Belarus: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Significant deterioration of the financial situation and devaluation of the rubble
After achieving strong growth in 2010 thanks to the highly expansionary fiscal policy pursued in the run-up to presidential elections, the Belarusian economy is now saddled with major macroeconomic imbalances that have spawned a severe liquidity crisis. Structurally imbalanced external accounts - attributable to overinvestment (exceeding 30% of GDP), inadequate savings (about 2% of GDP), and poor economic specialization - are currently deep in deficit. The current account deficit widened further in 2010, reaching 15.6 % of GDP largely due to the higher cost of energy bill after the new oil agreement with Russia came into effect: oil imported from Russia to be refined in Belarus and re-exported to Europe is henceforth wholly subject to Russian customs duties from which it had been previously exempt, thereby putting an end to the flow of secure income derived from the large margins available on the transport of oil. The government reacted by drastically reducing imports, particularly by replacing oil purchased from Russia by imports from Venezuela. But these measures were still not enough to eliminate a trade deficit inflated even more in the run-up to the December 2010 presidential election as a result of the government's generous hand-outs to civil servants and retirees, which sparked a consumption boom, especially in imported goods. By the end of the 2011 first quarter the country's trade deficit thus reached $2.4 billion with its foreign debt up to $10 billion and current account deficit among the highest in the world. At the same time Belarusians went on a buying spree to build up emergency stocks, thereby generating shortages and driving up prices in distribution channels. This trend is expected to continue in 2011/2012 with the energy trade balance destined to represent a growing proportion of the current account balance and with petrochemical products (19% of exports) and metals (8%) moreover sensitive to trends in world prices. Due to the limited inflow of FDI (under 5% of GDP) Belarus has been dependent on access to financial markets to balance its external accounts. Thus, despite a successful Eurobond issue by Belarus in 2010, its financial position became unsustainable in the first months of the year. Foreign exchange reserves sank to precariously low levels ($4 billion early March, or an estimated six weeks of imports) with the country consequently incapable of covering its short-term commitments (current account deficit plus short-term debt). The capital control measures implemented these past months (foreign exchange purchases by local banks 30 days in advance, ban on foreign exchange sales by local banks since March 22) have not succeeded in easing the pressure on the exchange rate. The spending commitments made by the government during the December 2010 presidential election (large wage increases in the public-sector, increase in the minimum wage, granting of loans targeted on sectors in difficulty) put pressure on the fiscal deficit and spurred inflation. In the first half of 2011, the consequent increase in macroeconomic instability in conjunction with repayments due on loans granted by the IMF and Russia during the crisis prompted the authorities to devalue the Belarusian rubble by 53% against the dollar on 23 May with the objective of gradually aligning the various exchange rates in force in the country.
Teetering on the edge, Belarus received $3 billion in aid from the Eurasian Economic Community
Through the rest of 2011, the substantial current account deficit in conjunction with debt service (estimated at $1°billion for the year) and soaring inflation (a 30% annual rate expected) could ultimately trigger a severe economic crisis and a sovereign default. Moreover, with companies no longer enjoying access to foreign currency, payment defaults are thus expected to be more commonplace. After the wave of public unrest sparked by the increase in petrol prices - announced and later suspended - the government has attempted to stem inflation by tightening monetary policy and instituting controls on price increases exceeding 5% especially on prices for basic necessities (coffee, sausages, and so on). Belarus's financial and economic situation has thus been extremely precarious. Sovereign spreads have increased sharply, significantly raising the cost of new Eurobond issues. To break out of the slump the country needs over $9 billion in financing this year. But the IMF and the EU have turned a cold shoulder to Belarus as a result of the flagrant human rights violations observed especially in the wake of Alexander Lukashenko's re-election. Reluctant at first to provide any support whatsoever, Russia ultimately granted a $3 billion loan to Belarus via the crisis fund set up by the Eurasian Economic Community. An initial $1.24 billion installment is to be released in 2011 followed by $800 million in 2012 and a $1 billion in 2013. The first installment was duly paid on 21 May this year. In exchange the Russians have insisted on a further devaluation of about 40% as well as privatization of Belarusian assets. The privatization plan calls for the sale over three years of some 150 state-owned companies and the government's ownership share in mixed public/private companies, representing about $7.5 billion in assets. Primarily at stake is the gas pipeline network owned by Beltransgaz in which the Russian company Gazprom already acquired a 50% interest in 2010. Beltransgaz transports 20% of the Russian gas delivered to Europe and represents on that score a strategic interest for the Russian state monopoly. The other highly coveted assets include oil refineries fed mainly by Russian crude destined for Europe and the fertilizer giant, Belaruskali. Isolated more than ever on the international scene, Belarus no longer enjoys much room for maneuver. The government has admitted having no illusions about the chances of the $8 billion loan request submitted to the IMF well aware that the Americans and Europeans will likely oppose it. Mr°Lukashenko does not appear willing, however, to give up his social-economic model and even denies that his country is gripped by a crisis, blaming the media for instigating the panic. Whether the authoritarian regime in power since 1994 will be able to cope once again with such a shock remains open to question.
Strengths
- Strategic position on the East-West frontier
- Creation of a tripartite customs union
- Skilled labor force and quality infrastructure
- Banking sector little affected by the crisis
- Lowest poverty rate among CIS countries
Weaknesses
- Regulated economic system
- Structurally high current account deficits
- Heavy dependence on Russia (30% of exports, 60% of imports)
- Very slow structural reform process intended to liberalize the economy
- Low foreign exchange reserves