size peaked since the beginning of the year. Such a favorable situation allows the National Bank to continue the process of liberalization of the foreign exchange market, an important psychological element of which was the abolition of the need to provide a passport when buying a currency by the population.
The inflation is slowing down even faster than according to all optimistic forecasts — its size in April was 0.7%, and on an annualized basis, consumer price growth was only 6.3%. A further drop in rates is also observed in the deposit and credit market. Thus, the rate for newly issued ruble loans in April dropped to 15.5%. Newly opened long-term deposits are placed by the population on average at 12.3%. The result of this drop in yield was the slowdown in the growth of ruble deposits (in April it was less than 1%), and taking into account accrued interest, there was a net fall. However, this process is insignificant, while the share of irrevocable deposits continues to increase (in March they exceeded 35%, which reduces the risks of deposit holders coming to the banks to take back their deposits. In addition, the observed growth in lending is too weak (for April + BYN 323 million for ruble loans and + USD 98.9 million for currency loans) to absorb the remaining shortage of bank liquidity (at the beginning of June it exceeded BYN 2.6 billion). In this situation, the National Bank continued to reduce the refinancing rate, which from June 14 fell down by 1% to the level of 13%. At the same time, experts of the National Bank expect inflation to accelerate in the second half of the year. This will be connected to both seasonal factors and the activation of consumer demand. If this expectation is justified, then the potential for further rate cuts will be exhausted and the market will expect relative stabilization.
The principle set in the budget (calculation of expenses based on a pessimistic scenario of economic development) allows the Government to execute a budget with a significant surplus, which for January-April amounted to BYN 1.9 billion, or 6.1% of GDP. The existing surplus of funds in the budget makes it possible to cover the deficit of the Social Protection Fund, which during the same period amounts to BYN 400 million, without problems. This plan is expected to be retained in 2018 as well.
After the rapid growth of the average salary in March, its April indicators showed a very slight increase (+ 0.88% to the level of BYN 776.6). In general, the real incomes of the population for the first quarter so far reduced (-2.2%).
The gold and foreign exchange reserves of the country once again experienced an increase, but comparatively small one (+ USD 92.6 million). At the same time, their size still remains significantly lower than the generally accepted standard at the level of a three-month import (USD 5.1 billion instead of the required USD 7.5 billion). The authorities plan to increase them to the level of USD 8-8.5 billion by 2018 without using borrowed sources. The current stabilization of the size of the gold and foreign exchange reserves is largely ensured by refinancing state debt payments through the bonds of the Ministry of Finance and the National Bank. The situation in the domestic money market created comfortable conditions for such placements. So, in May the National Bank successfully placed its bonds with a yield of 5.33% and 4.97%. At the same time, the size of the unsatisfied demand for these securities remained quite significant (for example, during the last auction, the issue volume was only USD 105 million at a demand of USD 268 million).
To maintain the stability achieved in the medium term, large external borrowings are still important: attracting the next tranches of the Eurasian Stabilization and Development Fund loan, the requirement for which is the deepening of public sector reforms; placement of a new issue of Eurobonds; obtaining an intergovernmental Russian loan (the amount of the latter is expected at the level of USD 700 million; further negotiations on a possible program with the IMF.
The improvement of the foreign trade situation contributes to a slight acceleration of economic growth in Belarus. Stimulating influence on the economic dynamics is also provided by the increase in lending against the background of falling rates on the money market. The latter became possible due to a record slowing of inflation and the preservation of the situation of excessive supply in the foreign exchange market. At the same time, the potential for further growth remains low and the authorities’ strategy to increase it is not yet visible. At the same time, there are signs of a readiness to return to the practice of large-scale state investments, this time at the expense of Chinese credit resources.