The risks to economic independence
The nature of further Belarusian-Russian relations continues to be the main uncertainty of the current agenda. The government groups of the two countries, as expected, were not able to formulate an agreed integration plan within the so-called “Union State of Belarus and Russia”. So, at the beginning of December, only 20 of the 31 integration roadmaps were agreed. At the same time, exactly the key issues of further interaction between the two countries remain unresolved (oil and gas market, general tax policy). During the meeting between Aliaksandr Lukashenka and Vladimir Putin on December 7, 2019 in Sochi the final compromise was not reached. As a result, the symbolic signing of documents to deepen integration, which, according to the idea of the Russian authorities was to be held on December 8, 2019 (on the day of the 20th anniversary of the treaty on the creation of “Union State”, was disrupted. As a result of the meeting, the heads of the two states refused from the planned press conference. The results of the negotiation are known only by the comments of the Ambassador of Belarus to Russia Uladzimir Siamashka, who previously has repeatedly expressed excessive optimism on issues of bilateral relations. This time, the official’s comments turned out to be more restrained: although the number of agreed roadmaps increased to 23, we can only talk about “finding approaches to solving” the key issues.
Under the current conditions, the likelihood of freezing the format of relations at the current level is increasing: Belarus refrains from real deepening of integration, at least in matters sensitive to its sovereignty (directly or through further protracting negotiations), and Russia, in turn, continues to lower the level of support for the Belarusian economy. Such a development of the situation will certainly have a negative impact on the Belarusian economy through a decrease in its growth potential and a fall in budget revenues. At the same time, the one can’t expect shock consequences: losses for the budget caused by the tax manoeuvre and the refusal of the “customs clearance” scheme are already included in the forecasts of the Belarusian Government for 2020 and subsequent years. The reduction in Russian support is taken into account as a basic scenario in the latest forecasts of the IMF and the World Bank (WB), which expect a modest (less than 1%) economic growth in Belarus.
At the same time, the issue of a new gas agreement remains unresolved. Its possible parameters in the event of a failure in integration negotiations remain unknown. Planning the budget for 2020, the Belarusian authorities based on the current level of gas prices (USD 127 per thousand cubic meters). At the same time, the negotiating position of Belarus is based on the demand for a price corresponding to the gas price in the Smolensk region plus transportation costs (about USD 75-80). Obviously, in the absence of integration, obtaining gas at Russian domestic prices is an unattainable task. But there is a question what price Russia can offer as a “repressive” measure. Based on the average price of Gazprom in the EU market in the 3rd quarter of 2019 (about USD 170), the cost of gas imports for Belarus next year could grow by about USD 800-900 million, which is 2.2-2,5% of total imports of goods. The increase in gas tariffs will become an additional inflationary factor, as well as will weaken the competitive advantages of Belarusian producers and worsen their position against Russian competitors.
The uncertainty in relations with Russia has an overall negative impact on the economy through the expectations of economic agents. In such a situation, the fact of clarifying and formally fixing a new format of relations is important, even if this format is accompanied by a reduction of Russian support.
The risks of financial instability
After a long period of relatively tight macroeconomic policies, the current policy of the authorities is showing more and more signs of gradual weakening. So, for the first time in 7 years, a budget with a deficit was adopted. At the same time, authorities expect that the situation of a deficit budget can last until at least 2022. The measures of direct lending to state enterprises were also expanded: in 2019, the limits for such loans were increased from BYN 800 million to BYN 984 million, and the authorities refused to reduce them to zero in 2020. The government continues to use the practice of debt restructuring by increasing the share of the state or its affiliates in the authorized capital of enterprises. The policy of administrative stimulation of incomes of the population continues to be actively pursued. So, the Government actually solves the problem of raising salaries in problematic organizations manually. At the same time, real incomes of the population are growing much faster than was planned (by 6.8% for 9 months with an annual target of 3.4%). Accelerated income growth of state employees and pensioners is planned for 2020, which in many respects has caused the formation of the budget deficit.
On the one hand, such mitigation is a necessary countercyclical measure to stimulate economic activity. In addition, the background for the use of such measures looks very favourable. Despite some fluctuations, inflation remains at a historically low level (5.3% on an annualized basis) and, by the end of the year, it is very likely to return to the target 5-percent level. According to a recent study by the National Bank, inflationary expectations of the population are also improving (tangible inflation fell to 11.4%, and expected — to 11.9%). The conclusions of the National Bank are also confirmed by trends in the money markets: despite the decline in interest rates, the size of BYN savings continues to show growth, while the growth in credit demand remains moderate and almost completely concentrated in the consumer lending segment. Largely due to the net supply in the foreign exchange market, the National Bank’s reserves are maintained at a historic maximum: as of December 1, they amounted to USD 9.16 billion with a plan for the end of the year of at least USD 7.1 billion.
At the same time, one cannot ignore the possible negative consequences of the weakening of economic policy by the authorities. Due to the stimulation of incomes of the population, the imbalance in the growth of wages and productivity is intensifying: with the growth of real wages in January-August 2019 by 7.6%, labour productivity increased by only 1.3%. This problem creates a certain inflationary risk: it was previously considered by the National Bank as one of the reasons for the acceleration of price growth in early 2019. A consequence of the growth in consumer demand is a disproportionate increase in imports. The Government already records this problem, and in 2020 there is a significant potential for its strengthening. The deterioration of the external balance will in turn act as a factor weakening the BYN, which in the conditions of still high dollarization of the money market is a strong destabilizing factor. The authorities have already officially recognized the potential problem of the growth of public debt due to the rejection of the budget surplus. According to the Ministry of Finance, the growth of public debt in BYN terms in 2020 will amount to 11.5% and its size by the end of the year will amount to BYN 54.4 billion (or 37.8% of GDP compared to the current 36% of GDP). Thus, it is critically important for the authorities to maintain the limited nature of stimulating measures of economic policy and to prevent the uncontrolled growth of risks associated with them.
The risks to economic growth
According to the results of January-October, there was a slight acceleration of the economy: GDP growth for this period amounted to 1.1% compared with 1% a month earlier. According to some estimates, in quarterly terms, the acceleration of the economy has been observed for 2 consecutive quarters. Moreover, in the near future, the economy should enter the phase of cyclical growth, and in 2020, due to cyclical factors, its growth may accelerate to 2%. The Government continues to remain optimistic regarding the expected acceleration of GDP growth. According to the expectations, despite the current modest results, by the end of the year the GDP growth will still be able to reach the level of 2.9%.
At the same time, forecasts of international organizations are more modest. So, after disappointing forecasts of the IMF, the World Bank sharply reduced expectations for the growth of the Belarusian economy: according to its estimates, the GDP growth in Belarus could reach 0.9% in 2020 and 0.5% in 2021. Such a modest forecast is associated with increased external risks for the Belarusian economy. So, the situation of no compensation for losses from Russian tax manoeuvre is already being considered as a basic scenario. An unfavourable situation is also expected in the markets for the main commodity export commodities (potassium and oil). Thus, due to the glut of the market, Belaruskali has not yet concluded a contract for the supply of potash fertilizers to China for 2020. There is uncertainty regarding the possible dynamics of the global economy in 2020, as a result of which the World Bank revised its forecast for oil prices from USD 65 to USD 58 per barrel.
Increasing the efficiency of the economy could compensate for the deterioration of external conditions, but the current policy of the authorities does not yet provide the necessary effect in this field. Thus, traditional sectors grow very sluggishly (industry growth since the beginning of the year has amounted to only 0.6%), and large investment decisions by the authorities, designed to change the structure of the economy, are unsuccessful. After huge failures in the cement and woodworking industries, Belarusian Nuclear Power Plant may become another expensive project without adequate economic returns. Despite the commissioning of the power plant scheduled for January 2020, the issue of using additionally generated electricity is still unresolved. The new economy, which should be stimulated by measures taken by the authorities to improve the business environment, also cannot yet become a full-fledged driver of economic growth. In fact, the IT sector as a whole and the HTP in particular remain the only exception. The size of the HTP export of services should exceed USD 2 billion by the end of the year. However, its growth potential is limited by the resource of skilled labour and can be exhausted in the coming years.
The government recognizes the need for structural changes to accelerate economic growth to an acceptable level and continues to announce various programs and bills aimed at achieving this goal. So, the Government and the National Bank are developing another plan of systemic measures to accelerate economic growth, while a political willingness to take some breakthrough decisions aimed at attracting investments is being declared. It is expected that, together with the plan for the next five-year period and the development strategy until 2035, a reform roadmap, developed jointly with the World Bank, will be adopted. Apparently, such a procedure, as planned by the Government, should increase the political weight of this document. But at the same time, the Government, despite the need to replace Russian loans and lower interest rates on sovereign bonds, still postpones the possible start of a new program with the IMF. This can be considered the main marker of the level of the authorities’ readiness to actually step up reforms in the economy.
Against the background of prolonged integration negotiations, there is uncertainty regarding the further nature of the Belarusian-Russian relations. Economic growth potential and risks to financial stability will be largely determined by the parameters of agreements reached in the oil and gas sector. An important condition for maintaining macroeconomic stability is the authorities’ preserving a limited nature of measures to stimulate the economy.