The risks to economic independence
Despite the approach of December 8, there is no longer any clarity regarding the future of integration projects with Russia. There are still no published details or at least the content of the integration roadmaps being developed, and the officials’ comments are more like a public skirmish. Thus, the Ministry of Finance of Russia stated that the only option for unification of tax systems is the adoption by Belarus of the norms of tax law of Russia with only a few exceptions. Moreover, the project of such unification, according to them, has already been developed. In response, the Belarusian authorities said they were not ready to sacrifice tax sovereignty unilaterally. In fact, Russian colleagues are invited to form a new tax system that consolidates the experience of both countries. The emphasis on preserving economic sovereignty is also made by officials of the National Bank of Belarus, emphasizing that they only work to harmonize, rather than unify, the banking supervision system.
In such a situation, it is increasingly likely that in December the heads of Belarus and Russia will sign documents containing only general statements, or such a signing may not take place at all. The refusal of the Belarusian authorities to restrict sovereignty threatens to freeze existing problems in relations with Russia. Firstly, the Belarusian authorities will no longer be able to count on any compensation for losses from the tax manoeuvre in the Russian oil sector. This situation threatens Belarus with an increase in the price of petroleum products in the domestic market. It can also result in losses for the budget and oil refineries (for the period 2019-2024, the amount of such losses is estimated at USD 9 billion). Secondly, the Belarusian Government may lose access to Russian credit resources. At present, Russia remains the main creditor of Belarus (it accounts for about 40% of the accumulated state debt), and the conditions for Russian loans were traditionally better than the market ones. In this situation, the Belarusian authorities will have to significantly revise the strategy for managing public debt (by increasing, for example, the presence of Eurobonds on the market), which will increase the cost of borrowing and create additional pressure on the budget. Thirdly, the practice of applying prohibitions and creating unfavourable conditions for Belarusian producers in Russian commodity markets may become more active.
The Belarusian authorities actually have no economic instruments to counter such a policy. Measures like reducing purchases of Russian oil in favour of raw materials from third countries (in particular, the authorities plan to import 3.5 million tons of crude oil per year from Kazakhstan) are unlikely to cause serious damage to the Russian economy, but may reduce the margin of Belarusian companies. In fact, the only option in this situation is to use arguments from the field of political and military cooperation.
The risks of financial instability
The authorities’ restrained monetary policy continues to bear fruit: against the background of continued macroeconomic stability, two historic achievements have been recorded — gold and currency reserves reached their maximum size in October (almost USD 9.2 billion (source)), and the refinancing rate once again breaks the historical minimum (it the size from November 20 will be 9%). This was facilitated by a favourable situation in the country’s money markets and a slowdown in inflation. So, consumer inflation in September dropped to 5.3% annually, and core inflation – to 4.3%. There is excess supply in the foreign exchange market: at the end of October, it was recorded both in the segment of the population (in the amount of USD 50 million) and legal entities (more than USD 240 million). BYN savings of the population show growth both in nominal terms (by more than 2%) and in relative terms (since the beginning of the year, the share of BYN deposits has grown from 23% to 27%). According to the authorities, the task of finding alternative to Russian credit resources has also been successfully solved. So, in the near future, the authorities will attract a Chinese loan in the amount of USD 500 million, which should replace an unreported loan from the Russian Government.
In order to further increase confidence in the BYN and deepen the de-dollarization of the economy, the National Bank plans to switch from the current monetary targeting policy (in which the regulator achieves its goals by controlling money supply) to a more adaptive inflation targeting policy (in fact, managing inflationary expectations) from 2021. As part of these changes, the National Bank plans to make the transition to a floating BYN exchange rate and increase its institutional independence. In particular, it is supposed to give the National Bank the authority to make its own forecasts for the development of the economy, different from the forecasts of the Government, to change the principle of approval of monetary plans (now they are adopted by presidential decree). However, given the level of consolidation of power in the Belarusian political system, the obtaining by the National Bank of true independence and the formation of such an assessment in society is a difficult task.
Although Russia’s refusal to provide the planned loans does not have a noticeable negative impact on the current situation, the loss of access to Russian credit resources creates significant risks in the medium term. Thus, the Belarusian authorities plan to refinance public debt for 2020 through new placements of bonds on the world and domestic markets (in the amount of USD 1.35 billion and USD 600 million, respectively). The stated plans look quite realistic, but have also negative sides. Thus, the wider access of the Belarusian authorities to the world borrowing market will create additional pressure on budget expenditures, as well as increase the sensitivity of the economy to events in global financial markets. Current quotes of Belarusian bonds, the yield on which is in the range of 4.4% -5.3%, can be estimated by the authorities as quite acceptable for new placements. However, in recent years, borrowings of developing countries have been characterized by high volatility, and their value can change dramatically with the next round of turbulence in world markets. Carrying out significant borrowing in the domestic market, the authorities enter into competition for capital with the private sector, thereby limiting the potential for economic growth.
Certain fears are associated with the planned fiscal easing by the authorities. After refinement of the variant rejected by Aliaksandr Lukashenka, the budget was nevertheless adopted with a deficit, although its level decreased from 1.3% to 1% due to a decrease in the state support for enterprises and an increase in dividends withdrawn from the public sector. The authorities plan to strengthen the social orientation of budget expenditures by increasing payments to state employees. According to the plan, the size of subventions from the budget to the pension fund will also increase significantly (from BYN 590 million this year to BYN 2 billion), which should help the authorities ensure that pensions grow to the target level of 40% of the average salary. In general, for the first time in 7 years the budget deficit planned has a countercyclical focus and should support economic activity in the country. The budget deficit is a traditional tool for smoothing economic cycles, but previously the Government has not resorted to its use due to possible negative consequences for the country’s balance of payments. Thus, the growth of consumer demand has traditionally been a factor contributing to the BYN weakening due to increased imports and increased demand for foreign currency. In addition, a return to the practice of budget deficit automatically means a refusal to solve the problem of reducing the state debt, which Lukashenka ordered to the Government recently. Taking into account the size of the accumulated external and internal foreign currency debts of the state and enterprises, the risk of BYN devaluation carries systemic threats to the country’s economy. That’s why the authorities are forced to use this tool of economic policy very limitedly.
The risks to economic growth
Despite the presidential elections scheduled for next year, the finally approved plan for economic growth turned out to be slightly higher than one previously criticized by Lukashenka – according to the approved forecast of socio-economic development, GDP growth in 2020 should be 2.8% instead of the original version of 2.5%. The Government hopes to achieve this acceleration by increasing salaries, increasing the export of IT services and additional funding for science. The adoption of a comparatively modest forecast from a political point of view means that the proposals of the supporters of intensified economic growth due to increased state investment were ignored and the choice was once again made in favour of maintaining macro stability.
Moreover, against the background of the current dynamics of GDP and forecasts of international organizations, even such a plan of the authorities seems too optimistic. So, following the results of September, a slowdown in GDP growth from 1.1% to 1% was recorded once again. The main forecasts for the growth of the Belarusian economy in 2020 are in the range of 1.2% -1.5%, and the IMF in the latest review of the global economy estimates it at the level of 0.3%. The key trading partners of Belarus have very restrained expectations of economic growth: the target forecast of the Russian authorities for economic growth is 2%, while according to the European Commission, the EU GDP growth will be 1.2%. At the moment, there are no prerequisites for reviving commodity markets, which form a significant share of Belarusian exports. Thus, a new contract with India for the supply of potash fertilizers recorded a decrease in prices from USD 280 to USD 270 per ton, and a contract with China has not yet been concluded. Despite the problems of the American shale industry, oil shortages are not expected in the world market due to the slowdown in economic activity in the world.
Moreover, the issue of accelerating growth after successful stabilization of the economy is becoming increasingly relevant. Slowing Belarus’ economic growth even at around 2% means widening the development gap with neighbouring countries, which increases the risks of the outflow of economically active people abroad and creates significant social problems. To correct the situation, stable growth of 6-7% per year is desirable, which is impossible without a dramatic increase in economic productivity. A possible reaction of the authorities to the issue of improving the efficiency of the economy could be a roadmap for structural reforms being developed with the World Bank. It is assumed that if the parties can work out a joint document, it will also become the basis of a new program of cooperation with the IMF. However, there no dates and deadlines known for the completion of this roadmap and the procedure for its possible implementation. According to the authorities, there are no conceptual disagreements with the World Bank regarding the necessary measures, but opinions about the speed of their implementation are different. In particular, the authorities are ready to solve the painful issue of full reimbursement of the cost of housing and communal services by the population no earlier than 2026. A fruitful cooperation may be interfered by the EBRD — this organization is seriously dissatisfied with the progress on the planned privatization projects. As a result, revising the strategy of working with Belarus for the next 5 years is being discussed. Which will lead to a shortfall in investment and a deterioration in the country’s image.
Amid a slowdown in economic growth, authorities continue to gradually soften monetary and fiscal policies, while the emphasis on maintaining macroeconomic stability is preserved even in the pre-election period. The nature of further relations with Russia is the key uncertainty.