Why is the Belarus president seeking to reshuffle government?

Why is the Belarus president seeking to reshuffle government?
Belarusian president Lukashenko said he would sack a number of ministers during a televised speech / twitter
By bne IntelliNews August 15, 2018

Belarusian President Alexander Lukashenko sacked a number a of ministers in public during a speech this week. He believes the incumbent government has failed to fulfil his orders due to "the devil-may-care attitude," he said on August 14, ordering "proposals to replace all the top government officials" by the end of the week in what amounts to a major purge of top officials.

"We will no longer have to listen to their explanations of how difficult and complicated their [the government's] work is," the Lukashenko said in televised remarks, who was elected for the first time to the presidential post more than 20 years ago.

Lukashenko's outrage was triggered by his visit to one of the state-owned tool-making plants in the country's Orsha eastern district, which financial state is far from satisfactory. "What kind of workstations are these? It is some torture chamber! People do backbreaking work here for $200 per month," state news agency BelTA quoted Lukashenko as saying during the visit. This is not the first time Lukashenko has gone to visit a facility in the regions and used it to public tongue lash officials in public.

On August 14, the president demanded to fire "right away" the nation's Industry Minister Vitaly Vovk and Architecture and Construction Minister Anatoly Cherny.

Remarkably, Vovk was under fire, specifically, due to the fact that he ignored Lukashenko's order "to get the roof [at the plant in Orsha] repaired". "Who had the right to cancel my decisions? Why did you fail to do what I told you to? Why did the construction company stumble?" Lukashenko said.

However, the main question is whether the authoritarian head of the post-Soviet nation is really going to change the whole cabinet in Minsk?

The incumbent Belarusian government has won some respect among local and foreign experts for its successful negotiations with the International Monetary Fund (IMF) in 2016-2017 over a new loan programme for Belarus, which failed at the final stage due to Lukashenko's refusal to greenlight privatisation of state-owned companies and a sharp hike in utility tariffs.

What is even more important, the government and the National Bank of Belarus (NBB) was able to secure micro- and financial stabilisation in the country following a number of bitter crises. Specifically, they beefed up the nation's foreign reserves to $7bn against a background of significant debt repayments in the past years.

After repaying an $800mn Eurobond in January, the remaining $1.6bn debt for 2018 will be covered by the proceeds of the February $600mn Eurobond issuance, local market debt roll-overs, foreign currency revenues (custom duties and oil proceeds) and multilateral financing, according to Fitch.

"The government's strong cash position ($5.01bn) can provide short-term financing flexibility, but this cannot be fully used without a sharp drop in international reserves," the rating agency said in a statement in July, affirming Belarus at 'B' with stable outlook. That would be a problem as Belarus’s gross international reserves (GIR) are currently equivalent to only two months of import cover – less than the minimum three months of cover economist recommend to ensure the stability of the currency. If the state has to dip into its reserves the Belarusian ruble will probably devalue as it has several times in the past.

Foreign currency debt amortisation and interest payments will remain high, averaging $3.4bn in 2019-2020. Sustained reduction in refinancing risks will depend on continued progress on diversifying external sources of financing, refinancing opportunities of bilateral debt (Russia) and the pace of local market development. The government is working towards accessing the ruble and Chinese yuan market in the near term, Fitch added.

However, the Belarusian government faces an unexpected problem as a new financial and trade conflict with Russia erupted last week. Moscow reportedly intends to limit its credit support and oil subsidies to Belarus. Lukashenko's reaction was swift. According to him, Russia acts in "a barbaric way" towards Minsk, considering his country to be like "their vassals".

The row could potentially has very bitter impact on Belarus' state finances as export duties on oil and oil products remain significant source of monthly replenishment of the nation's foreign reserves.

Russia also reportedly intends to suspend the allocation of new tranches from $2bn support package agreed between Minsk and the Russia-led Eurasian Fund for Stabilisation and Development (EFSD) in 2016, as well as suspend negotiations on a new $1bn intergovernmental loan, which could be a painful blow for the reserves.

At the same time, Belarus' economic recovery has been stronger than previously anticipated. According to official data, the nation's GDP grew 4.5% y/y in January-June, which is almost twice the 2.8% forecast at the start of the year.

The economy is recovering mainly thanks to the ongoing recovery in neighbouring Russia, the country's main trade partner. Belarus' GDP grew by 2.4% y/y in 2017 after two years of recession. It contracted 3.9% y/y in 2015 following 1.6% y/y growth in 2014.

In April, the IMF revised upwards its GDP growth forecast for Belarus from 0.7% y/y (October's forecast) y/y to 2.8% y/y.

Meanwhile, Fitch believes that could accelerate further to 3.5% y/y in 2018 supported by reduced external financing constraints, growth in Russia and other trading partners and strong domestic consumption and investment performance.

Fitch expects growth to moderate to 2.5% y/y and 2% y/y in 2019 and 2020/ However, the nation's large public sector (estimated at 47% of GDP in 2017) with high leverage and productivity challenges weighs on medium-term growth prospects, which is a rating weakness.

Inflation has been another success of the government and also remains low this year. According to the Belstat statistics service, Consumer Prise Index declined by 0.2% month-on-month in July.

Fitch expects inflation on an annual basis to average 6% in 2018, almost half the 2016 level and in line with the NBB end-year objective.

"The success of the NBB's strategy to move toward a fully-fledged inflation targeting regime and reach 5% inflation by 2020 will depend on sustaining policy consistency, and improving monetary policy transmission channels through continued progress in the reduction of financial dollarization (67% of deposits) and quasi-fiscal programme lending," the agency said in the statement.

 

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