The risks to economic growth
Despite some slowdown, the growth of the Belarusian economy continues to exceed the expectations of experts and the Government’s forecasts. The main driver of GDP growth (+4.8% in January-April) is industry: it grew by 9.6%. After the failures of the previous years, the construction shows good dynamics: + 5.9% for the abovementioned period. Against the background of the exhaustion of the low base factor at the beginning of last year, the formal dynamics of economic growth will continue to slow down. However, the Government’s annual plan for GDP growth of 3.5% no longer looks too optimistic, and is realistic to be achieved in case favourable external conditions are maintained. The forecasts of international funds also change positively: for example, the EBRD increased the assessment of the growth of the Belarusian economy to 3% in both 2018 and 2019. The main reasons for optimism were the economic recovery in the region, incl. thanks to the restoration of the Ukrainian economy and the rise in commodity prices. In May, the price of oil was in the range of 75-80 USD/barrel, and according to some forecasts, in case of US imposing sanctions against Iran it could grow to the level of USD 100. As a result, the situation on foreign markets contributed to the growth of Belarusian exports in the first quarter by more than 25% against the level of the previous year. At the same time, the external positive is restrained by a rather modest forecast of economic growth in Russia: according to the expectations of the EBRD, it will amount to only about 1.5% in the coming years. The risk of sanctions is pressing on the Russian economy: it will be extremely difficult to assess the potential losses.
Along with the favourable external conjuncture, the factor of domestic demand is also growing. According to experts of the Russian Sberbank, the stimulation of domestic consumption is the basis of the observed economic growth. Thus, the positive dynamics of retail trade in January-April amounted to 9.8%, which in turn became possible due to the growth of real incomes of the population by 7.6%. Just like in the second half of 2017, consumer lending shows an impressive growth: almost 13% in 4 months.
At the same time, the prospects for accelerating growth of the economy in the medium term remain uncertain, and, according to the EBRD, are related to the structural problems. The problem of regional and sectoral imbalances remains acute, as a result of which positive economic dynamics remain invisible to a large part of the population. Apparently, the Government will respond to these problems with the so-called “New industrialization” program, the number of mentions and discussions of which has increased dramatically over the past month. According to the officials, the draft of this program is a list of 1,742 investment projects that are grouped into three groups: import substituting projects (while importing the EEU countries as a whole), joint Belarusian-Chinese projects and regional projects aimed at using specific territorial advantages. According to the authorities’ estimates, the implementation of the program will annually add 2 pp to the economic growth.
At the same time, the issue of funding sources for these plans is unresolved. Further active attraction of Chinese loans will lead to an increase in the national debt, the level of which, taking into account the size of state guarantees, has already approached the upper threshold of the safe level (about 60% of GDP). In addition, a significant part of Chinese projects can not boast of successful results, ensuring an appropriate return on spent investment. The authorities’ calculation of attracting other foreign investments looks too optimistic: the practice of placing investment proposals on the websites of local authorities is not new, and it has not yet led to a noticeable increase in investment activity. The experience of large-scale state investments in Belarus has already shown its inefficiency: the use of budgetary resources limits the possibilities for financing social programs, the enthusiasm for emission sources undermines financial stability, and the effectiveness of implemented projects has often been extremely low.
If the massive use of budgetary and emission resources to finance state investments is not likely to be implemented in connection with existing negative experience, then the gradual increase of state investments seems to be quite possible scenario of the Government’s policy. One of such significant projects may include the modernization of the “Hrodna-azot” enterprise: specific decisions regarding its development were taken directly by Aliaksandr Lukashenka. The president’s instructions to develop the production of sports equipment and musical instruments in Belarus, which can’t be economically justified, demonstrate the mechanisms for taking investment decisions.
The risks of financial volatility
Despite the statement by Vice Prime Minister Vasil Matsiusheusky about the deflation observed in May, inflation risks in the economy are gradually increasing. At the end of 4 months, inflation exceeded the level for the same period last year (2.8% against 2.4% a year earlier) and amounted to almost half of the annual forecast. The inflationary processes will be stimulated by the expected rise in price of gasoline, which in case of reaching the level of the Russian market can amount to 24%. Inflationary pressures are exerted by accelerated wage growth, which is much higher than productivity growth in the economy (13.8% vs. 5.9% in the first quarter). Gradually, the situation on the foreign exchange market becomes less favourable: the net sale of currency by the population decreased by 37% compared to the previous year (to USD 450.5 million compared to USD 716.7 million in 2017). The growth of inflationary expectations can also be explained by the growth rates on the deposit and credit markets. And if in the previous months this trend was noticeable only on the BYN market, then in May it could be observed in the currency segment. Such dynamics in general is typical for the markets of developing countries against the background of growth of US Treasury bonds and the growth of global uncertainty. In such circumstances, the National Bank in June will have to make a difficult choice about the further dynamics of the refinancing rate.
Although the safety margin of the financial system is gradually decreasing, its current state remains stable. Due to unplanned income at the beginning of the year the budget surplus remains at a record high level (almost 10% of GDP, or BYN 3.5 billion). The government is also gradually reducing the external public debt, which since the beginning of the year decreased by 1.9% (USD 315.6 million) to USD 16.4 billion. To a large extent, however, this reduction is financed by the accumulation of domestic public debt, the growth of which amounted to BYN 262 million since the beginning of the year. The gold reserves of the country remain stable at around USD 7 billion. They even slightly increased in April due to the purchase of currency in the domestic market by the National Bank.
The risks to economic independence
In May, Vice Premier of China Wang Qishan visited Belarus. One of the objectives of the visit was to study the further development of the Belarusian-Chinese industrial park “Great Stone”. In comparison with previous years, activity around the park has certainly grown. In May, the number of residents of the park increased to 35, and the German group of companies Duisburger Hafen, which bought the total share of 0.84% from Gorizont and the Minsk City Executive Committee, joined the shareholders. The administration of the park finally announced the commissioning of the first three production lines. At the same time, the financial performance of the park is not impressive. Current investments in the park are estimated at USD 300 million (a significant part of which is obviously Belarusian investments in infrastructure). With a positive scenario by the end of the year they can reach only USD 500 million. For example, the potential investments of Duisburger Hafen, the manager of the largest river port in Europe, are estimated at a rather modest level of EUR 30 million.
The investment attractiveness of the park as a point of entry to the Russian market is clearly not conducive to the periodically arising trade conflicts between the allied countries. Another one happened in early June and is associated with the introduction of a ban on the import of some dairy products from Belarus. The unexpectedness of the Rosselkhoznadzor’s (the institution regulating the Russian agriculture product market) decision is caused both by its announcement without previous warnings and its adoption in the absence of an approved Government. At the same time, the allied bodies of the EEU once again demonstrated their inability to prevent the use of protectionist measures by the countries of the Union. The hope for the WTO as a tool for resolving such disputes after Belarus’s accession to it, expressed by some Belarusian officials, also looks naive: the prestige of the organization on the world stage after Donald Trump administration started a series of trade wars is clearly falling. Moreover, earlier, the WTO could not help some post-Soviet countries in the situation of unjust trade restrictions on the part of Russia.
Inflation risks, due to a number of internal and external reasons, continue to increase, while the current financial situation remains stable. Negative trends related to the stimulation of incomes of the population can significantly increase in case of activation of state investments in the framework of the new industrialization program. Again, the issue of Russia’s usage of protectionist measures aimed at protecting the domestic market from Belarusian producers is becoming urgent.