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The risks of financial volatility
The IMF statement, published on the results of the November visit to Minsk, highlights the main vulnerabilities of the Belarusian economy once again. These are: a weak country and commodity diversification of foreign trade, a significant amount of public debt and a high level of dollarization of the economy. In the context of these weaknesses, we can talk about the continuing growth of risks in the economy in November.
There are more and more reasons to draw conclusions about the end of stable surplus in the foreign exchange market. In recent months the net sale of foreign currency by the population has significantly reduced, and enterprises have been generating net demand for foreign currency for the fourth month already. Thus, in November, the net purchase of currency by resident enterprises amounted to almost USD 95 million, and the net supply from the population fell to USD 10 million. The reason for this was the growth of devaluation and inflation expectations in the economy (population’s expected inflation in November was 12.6% against 11.7% in August), as well as an increase in incomes of the population and the resulting increase in consumer activity. The attractiveness of the BYN as a means of savings is also gradually decreasing. Taking into account capitalization, the level of BYN deposits decreased two months in a row (the total estimated outflow for September-October amounted to about BYN 60 million), while the outflow of foreign currency deposits slowed down significantly. Thus, since the beginning of autumn, foreign currency deposits of the population decreased only by USD 33 million, with an annual decline of more than USD 580 million. As a result, the share of BYN deposits in the structure of savings of the population stopped growing and even slightly declined.
Indicators of accessible BYN liquidity in the banking system have significantly deteriorated, while the rates on interbank loans slightly increased. As a result, already the two largest banks in the country were forced to seriously limit their lending activity, suspending housing and consumer lending to the population. The slowdown in inflation from 5.6% to 4.9%, observed at the end of October, with a high probability may be short-lived. In addition to some commodity items that are expected to accelerate price growth for various reasons (for example, the agricultural products — due to poor harvest, gasoline — due to the current unprofitability of oil refining), price pressure will also create the expected acceleration of inflation in Russia. In addition, according to some estimates, the inflationary impact of accelerated growth in real incomes of the population was not full. From the beginning of the year, the growth in real incomes of the population amounts to 7.8% and significantly exceeds the level of economic growth.
The situation is aggravated by the Government’s limited abilities to respond to emerging problems. The authorities’ using standard instruments of adjusting the balance of payments and financial markets by raising the refinancing rate and weakening the national currency will have negative political as well as side economic effects. In particular, such measures will worsen the already difficult situation with bad debts in the economy and will create additional pressure on budget expenditures related to the servicing of foreign currency debts. These measures will also have a negative impact on the level of economic growth. As a result, the authorities continue, by inertia, to send signals about the planned easing of monetary policy, which doesn’t correspond to the current market situation. For example, the intention to reduce the refinancing rate to less than 10% in 2019 is being stated.
The authorities are unable to implement the announced plans to reduce the external public debt. After attracting another borrowing, on November 1 the level of public debt exceeded the amount for the beginning of the year by USD 43 million and reached a historic high of USD 16.8 billion. It is also necessary to note the growth of gold reserves, the size of which since the beginning of the year increased by USD 125 million to USD 7.44 billion. At the same time, the risks of sovereign default remain insignificant: the Government’s plan to refinance state debt in the medium term looks quite implementable. In the next 2 years, the authorities plan to attract about USD 2 billion on foreign stock markets. A part of this amount (USD 500 million) is expected to be received by placing bonds in new for the country markets: Chinese and Russian ones. An agreement with the Russian Government on the allocation of another loan in the amount of USD 630 million has been reached. In case of emergency, the authorities can enter the Eurobond market, where Belarusian presence is insignificant now. In addition, a possible return to the IMF program, which could occur in 2020 (apparently, after the presidential election) is discussed again. Thus, at present, a significant amount of public debt is primarily manifested through budgetary risks due to rising costs for its servicing. Already in 2019, almost 14% of the republican budget expenditures (about BYN 3 billion) will fall to the repayment of foreign debts. According to some estimates, during the period of peak payments on public debt, which are constantly shifting and now occur in 2020-2021, the annual cost of servicing it will reach 4% of GDP.
To combat this problem, the authorities are developing a concept for reducing public debt. They plan to achieve a reduction of public debt from the current 38-39% of GDP to 25% of GDP due to the redistribution of budgetary expenditures by 2025. The cost of public debt is also planned to be somewhat reduced by refinancing loans borrowed at rates substantially higher than the current market level. At the same time, the estimates of the IMF regarding the future dynamics of the Belarusian national debt are much more pessimistic. The Fund attributes the observed increase in public debt to a significant level of quasi-budget deficit — the results of budget execution, taking into account the costs of recapitalization and repayment of debts of problem enterprises. Taking into account such operations, the total budget deficit, calculated according to the IMF methodology, this year will increase from 0.7% to 1.5% of GDP, and next year it may reach 4% of GDP. Under favourable external conditions, we can only talk about consolidating the level of public debt at the level of 60% (the IMF, in contrast to the Government, additionally includes the size of government guarantees in the state debt). To achieve the target indicator of debt in the amount of 50% of GDP in the medium term, which is an anchor recommended by the IMF, constant adjustment of budget expenditures in the amount of about 2% of GDP will be required. In fact, this means abandoning the practice of financial support for state-owned enterprises and increasing the incomes of state employees only at the level of inflation. With actualization of all budget risks (lack of an agreement on compensation for losses due to tax manoeuvre in Russia, unbalanced growth of social expenditures of the budget, a forced reduction of excise taxes on fuel, etc.), the growth of external government debt may continue.
The risks to economic growth
The growth of Belarus’s GDP over the past 10 months stopped at the level of 3.5%, which corresponds to the annual planned target of the Government. The slowdown in economic growth is explained by the exhaustion of the recovery growth factors that previously existed.
For the first time in several years, the external economic situation shows a steady downward trend. The growth of the physical volume of exports stopped in the second quarter. The sum indicators of Belarusian exports to the key Russian market have been stagnating for 4 months in a row. At the same time, even a modest economic growth in Russia is under threat due to the possible tightening of sanctions. Despite the growth in exports, the current account deficit will grow and reach 2.5% in 2018. The tax manoeuvre in Russia starting in 2019 will also have a negative effect on the results of Belarus’s foreign trade. Only the cost of oil imported by Belarus will grow by USD 360 million. Among the positive factors one can note that OPEC + countries reached an agreement on a reduction in oil production in early December. This measure should stabilize the oil market and lead to some increase in oil prices.
Internal factors of economic growth are also weakening. The growth of investments in fixed assets slows down significantly, which is apparently due to the general growth of uncertainty in the economy and the reorientation of business to wait-and-see tactics. The cut of budget expenditures for the economy by 10% in 2019, will curb domestic investment demand. A number of factors also affect the slowdown in consumer demand: a more moderate income growth in 2019, a reduction in consumer lending, and a possible weakening of the national currency.
As a result, a combination of negative factors, according to some estimates, may lead to the fact that economic growth in Belarus will again fall below the potential level of 2-2.5% per year in 2019. In fact, this means a return to the lagging situation in terms of economic development from most countries in the region.
At the same time, the ability of the Government to implement even the declared transformations aimed at liberalizing economic conditions (for example, decriminalizing economic crimes and repealing a decree on false enterprise, conducting pilot privatization projects, etc.) remain in doubt. Moreover, the Presidential Administration and the State Control Committee are increasingly opposed to the economic block of the Government. Thus, these bodies actually blocked part of the liberal changes to the Tax Code proposed by the Government. The idea of refusal to arrest people for committing tax crimes, as well as the Government’s attempt to remove about 50 orders from the president’s control, was also publicly criticized.
The risks to economic independence
The minimization of losses associated with the tax manoeuvre in the Russian oil sector remains an important factor in maintaining financial stability and positive economic dynamics. Only in 2019, the loss of the budget of Belarus due to the tax manoeuvre is estimated at USD 300 million (this amount includes a reduction in export duties and excise taxes on fuel). For the entire period of the manoeuvre from 2019 to 2025, according to various estimates, losses for the Belarusian economy can be from USD 8 to 11 billion. The negotiations to work out a mechanism to compensate for these losses by the Russia have brought no results. Both the possible amount of such compensation and the method of its provision remain in question. If Belarus would like to receive a discount in the price of oil, the Russian Government is inclined to the option of intergovernmental transfers, which subsequently can obviously be used as a lever of economic pressure on Belarus. The importance of the issue makes the Belarusian authorities to exacerbate bilateral relations. Aliaksandr Lukashenka in a sharp form publicly discusses the unequal economic conditions in the EAEU with Vladimir Putin, and middle-level Belarusian officials discuss the feasibility of Belarus being in this economic union. At the end of December, when the next meeting of Lukashenka and Putin will take place, it will become clear whether such tactics will bring the result.
Tensions in the financial sector are gradually increasing due to the growth of inflationary and devaluation expectations of the population. At the same time, the ability of the authorities to control and prevent the emerging risks is significantly limited for political and economic reasons. Economic growth continues to slow due to deteriorating external conditions and a slowdown in investment activity. The most important factor determining the state of the national economy next year is receiving compensation for losses from tax manoeuvre in the oil sector of Russia.