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The risks of economic recession
There are positive trends in the real sector of the economy: according to the results of 9 months, the GDP growth amounted to 1.7%, and by the end of the year, according to the expectations of the Government, it should reach 2.3%. In all major sectors of the economy, except construction, restrained optimism is observed. Stockpiles of finished products in warehouses of enterprises have declined to a five-year low at the level of 60% of monthly production volume. Some improvements are also observed in the employment market: for the second time in a year the monthly rate of newly recruited has exceeded the number of laid-off workers, and unlike the similar situation in July this excess turned out to be much larger.
The international funds also improved their forecasts on GDP growth in Belarus. Thus, the World Bank in case of favorable external conditions expects a moderate economic growth of the economy of Belarus by 1.8% in 2017 and by 2.1% in 2018. According to more conservative estimates of the IMF, Belarusian GDP in 2017 and 2018 will grow by 0.7%. According to the IMF assessment, the current growth is restorative and the most important factor is the increase in demand in the Russian market and the overall economic recovery in the region. At the same time, the medium-term growth of Belarus is expected to be the smallest in the Central and Eastern Europe region, which is connected with the inability to increase aggregate productivity in the economy due to the negative impact of the prevailing state investments. Actually, the issue of transforming the governance mechanism of the public sector has become the main stumbling block preventing the launch of a new credit program with the IMF.
In general, there is an impression, evidenced by separate statements by the officials, that the emerging modest economic growth has reduced the authorities’ interest in implementing fundamental changes in the economy. Thus, the already announced withdrawal from cross-subsidization has been postponed. According to the statements of the officials it should take place either by 2020, or only after the increase of the population’s incomes. Once again Aliaksandr Lukashenka set the maximum growth of the value of public services for the population at the level of USD 5 per year. Reforms in agriculture with the use of the mechanisms of bankruptcy and change of the owner are not decisive as well. Despite the fact that these measures are directly described in decree of the President (which is already functioning), the Government once again proposes to discuss the possibility of using them in practice. At the same time, the authorities do not seem to refuse from widely announced measures to improve the conditions for the work of small and medium-sized businesses.
The risks of financial volatility
In October, there was an improvement in almost all statistical indicators characterizing the financial stability and activity of the economy. By the end of September, annual inflation fell to 4.9%, which is the minimum value for the entire sovereign history. So far, negative fears about the possible excessive weakening of the monetary policy by the authorities have not been justified either. The size of the currency deposits of the population decreased insignificantly (minus 0.5%), and the amount of BYN deposits after the month of falling grew up once again. The size of the growth, however, amounted to only 1.2%, which is not much more than the size of the capitalization of existing deposits. It is important to note that this growth was recorded against the background of a slight but still increasing rates on BYN deposits (+0.2 pp on short-term and +0.6 pp on long-term deposits). The increase in nominal yield on deposits is recorded for the first time since the beginning of 2015, which may indicate the exhaustion of the potential for a safe easing of monetary policy.
The situation on the currency market improved slightly as well: the net sale of the currency by the population again increased and in September amounted to USD 196.2 million, which is more than the net demand for currency from the business (USD 187.8 million in September). The authorities managed to stabilize the situation with bad debts in the banking system: on October 1, their level dropped to 12.8%, which corresponds to the indicator at the beginning of the year. At the same time, according to statements of the members of the Government, the practice of replacing the corporate debt by the state remained insignificant in 2017. If in 2015 more than USD 1.4 billion was spent for these purposes, in 2016 – USD 400 million, while this year – only USD 2 million.
The country’s gold and foreign currency reserves continue to grow and reached the level of USD 7,395 billion of November 1, 2017, growing by almost 50% from the beginning of the year. This growth was based on the next tranche of the loan of the Eurasian Stabilization and Development Fund (hereinafter referred to as the EASDF) in the amount of USD 200 million allocated to Belarus in October. One should note that the Fund reduced the formal requirements for receiving the next tranche by lifting the restriction on the growth of the money supply and the marginal share of the public sector in GDP. The remaining demands (for example, the transfer of at least 20 state-owned enterprises to communal property) because of their insignificance were easily executed by the authorities. The reserves accumulated by the authorities make it possible to consider the issue of servicing the national debt for 2018 to be closed. They also neutralize the risks of sovereign default in the short term.
These achievements were appreciated by S&P rating agency, which in October upgraded the long-term sovereign rating of Belarus to the level of “B” with a stable forecast. This increases the attractiveness of the Eurobond market as a possible source of further refinancing of the national debt in the coming years. One should note that in October the first ever corporate placement of Eurobonds by the Belarusian company took place: the sum of USD 350 million was attracted by the largest retailer –“Euroopt”. At the same time, the cost of placement was 8.75% – just like in 2011, when the Eurobonds were place by the Government of Belarus.
However, the risks of inflation accelerating are still significant. Thus, experts of the Eurasian Development Bank consider the reduction of the refinancing rate too fast, and the growth of broad money supply (+ 9.3% since the beginning of the year) excessive. Due to a drop in interest rates on the credit market (in September, the average interest rate on new loans was 12.3% for legal entities and 12.1% per annum for individuals), there is a significant revival in credit performance in the economy. The most large-scale increase is recorded in the consumer lending market, which added BYN 839.1 million (49.8%) since the beginning of the year. The total amount of BYN-denominated loan debt grew by 12.3%, which is smaller but equally significant. At the same time, there is a significant amount of excess liquidity in the banking system (about BYN 1.5 billion at the beginning of November), partially connected with the weakening of requirements for the formation of reserves.
The authorities also expect the inflation to accelerate: according to their forecast the inflation level will be about 7% in 2018. The price increase can be stimulated by the traditional increase in budget expenditures at the end of the year as well as by the increase in wages planned by the authorities. Despite the fall of wages by the end of September by 1.6% to BYN 831.3 (which is typical for this month of the year), the Government does not abandon plans to increase the average wages to the level of BYN 1000 by the end of the year. At the same time, in the public sphere there are already statements that in order to do this it is necessary to temporarily abandon the principle of balanced growth of wages and productivity. A deterioration in the trade balance of foreign trade in goods, the deficit of which in September amounted to more than USD 470 million, can also be an additional factor that stimulates the inflation. Much of this is connected with the growth of consumer imports, which is expected to grow even more against the background of improved economic dynamics.
The risks to economic security
The reverse side of the country’s gold and foreign currency reserves’ growth was the growth of the external public debt, which reached 16.3 billion as of October 1, having increased by 19.5% since the beginning of the year and exceeding the 30% of GDP. The main creditor of Belarus for the last 5 years has been the Government of Russia, as well as related financial institutions and banks. In October, the Russian authorities for unknown reasons decided to disclose the amount of credit accumulated by Belarus on state loans, which is USD 6.5 billion. This amount does not include the debts of Belarus to the ESDF and Russian banks. An additional factor of dependence on Russia is its dominant share in Belarus’ foreign trade, which remains the same despite the plans for diversification. In combination with monopolistic energy supplies at reduced prices, this continues to ensure Belarus’ tremendous economic dependence on Russia, which so far is growing. There are not so many possibilities for the Belarusian authorities to influence this situation., The IMF resources could be used for refinancing the national debt, but the authorities are not yet ready to fulfill the Fund’s requirements. The funds received from the placement of Eurobonds can also be a help here. They will be clearly more expensive than Russian resources, which in the long run will negatively affect the economic growth in the country. The authorities try to fix the terms of trade and to exclude the possibility of manipulation for political purposes through the rejection of exemptions and restrictions in mutual trade within the framework of the Eurasian Economic Community. 2025 is declared to be the final term of trade liberalization, however, judging by the discussions in the Russian community, the liberalization even in such a long term is questionable.
The economy of Belarus continues to intensify while maintaining a balanced financial policy. At the same time, the observed growth is the smallest in the region and its medium-term prospects are relatively pessimistic without taking measures to increase the efficiency of the large-scale public sector. Serious pressure on the budgetary policy of the authorities in the medium term will also be provided by the growing external public debt, consisting mainly of Russian loans. In this regard, there is high risk of servicing the public debt issue becoming not only economic but a political one.