The risks of financial instability
After a difficult August, there was a certain stabilization in the foreign exchange market in September. The demand for foreign exchange from the population and legal entities has significantly decreased, and as a result, there was even a net sale of foreign exchange in this market segment. Banks also sold significant amounts of foreign currency (about USD 230 million on a net basis): they were forced to replenish their BYN liquidity using this measure. This allowed the National Bank to prevent a significant reduction in the country’s gold and foreign exchange reserves in September, despite a noticeable reduction in the price of gold (by USD 113 million) and significant payments for servicing the state debt (almost USD 300 million). As a result, at the end of the month, the country’s gold and foreign exchange reserves decreased by only USD 140 million, which can be considered a success for the National Bank.
At the same time, one can’t even talk about full-fledged normalization in the country’s financial market. The situation of high devaluation expectations persists. The National Bank is not ready to compensate for it by raising the refinancing rate and rates on its operations. Accordingly, the National Bank is forced to continue the policy of decreasing liquidity and abandoning current operations to support bank liquidity. In turn, banks are responding to current problems by significantly increasing rates on short-term deposits (up to 17-23%), as well as freezing lending (primarily consumer and housing). As a result, by the beginning of October, the situation with BYN liquidity in the banking system had really improved: rates on the interbank market dropped from 25% to 13-15%, and a liquidity surplus was recorded in the banking system as a whole. At the same time, the sustainability of this achievement remains questionable, since the sale of foreign currency by banks and budgetary expenditures financed at the end of the quarter became a key factor in restoring liquidity. In addition, according to some information, the National Bank provided significant anti-crisis loans to some banks (for example, to Belarusbank in the amount of BYN 600 million).
Apparently, thanks to the targeted support of banks, the authorities resumed large-scale administrative lending to individual enterprises. So, in August, some enterprises (the list is not published) were provided loans in the amount of over BYN 800 million on favourable terms. As a result, by the end of August, there is an almost 10% increase in liabilities of state-owned enterprises on BYN loans to the banking system. This practice is discriminatory, since in conditions of limited banking resources, the possibility of obtaining loans for other business entities is noticeably deteriorating. To a large extent, we can talk about the emission nature of such support.
The market situation could be fundamentally improved by good news related to the receipt of significant external financing and a weakening of the problem of servicing external debt. However, the amount and terms of the agreed Russian financial assistance turned out to be clearly insufficient to guarantee the Belarusian authorities problem-free financing of their obligations. So, this year, the authorities hope to receive only one loan in the amount of USD 500 million, which will largely be used to pay off the debt accumulated to Gazprom (in mid-September it exceeded USD 330 million). It is assumed that this loan will be provided through the EFSD, and, accordingly, it may be accompanied by additional conditions and the signing of a certain program. The provision of an intergovernmental loan in an amount equivalent to USD 1 billion will be carried out in Russian rubles, and apparently already in 2021.
The problems with finding sources of government debt refinancing will aggravate budgetary risks, which are already visible against the background of a slowdown in economic activity, a fall of BYN and a reduction in export oil duties. So, budget revenues for the period January-August 2020 were executed only by 57.2% (last year for the same period, the execution was 67.5%), while the collection from income tax amounted to only 17.8% of the plan (last year it was 46.1%). As a result, following the results of 8 months, the budget deficit amounted to BYN 1.5 billion, and by the end of the year it is expected to be at BYN 3 billion. This deficit is supposed to be financed from the treasury savings formed during the years of tough budget policy. According to the authorities, the amount of such savings reaches BYN 6 billion, and it should be enough to finance the planned budget deficit in 2021. However, a more rapid depletion of this reserve may force the authorities to start sequestering budget expenditures as early as 2021.
The worsening situation in the financial sector has already affected the country’s credit ratings. Thus, the S&P agency changed the rating outlook from stable to negative and may revise the rating itself in the next 3 months.
The risks to economic growth
Despite the problems in the financial sector, the dynamics of the economy has slightly improved over 8 months. Thus, the drop in GDP in January-August amounted to 1.3% compared to 1.8% a month earlier. The key factor in this change was agriculture, which grew by 7.9% thanks to a good harvest. As a result, the sector’s positive contribution to GDP growth increased from 0.1 pp to 0.4 pp. However, further preservation of such dynamics and the economy reaching zero growth at the end of the year, as announced by the Government, seems unlikely. The positive factor in agriculture will gradually weaken, and by the end of the year, the growth of this sector should slow down to 5.5%. At the same time, one should not expect a noticeable acceleration of growth in other sectors. The demand for Belarusian products in foreign markets will be influenced by the second wave of coronavirus, and the accumulated negative effect associated with a sharp reduction in consumer lending will appear on the domestic market.
At the same time, it seems that the government’s attention is more focused on the development of the next five-year plan, rather than on solving operational problems. According to some reports, in the draft planning documents, the authorities set an ambitious goal of economic growth by 21.5% for the period 2021-2025. At the same time, economic growth will accelerate gradually: from 1.8% in 2021 to 6% in 2025. However, even with such dynamics, the task announced by Aliaksandr Lukashenka to achieve the GDP of USD 100 billion will never be fulfilled. The predominant role in the declared growth should be played back by domestic demand, which is planned to be provided both by increasing incomes of the population (for the first time a separate planning document will even be adopted for 2021), and by increasing investments. Thus, Prime Minister Raman Halouchanka sets the task of increasing the share of investments in GDP, which should be accompanied by the creation of new enterprises and the development of new industries. One of the sources of financing for such investments should be the improvement of the financial condition of state-owned enterprises, which is planned to be achieved, incl. through measures to improve the quality of public sector management. In particular, once again it is planned to revise the list of benchmarks brought to the attention of enterprises and shift the emphasis from gross indicators to indicators of efficiency and profit. There is also a proposal to carry out the mass privatization of small state-owned enterprises (with up to 100 employees), as well as actively sell minority stakes (up to 10%) of large state-owned enterprises. The need for further liberalization of the business environment is also declared, in particular the decriminalization of economic violations.
In general, such a plan of the authorities looks like a compilation of ideas, to one degree or another, voiced or implemented over the past 10 years. Some of them, due to political reasons, were never implemented, some produced an effect different from the expected one. So, in conditions of a negative return on government investments, the main result of their next increase may be an increase in public debt and an increase in bad debts in the economy.
The risks to economic independence
Against the background of the crisis in foreign policy relations with the EU countries, the Belarusian authorities set the task of reducing economic interaction with them. Thus, it is planned to redirect a significant part of Belarusian goods flows from the Baltic ports (primarily Lithuanian) to the ports of the Leningrad region of Russia. Moreover, if earlier it was about the redirection of only 3-4 million tons of oil products, now the estimated volume has been expanded to 5-6 million tons. The Belarusian authorities also declare a desire to participate in the construction or acquisition of a share of the existing Russian sea terminal. The task is also to push out the Lithuanian logistics operators from the Belarusian market. Their role should be taken by some private structures that enjoy special preferences in Belarus. Under this aegis, one should, apparently, expect other protectionist measures aimed at reducing the role of foreign business in Belarus. For example, if a published bill regulating the taxi industry is adopted, the activities of international taxi operators in the country will be blocked.
For the first time in a long time, it has been announced that negotiations on roadmaps for integration with Russia will be resumed. They are supposed to be updated after almost a year’s break. Characteristically, at the same time, Lukashenka’s demands to compensate for losses from the tax maneuver disappeared from the public plane, and the position on the gas price also ceased to be an ultimatum.
Thanks to the tough measures of the National Bank, the authorities managed to stabilize the situation in the foreign exchange market and prevent further BYN weakening. A side effect of this stabilization is the freezing of banks’ lending activity, which creates risks for economic growth. At the same time, the authorities are increasingly using measures of targeted support for banks and enterprises.