The risks of financial instability
In November, the situation on the financial market, which in the short term remains a potential source of the most significant risks, developed in the previous months’ trends. The outflow of deposits, although still taking place, is gradually slowing down, and in the foreign exchange market, despite the net purchase by the population, the situation of excess supply continues to be observed. Thus, according to statistics, in October, foreign currency deposits of the population decreased by 2.1%, and BYN deposits — by a symbolic 0.7%. The purchase of foreign currency by the population for USD 90 million was compensated by the sale of foreign currency by organizations and banks in the amount of USD 248 million. In such a situation, the country’s gold and foreign exchange reserves, despite significant payments on the state debt (USD 338 million), decreased slightly (by USD 109.2 million to USD 7,376 million) in November. At the same time, the main reason for this fall was the cheapening of gold on world markets.
However, it is possible to maintain the situation in such relative equilibrium only due to the actual tightening of monetary policy, although the National Bank, as before, refrains from a formal increase in rates. So, in response to the National Bank’s refusal to provide liquidity to banks, the latter were forced to significantly tighten the conditions for granting loans. In fact, many credit programs were terminated, in particular ones for financing the construction and purchase of housing. The cost of loans also remains significantly higher than the refinancing rate and the current inflation rate (for example, a significant part of consumer loans is issued at rates of 25-30%). As a result, according to the results of October, for the first time in a long time, there was a decrease in the population’s debt on bank loans (by 0.3%).
At the same time, the National Bank, judging by the announced measures, does not expect a radical improvement in the situation and the restoration of public confidence in the national currency in the coming months. According to a study by the National Bank, the share of citizens who prefer to use bank deposits for savings fell to a record 8.9% compared to 28.3% a year earlier. The observed acceleration of inflation, which, according to the authorities’ estimates, will reach 6.9% in annual terms does not contribute to the attractiveness of BYN savings. As a result, the regulator, starting from January, plans to use a new mechanism for providing liquidity to banks — credit auctions at a fixed rate (currently 9.75%) for a period of 6 months secured by securities.
Another potential point of tension for financial stability, associated with servicing the public debt, is relevant in the medium term. The authorities were able to ensure refinancing of payments on external debt this year. As a result, the amount of external debt continues to grow moderately: at the beginning of November it amounted to a record USD 18,121 million. However, the issue of the sources of payments for 2021 is still unresolved. If the Eurobond markets are closed for Belarus, the government will have to spend more gold and foreign exchange reserves, as well as look for new sources of borrowing in the Russian and, possibly, Asian markets.
The situation with servicing the state debt will be aggravated by the need to finance the state budget deficit. Already this year, the authorities are experiencing difficulties with the execution of the budget, the annual deficit of which, according to the government’s estimates, will be about BYN 2.6 billion (less than 2% of GDP). The source of the problem was a significant drop in budget revenues, especially income tax and foreign economic activity (for 10 months of the year, only 60.1% and 66.4% of the planned were collected).
But if this year the budget deficit is largely the result of force majeure (the coronavirus epidemic and political destabilization), then planning a significant deficit for next year is a deliberate step by the authorities. Thus, in the face of falling external demand, the authorities expect that the budget deficit of about 3% of GDP will become an important factor in stimulating domestic demand. At the same time, the regime needs to find sources to finance this budget deficit. Publicly, the authorities declare their intentions to use the reserves accumulated earlier by the Ministry of Finance, which are kept in accounts in commercial banks and in the National Bank (in the amount of BYN 5.76 billion and BYN 1.53 billion, respectively). However, their use can cause certain difficulties, since it will cause a decrease in liquidity in state-owned banks and require its replacement by the National Bank. Financing the deficit by increasing the national debt is also problematic — the market for borrowing in the national currency is practically undeveloped, and the authorities are experiencing certain difficulties with attracting foreign currency.
The risks for economic growth
The annual GDP dynamics continues to improve — the fall down of the economy in January-October slowed down to 1.1% compared to 1.3% a month earlier. The improvement in dynamics is attributable to increased industrial output, while growth in agriculture and ICT has slowed. Thus, the growth of the ICT sector in October turned out to be the minimum over the year and amounted to less than 2%.
At the same time, against the background of encouraging gross indicators in the Belarusian economy, efficiency indicators have sharply deteriorated. Thus, the amount of net profit for 9 months of the year decreased by almost 3.2 times, the share of unprofitable and low-profit organizations amounted to 21.4% and 32.3% respectively.
The authorities’ expectations on the dynamics of the economy by the end of the year have become more realistic — the government has abandoned the rate for zero growth and expects that by the end of the year, the drop in GDP will not exceed 1%. At the same time, according to the plans of the authorities, the economy will fully recover thanks to the planned growth of 1.8% next year. Domestic demand is considered a key source of such dynamics — both in terms of investment and consumer demand. For the purpose of stimulating the latter, it is proposed to use a targeted lending mechanism, for example, to issue loans to the population for the services of Belarusian health resorts. At the same time, Prime Minister Raman Halouchanka gives a cautious assessment of the external situation, suggesting to level it somewhat by stepping up measures to support exports, primarily by increasing export lending.
The government also announced a program of its actions for the next 5 years, which should lead to an increase in GDP by 21.5% to the level of USD 80 billion by the end of 2025. It can be called a surprise that, in addition to standard statements that were transferred from one program document to another for several years (for example, such as the growth of the share of small business, attraction of foreign investment, the development of new sectors of the economy), plans to increase the efficiency of the public sector are announced in more detail. So, according to Mr. Halouchanka, the authorities plan to classify all state-owned enterprises into 3 groups, depending on their ability to function without state support. At the enterprises of the first, most successful group (according to the government’s estimates, it includes about 80% of state-owned enterprises), it is planned to take measures to improve management. The enterprises of the second group (about 250 organizations) are planned to carry out debt restructuring, based on the assumption that after a decrease in credit pressure, their activities will be stabilized. Organizations of the third group (about 400 companies), which are persistently insolvent even with the condition of state support, are supposed to be liquidated with a controlled flow of labour from them to other organizations. The announced plans of the authorities coincide in form with the earlier repeatedly expressed recommendations of the WB and the IMF. True, an important difference is that international funds proposed to approach the issue of classification of state organizations in more detail and conduct an audit of enterprises with the involvement of foreign industry specialists.
At the same time, it is not yet necessary to speak about the conceptual focus of the current government on deepening and accelerating reforms. Some of the current steps by the authorities are in many ways discordant with the declared desire to liberalize the economy and rather indicate an intention to strengthen manual control of the economy. Thus, Lukashenka signed a decree authorizing his representatives in the regions to actively interfere in the current activities of key organizations (to participate in meetings of their governing bodies and give assessments and recommendations regarding current decisions). Also, once again, Lukashenka ordered the government to control the prices and imports.
The risks for economic independence
The most important factor affecting the economic situation in the country is the threat of economic sanctions by the EU. Compared to the previously adopted personal bans on entry for some officials and security officers, this time the threat concerns state-owned companies and representatives of private businesses close to the authorities. So, 7 Belarusian companies and 29 regime minions got on the sanctions list. At the same time, the EU declares its readiness to further expand the sanctions lists if the Belarusian authorities refuse to make concessions. It is also announced that the EU will curtail cooperation with the Belarusian authorities through European financial institutions — in particular, the European Bank for Reconstruction and Development and the European Investment Bank. Given the scale of this interaction in recent years (for example, in 2019 the EBRD invested EUR 390 million in 24 projects, and the EIB increased its investment portfolio to EUR 550 million), this step will be very painful for Belarusian economy.
In conditions of aggravation of relations with the EU, the Belarusian authorities do not receive noticeable support in economic matters from Russia either. Apparently, the attempts of Belarusian authorities to reduce gas prices will fail. According to current information, in 2021 the current price will remain at the level of USD 127 per thousand cubic meters. At the same time, the Russian Ambassador linked possible price revision with concessions on some painful issues for the official Minsk (for example, the unification of tax legislation). The consequences of the tax manoeuvre in Russia will continue to fully affect the Belarusian economy. Thus, it is expected that the price of oil for Belarus in 2021 will grow to 88-90% of the world price compared to 85% this year. Another very unpleasant incident for Belarus is the next introduction of a ban on the supply of products for some producers of meat products to Russia, including the largest exporter – the Brest meat processing plant. At the same time, one can’t observe Russia executing the pressure on Lukashenka for deepening integration.
The key issues for the authorities include maintaining stability in the financial market, finding sources for servicing the state debt and financing the state budget deficit. A tense background for solving these issues is created by the aggravation of relations with the EU and the threat of imposing economic sanctions.