The risks of financial volatility
The weakening of BYN, the intensity of which was particularly noticeable in the first half of September (the growth of the USD during this period reached 4% compared to the level of the beginning of the month), led to a noticeable increase in devaluation expectations in the economy. As a result, in September, a number of negative phenomena in the money market were recorded. Thus, in September, for the first time since January 2018, the situation of excess demand in the foreign exchange market, reaching a level of USD 149 million, was observed. This was the result of a sharp drop in net sales of currency by the population (in September it amounted to only USD 6.7 million, with an average value of USD 134 million in January-August) amid continued net demand generated by the business. Inflation showed a noticeable acceleration: in September it reached the annual level of 5.6% with the annual plan no more than 6%. For comparison, in July it was 4.1%, and in August — 5%. For the first time in a long time, the dynamics of the population’s deposit market also changed — after a 13-month growth period, the size of BYN deposits in September insignificantly decreased (by 0.31% in total and by 1.13% taking into account capitalization).
At the same time, the reduction in foreign currency deposits of the population since the beginning of the year was minimal. Such dynamics indicates a partial flow of BYN deposits into foreign currency deposits due to the decline in the attractiveness of BYN as a currency of savings. Such a noticeable reaction of the population to a relatively small weakening of the national currency, which was also temporary (for example, the USD rose only by 1.3% in September), shows that the authorities are still unable to achieve the key goal of the de-dollarization policy. Successes in stimulating savings and loans in national currency are modest against the background of the rest of the EAEU countries. There’s instability even with a limited acceleration of devaluation. Certainly, it is worth expecting that the decrease in the volatility of BYN, observed in October, will have a stabilizing effect on the money markets. However, this situation once again demonstrated the de facto defenselessness of the Belarusian economy to uncontrollable external factors creating devaluation risks (such as falling energy prices, toughening anti-Russian sanctions, etc.). It also showed the reaching the limit of the lowering rates policy in the economy. It is evidenced by the decision of the largest bank in the country Belarusbank to increase rates on loans for real estate from 13% to 15%.
The deterioration of the situation in the foreign exchange market was one of the reasons for the fall in gold and foreign exchange reserves of the country in September by USD 320 million (or 4.4%). The partial improvement of the situation in October (gold and foreign exchange reserves increased by USD 181 million) was only possible due to substantial revenues from Russian sources of financing: the long-awaited tranche of the Eurasian Fund for Stabilization and Development (ESDF) loan in the amount of USD 200 million was finally received, and the Government of Russia transferred to the Belarusian authorities the accumulated debt on so-called mechanism of “additional customs duty” in the amount of USD 263 million. At the same time, in the short term, the dynamics of the country’s international reserves do not cause much concern, since the authorities were able to find additional sources for their replenishment. Already in the first quarter of 2019, the Belarusian authorities expect to receive the final tranche of the EFSD loan. Due to the rising cost of oil, a significant increase in the amount of transfers through the “additional customs duty” mechanism in the remaining months of 2018 is expected as well. This forced the Russian authorities to increase the amount of budget funds reserved for these purposes by USD 400 million. In addition, in 2019 the Russian authorities are willing to provide another loan from Belarus, aimed at refinancing its debts to Russia. The main problem in the negotiations is connected to the amount of such a loan: the Belarusian authorities want USD 1 billion, the Russian government is ready to allocate USD 630 million.
Although the level of public debt has stabilized this year, the cost of servicing it in 2019 will increase from BYN 2.5 billion to BYN 3 billion. The source of these payments remains the budget surplus, which so far has been able to form at a significant level (almost 4.9% of GDP for the period January-September 2018). Active reduction of public debt is currently an impossible task for the authorities (the option of selling state property for this purpose is not considered in principle). Accordingly, the Government plans to concentrate its main efforts on reducing the cost of public debt maintenance. Thus, it declares its readiness to prematurely repay all domestic bonds in the amount of about USD 500 million with their subsequent placement at lower rates. This event should reduce for the budget the cost of resources borrowed in the domestic market. So, the last placements of government bonds were at the rate of 5.5% (source), while the yield on bonds placed by the Ministry of Finance, for example, reached 7.25% in 2015.
In addition to external factors, international funds point to significant risks for the financial sector associated with the possible easing of monetary policy against the background of the start of a new political cycle. Officials of the National Bank also repot about activization of supporters of active lending to the public sector at below-market rates in the top bureaucracy. If we can only speak hypothetically about the accelerated build-up of the BYN money supply, then the policy of administratively increasing the income of the population is an indisputable fact. The growth of real incomes of the population since the beginning of the year was 7.8%, which is significantly higher than the observed economic growth (3.7% over the same period). The size of the average salary remains a key indicator for the Government. Thus, due to an unexpectedly large wage cut, in September, Prime Minister Siarhey Rumas convened an urgent meeting of the Government. The negative consequence of this policy has already been the deterioration of the country’s balance of payments, which has a direct impact on the foreign exchange market: according to the results of 7 months, the current account deficit widened to 2.5% of GDP against 1% of GDP in the same period of 2017. At the same time, the authorities have more restrained plans for the next year: the average annual wage will reach BYN 1025 against the planned BYN 938 this year (+ 9.2%), with GDP growing by 4% and inflation of 5%.
The risks to economic growth
In September, the country’s GDP growth stabilized at around 3.7%, which is even higher than the optimistic plan of the government at 3.5%. Positive expectations regarding the dynamics of GDP in the current year are also expressed by international funds. For example, the IMF estimate exceeds the expectations of the authorities and amounts to 4% of GDP. At the same time, it is generally accepted that cyclical and reductive growth factors in the current year will be exhausted. Thus, the further growth of Belarusian exports at current rates (more than 18% since the beginning of the year) seems unlikely due to the stagnation of the economies of the main trading partners. The growth rate of consumer loans to the population will continue to slow down, creating an additional basis for the growth of domestic demand. An emerging policy of rising interest rates, which began amid a deterioration in the situation on the foreign exchange market, will have the restraining effect on the growth of credit debt. A negative factor will be the loss of budget revenues due to Russia’s tax manoeuvre in the oil sector. Additionally, it will limit domestic consumer and investment demand generated by the budget as well as the above-mentioned growth in public debt service costs.
In such conditions, Belarus’s GDP growth will decline to the potential level and according to the World Bank will be at 2-2.5%. Accelerating economic growth while maintaining external conditions can only be achieved through structural reforms aimed at increasing the share of the private sector and commercializing state-owned enterprises. During October, the Government adopted a series of policy documents enshrining the overall economic policy strategy in general (in particular, the government’s program of activities for 2018–2020) and the business development strategy. The measures envisaged by these documents and the rhetoric of the members of the Government during their discussion are unconditionally market. Thus, it is stated about the importance of ensuring equal conditions of management, protection of property rights, and stimulating competition. The reform of the Ministry of Industry is once again being discussed, which should be accompanied by the abolition of the operational management of enterprises by the state and a focus on owner supervision. An important factor in improving the business climate is considered the refusal to prosecute tax crimes and, in general, decriminalize a significant part of economic violations. The possibility of selling shares of all enterprises, the state share of which is less than 10%, is discussed. Premier Rumas sees the escalation of private investment instead of state investment, which is often accompanied by the mistakes of officials, critically important for the economy.
At the same time, the controversial program of the next industrialization of the country remains relevant, while the sources of financing and the procedure for its implementation remain uncertain. The lack of readiness to revise the role of the public sector is indicated by the definition in the Government’s program for 2018–2020 of a list of strategic state-owned enterprises consisting of 3,500 facilities (with a total number of medium and large organizations in the country of about 7,500). The decree on the restructuring of distressed agricultural enterprises also turned out to be aimed at preserving the existing structure of the economy. Thus, this decree essentially enshrines the refusal to use the bankruptcy mechanism of insolvent agricultural organizations, and local authorities are given additional rights for the operational management of them. Solutions to quotas on the market for alcoholic products are also far from the principles of free competition: in fact, the decisions of the authorities are aimed at supporting state producers against the background of a fall in demand for these excisable products.
In addition, a significant part of the discussed intentions has been repeatedly voiced by the authorities since 2012, but has not been implemented. It is significant that the Government was unable to fulfil such control requirements of the EFSD credit program as the introduction of the position of an ombudsman for property rights, the adoption of a law to check all legislative initiatives for worsening conditions of entrepreneurship, the activization of the labour market with the optimization of the number of people employed in state enterprises. At the same time, even such a purely verbal activity of the Government has already provoked criticism from Aliaksandr Lukashenka, who pointed out the Government’s excessive enthusiasm for strategic issues and demanded to tackle the problems of specific enterprises.
The risks to economic independence
In October, the main controversial issues with Russia in the economic sphere were resolved. Thus, balances of deliveries of Russian oil products to Belarus in 2018-2019 have been agreed. As a result, next year, the supply of petroleum products for the chemical industry of Belarus will grow by 10%. Deliveries of dark oil products, which according to the Russian side were used for grey schemes of avoiding export duties, will be completely stopped. Russia recognized the obligation to transfer duties to the Belarusian budget through the so-called “additional customs duty” mechanism. But its growth due to the increase in the cost of oil caused discontent of the Russian authorities. Fundamental agreement on the issue of the necessary compensation for the Belarusian economy due to the tax manoeuvre in Russia was obtained. Only the mechanism of such compensation remains the subject of discussion: either direct intergovernmental transfers (which Belarusian prefers), or compensation in the price of oil (which the Russian authorities are inclined to). The EFSD made a positive decision on the allocation of the next tranche of the loan, despite the failure of the Belarusian authorities to carry out 3 out of 5 control points of this stage of the program. Successfully, according to Belarusian officials, negotiations are underway to obtain an intergovernmental loan aimed at refinancing Russian debt. In addition, conditions to improve the already granted loan for the construction of Belarusian nuclear power plant are expected. For example, the Government is also counting on both an increase in its duration and a reduction in the rate. The process of lifting the prohibitions from Belarusian producers on the supply of dairy products to Russia has begun. In fact, the Belarusian authorities were able to resolve almost all disputed issues in a favourable manner. There is only the question, what caused such a contractual capacity and generosity of Russia.
Conclusions
The deterioration of the situation in the foreign exchange and deposit markets, caused by the September devaluation of BYN and the rapid growth of population incomes, may force the authorities to switch to a policy of actually tightening monetary policy. Along with the exhaustion of cyclical factors of economic growth, this may create problems for the authorities to achieve the planned GDP growth in 2019. At the same time, the Belarusian authorities were able to reach agreement with Russia on key controversial issues in the economic sphere on favourable terms, which should ease the problem of public debt in the medium term.
