Belarus devaluation a step closer

By bne IntelliNews March 22, 2011

Tim Gosling in Moscow -

Belarus is teetering ever closer to running out of foreign currency reserves as the current account deficit balloons, with analysts saying that the rapidly deteriorating economic situation makes a currency devaluation increasingly likely.

The country followed up a $700m drop in forex reserves in January with a fall $300m in February to leave its foreign currency reserves at $4bn, according to the National Bank of the Republic of Belarus. This means that its international reserve assets calculated by International Monetary Fund (IMF) standards have fallen by 20% for the first two months in 2011.

On March 22, UniCredit Group's Russia subsidiary said it had temporarily halted the purchase and sale of the Belarussian ruble, the same day Belarus' central bank stopped selling foreign currency to the country's banks. "We ask you until further notice not to send us requests for purchasing or selling Belarussian rubles," UniCredit's Russian unit said, Dow Jones reported.

The authorities appear at a loss of how to turn around the situation, which has at its root a chronic trade deficit, the effects of which have only worsened since the end of the economic crisis. Earlier this month, people flocked to currency exchanges as rumours of a one-off devaluation to the Belarusian ruble spread.

Analysts have suggested a gradual devaluation, alongside tightening monetary policy as short-term actions to help ease the problems, whilst boosting privatisation and foreign direct investment (FDI) as longer-term solutions. Such a programme would bring in much needed revenue, as well as help eventually remedy the inefficiencies in the country's state-dominated corporate sector. "Given the wide current account deficit (15-16% of GDP) in 2010 and the very significant external financing gap ($4bn-5bn), pressure for a significant exchange rate correction is building," says Tim Ash, emerging market analyst at Royal Bank of Scotland.

However, there's also been bad news on the FDI front. The National Bank of Belarus said on Monday, March 21 that direct investment from abroad dropped 26.7% in 2010, reports Prime Tass. FDI mustered no more than $1.3bn last year, the majority of which came via the sale of another 12.5% Beltransgaz stake to Gazprom. Other sources of investment hardly raise excitement that investors will be able to dramatically turn around the management and technology of sclerotic Belarusian companies, with China and Iran also figuring amongst the top spots.

Belarusian officials have been queuing up to reject recommendations from the likes of the IMF, whilst the authorities have turned to the Commonwealth of Independent States (CIS) to replace the series of Eurobond placements it has depended on since making its debut on the international debt markets in June. A downgrade in March by Standard & Poor's of its foreign-currency rating to 'B' from 'B+', leaving it five steps into junk, sounded the death knell for an apparent strategy to borrow its way out of the imminent danger on the international markets.

Minsk has now turned to Russia for a $1bn loan, as well as a $2bn lifeline from the Anti-Crisis Fund of the Eurasian Economic Community - a bailout fund set up by a number of CIS states in 2009. However, analysts from Danske Bank doubt that would prove to be anything but a stop-gap measure, and that devaluation of the country's currency now looks unavoidable. "Belarus has been running a deep current account deficit for years now and the presidential election year of 2010 led to excessive fiscal spending," Danske writes. "The foreign currency reserves have been declining rapidly during the past months, but Belarus is still trying to avoid devaluation and is hoping for a bilateral loan from Russia. However, we believe that a loan would only help in the immediate term given that the current account seems to be remaining deeply in deficit in 2011 as well."

Still, Minsk is searching for routes other than the austerity measures put forward by Western institutions, influenced in no small part by the urge to continue populist measures to forcibly keep the economy growing following the mass protests that were viciously put down following the rigged presidential election in December.

In typical fashion, the authorities have tried every regulation they can think of, whilst refusing to pull market levers. "Already, the Belarus Central Bank has hiked interest rates, introduced strict currency controls and increased fees on foreign currency transactions," the Danske analysts complain, noting that "problems with payments have been reported from companies operating in Belarus."

"Thus, the situation seems to be escalating rapidly," they warn. "We see no other reasonable alternative, but for a devaluation against the currency basket."

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