Belarus government plans to spend $3.5bn to support machine building

Belarus government plans to spend $3.5bn to support machine building
Maz trucks are one of Belarus' most famous exports
By bne IntelliNews August 16, 2017

The Belarusian government plans to spend $3.5bn to support machine building over the next four years. The sector is financially unsustainable and constantly losing employees, thus experts say the plan is unlikely to make a difference.

The state programme aimed at supporting the machine-building complex has been approved with a total budget BYN7.3bn or more than $3.5bn. At the same time, industry has BYN4.9bn worth of investment projects, of which BYN0.7bn would be spent to compensate banks’ losses from granting export credits to buyers of domestic equipment.

Belarus has launched a mini-revolution that could be a “paradigm shift” in the way the country is run, analysts at Berlin Economics believe, but whether the new five-year programme can actually be implemented remains an open question.

The state is trying to move away from directed credits to its companies, but it has not been able to go far because few of the state-owned enterprises (SOE) are profitable. Still, the burden of investment is still being shifted on to companies’ shoulders. Enterprises are expected to spend BYN0.7bn on modernisation from their own funds. The rest will be provided by banks and the budget, but companies are now expected to provide a business plan showing how the money will be spent.

The plan’s goals are to grow exports of machine-building products by 70%, reduce production costs by 1% annually, and boost profits from sales by 7% to 9%.

In 2014-2015, net losses of the machine building sector exceeded BYN660mn before starting to recover in 2016 thanks to a bounce in the Russian economy as well as a write-off of currency exchange losses.

But the sector is still suffering a lot of pain. In 2016, vehicle manufacturers laid off more than 3,200 people, manufacturers of machines and equipment 3,900 people, and metallurgists more than 2,000 people. Most of the products were exported to Russia: more than 90% of exported cars and 70% of trucks. That said, giant mining truck-maker MAZ, despite increased exports to Russia, has dropped to 6th rank from the 3rd in sales in Russia.

The problem with the program is the optimistic profit targets with margins of 7-9%. In 2015, this figure was 8.8% in the industry and the overall profitability of the industry has not improved.

Investment projects for BYN2.4bn were not implemented, which will stymie new projects and lead to the inefficient allocation of funds. The programme lacks measures to improve services, which is a key obstacle to entering new markets.

One of the support mechanisms envisages purchase of equipment by domestic enterprises through leasing schemes, which was practiced before, however without any effect on the industry’s performance. Many factors are beyond the influence of Belarusian producers, such as prices for raw materials and energy resources, their dynamics, and administrative barriers on foreign markets.

To sum up all of the above, the state programme is likely to repeat the fate of the modernisation programme in wood processing and the cement industry. Public funds are likely to be spent inefficiently, and instead of economic growth the economy would receive businesses that require constant financial support from the state to repay loans and borrowings. The only beneficiaries in this programme would be public officials who control procurement of equipment for modernisation.