The risks for economic growth
The key factor determining the state of the country’s economy is the external demand environment, which has significantly deteriorated amid the crisis in the global and Russian economies. The gradual easing and lifting of quarantine measures in the EU and Russia will push the revival of economic activity, but it is still unknown according to which model the global economy will restore. So, judging by the euphoria prevailing on world stock markets (for example, the American Dow Jones and S & P500 indices are approaching the historical highs of the beginning of the year, and the Nasdaq technology companies index has already exceeded it), we can conclude that there are expectations of recovery by the V-shaped model (sharp recession is replaced by the same sharp increase). At the same time, the forecasts of international organizations are more restrained, and for many countries they look U-shaped (recovery occurs with some delay) or even L-shaped model (slow recovery after a significant decline). Thus, according to the latest World Bank forecast, the global economic decline in 2020 will amount to 5.1%, and its growth in 2021 by 4.2% will be insufficient for a full recovery. The key trading partners of Belarus are expected to have even more difficult situation: the Eurozone economies may fall by 9.1% this year with a subsequent recovery of only 4.5%, while the Russian economy may decline by 6% in 2020 and grow only by 2.7% in 2021.
Estimates of the Russian authorities are more optimistic, but they do not expect the Russian economy to recover before June 2021. At the same time, investment demand will suffer the most (its annual decline is estimated at 12%), because companies will be forced to change the cost structure in favour of increasing the share of wages.
Unfavourable trends are forming in the global food market, as prices for most types of agricultural products (including dairy products and most meat products) continue to fall. Food market stagnation, in turn, has a deterrent effect on fertilizer markets, including potash fertilizers.
In such conditions, the demand for key export positions of the Belarusian industry and agriculture is under serious pressure. As a result, over the 4 months of the year, the country’s GDP decline accelerated from 0.3% to 1.3%. At the same time, according to some estimates, directly in April the decline of economics amounted to 4.8%, and industry decreased by 7%. A large drop was avoided due to the positive dynamics of three sectors: agriculture, construction and IT services. At the same time, the role of the export of IT services in the economy continues to increase: in the first quarter it amounted to USD 0.64 billion, adding almost 30% year on year. However, certain negative trends are already observed in the IT sector, in particular, a net outflow of employees, recorded for the first time.
In early June, the uncertainty regarding the timing of the restoration of external demand was accompanied by a rather unexpected change in the economic bloc of the Belarusian Government and the resulting uncertainty regarding its future policy. Based on the public statements of Aliaksandr Lukashenka, it can be assumed that such a decision is not just a change of personalities, but also a change in the model of the Government as a whole. In this case, the new Government will be more focused on the execution of instructions of the ruler and his administration, and the practice of manual control of the economy will expand. Thus, according to Lukashenka, the new Government should tackle the issue of protecting the domestic market more closely, as well as strengthen production and technological discipline in enterprises. One can also expect increased pressure on the banking sector, including the active promotion of the idea of buying shares in the real sector by the banks.
With such a disposition, the chances are not high that the new Government will continue the attempts of their predecessors to advance the anti-crisis program for fiscal support of consumer demand. Thus, the anti-crisis measures taken by the authorities remain quite limited, and many proposals of the previous Government were rejected by the Presidential Administration or approved in a reduced form. So, the initiative to increase unemployment benefits to the level of a living wage, which the old Government had already announced and which could become a landmark event for the country’s economic policy, was not implemented. As a result, the introduced only surcharges to certain categories of workers up to the minimum wage level, and only in case of such decision of local authorities. One can’t expect the sectoral support to the affected sectors of the economy, while the decision on targeted assistance to individual enterprises will be taken separately in every case.
The rapid deterioration of the budget execution situation will also have a negative impact on GDP growth. According to the Ministry of Finance, in January-April 2020, state budget revenues only in nominal terms decreased by 5.7% compared to last year. At the same time, directly in April, the decline in the republican budget revenues amounted to 19%, and in the budget of the general government sector – to 22.9%. As a result, the authorities are forced to work out a plan to reduce capital expenditures, the details of which have not been publicly disclosed. According to some sources, there are the ideas like attracting private sector organizations to finance capital expenditures.
In the context of the Government change, the plan of the authorities to attract loans of international structures in the amount of USD 2.5 billion to finance additional budget expenditures, previously announced by the previous Council of Ministers, is suspended. Refusal of reform rhetoric and a return to voluntarist practices will seriously worsen the prospects for negotiations with the IMF, WB and other financial organizations.
The risks of financial instability
BYN exchange rate, thanks largely to the strengthening of the Russian currency, continues to grow against the USD. Although the size of BYN devaluation has remained significant since the beginning of the year (about 13%), such a weakening did not lead to an imbalance in the financial system. There is still excessive demand for foreign currency from the population, but in general, the situation in the foreign exchange market is again a situation of net supply. After the failure at the beginning of the year, the country’s gold and currency reserves also stabilized — at the end of May, they amounted to USD 7.9 billion. BYN weakening provoked some acceleration of annual inflation — it reached 5.4% in April. At the same time, the inflation rate still remains at a historically low level, and according to the estimates of the National Bank it will be in the range of 5-6% according to the results of the year.
The crisis is not observed in the banking sector. The dynamics of bad debts is insignificant (growth from 5.34% at the beginning of the year to 5.6% in April), although the National Bank allows the risk of their growth with a certain time lag. The outflow of household deposits, caused by the worsening of expectations of the population, also did not become large-scale: foreign currency deposits of the population declined in April by 3.2%, and BYN deposits – by 1.56%.
The controllability of the current situation allowed the National Bank to keep abreast of global trends and reduce the refinancing rate in May from 8.75% to 8%, which is another historic low. The softening of monetary policy amid the BYN weakening and rising inflation expectations is a rather unusual step for Belarus, however, in the current situation, the National Bank justifies it with a significant disinflation effect due to the sharp economic recession, as well as a slowdown in inflation in Russia. This decision of the National Bank should have a stimulating effect on the economy by reducing the interest rate on previously issued loans and increasing demand for new loans.
In such circumstances, the main risks in the financial sector are concentrated in servicing the public debt. Difficulties with budget execution increase the need for refinancing the current state debt and even building it up to stimulate the economy. The change of Government, as well as increased political repression against the background of the presidential election, significantly worsen the ability of the authorities to attract external financing from such borrowers as the IMF, WB, and EBRD. The deterioration of relations with the EU and the USA (up to the possible introduction by the latter of new sanctions against the leadership of Belarus), in turn, will negatively affect the situation for new placements of Eurobonds. In such a situation, taking into account the cold relations with Russia, only Chinese resources (unrelated loans or swap lines) can remain the main source of refinancing the public debt. The negotiations with China were announced by the Government of Siarhei Rumas, although without specifying the possible loan amounts.
In an extreme case, in the short term the authorities will be able to cope with the financing of public debt without attracting new loans just by reducing the gold reserves. However, the flip side of the policy of active spending of gold reserves is the decrease in public and business confidence in the financial system and the increase in pressure on the foreign exchange market.
The risk of another weakening of the Russian ruble is less obvious at the moment, but still significant factor. According to some analysts, the observed strengthening of the Russian ruble may turn out to be short-lived and, as time factors are exhausted, it will again show a significant drop. A possible weakening of the ruble is affected by a number of factors: further easing of the policy by the Central Bank, the end of the period of dividend payments, the fall in export earnings from energy sales, the revival of domestic consumer activity (including thanks to the start of the economic recovery program). One can also expect a revision of the budget rule, involving the active sale of currency from the National Wealth Fund, due to which the ruble exchange rate currently demonstrates restrained volatility regarding changes in oil prices. As a result, according to some forecasts, the exchange rate of the Russian ruble may fall to the level of RUB 90 per USD by the end of the year. A counterbalance to this risk is the recovery of the global economy by the V-shaped model and, accordingly, the rapid increase in oil and natural gas prices. The possible significant weakening of the Russian ruble will greatly worsen the state of the financial sector in Belarus, primarily the banking system.
The risks for economic independence
After a certain break, the Belarusian authorities again raised the issue of integration within the Union State. So, the Belarusian Ambassador to Russia Uladzimir Siamashka announced his readiness to sit down at the negotiating table after the presidential election and come to the final approval of the package of integration maps. According to the Ambassador, the key blocking issues for the Belarus are the formation of a single gas market and the compensation of the tax manoeuvre.
Apparently, the ongoing policy of diversifying oil supplies, which is largely demonstrative, should strengthen Belarus’s negotiating position. So, in June, the first batch of US oil in the amount of 77 thousand tons arrived in Belarus. Another disagreement over gas supplies also creates a topic for negotiations. This time, in a situation where the contract price for Belarus significantly exceeds gas prices in the European market (USD 127 per thousand cubic meters versus USD 34-53 in the spot market), the Belarusian authorities again decided to repeat the experience of 2017, without paying extra supplied gas while denying debt. Belarusian officials explain underpayments in the amount of USD 166 million by the low calorific value of gas supplied. The failure to adopt the EAEU development strategy, which was blocked by Kazakhstan due to threats to sovereignty because of a significant increase in the powers of the EEC, is also beneficial for Belarus.
At the same time, it is obvious that repeating the 2010 election scenario with subsequent cooling of relations with the EU and the USA will increase the demand of the Belarusian authorities for Russian resources. This will significantly weaken the position of Minsk in integration negotiations with Moscow, and if imbalances in the economy increase, it will increase the willingness of the Belarusian authorities to compromise on many contentious issues.
The uncertainty associated with the timing of the restoration of the external environment for Belarusian exported goods is accompanied with the uncertainty associated with the change of Government and the aggravation of the political situation in the country ahead of the presidential election. A possible return to manual management practices and cooling relations with international lenders will complicate the task of servicing the external public debt and weaken the position of the country’s authorities in integration negotiations with Russia.