Belarus Country Report Mar19 - March, 2019

March 4, 2019

The Belarusian economy is basically doing pretty well, although growth has fallen off in the last year. The country finished 2018 with 3% growth, however, in January growth fell to a low 0.7% on an annualised basis.

However, the debilitating crises of recent years are in retreat as the government focuses on more prudent management of its debt and currency reserves.

The main issue of the country at the moment is changes to Russia’s tax code that will affect Belarus energy subsidies. Moscow is battening down the hatches in anticipation of more US sanctions and amassing cash, which has led to reducing Belarus’s stipend via the so-called “tax manoeuver.” This could cost Minsk several billion dollars a year and the IMF has warned the republic to get a “plan B” ready in case Moscow goes through with its threat.

This uncertainty has not only provoked more prudence, but has also lead Belarus to turn to the west for more trade and liberalized its economy to encourage more inbound investment. The visa regime has been thrown open (much to Moscow’s annoyance as Russia and Belarus are supposed to be borderless). And investors are coming. Last foreign direct investment (FDI) increased to $10.8bn.

The main investors were commercial entities from Russia (38.3%) but Belarus has been surprisingly successful at building up trade and investment ties with western Europe too. The UK accounts for another quarter (25.7%) of inbound investment.

The World Bank says the cyclical economic recovery is being led by growth in consumption and exports. Stronger domestic demand and increased exports helped GDP growth accelerate over six straight quarters to 3.9% by the second quarter of 2018. Real wages rose, outpacing productivity growth throughout the second half of 2017 and during 2018, fuelling household consumption, which grew by 10.2% year-on-year (y/y) in the second quarter of 2018.

Rapid increases in capital spending by local governments (during 2017-18), and in bank lending, reinvigorated investment, which expanded by 7% in the second quarter of 2018. As a result, the contribution of domestic demand to GDP growth exceeded that of net exports, which turned negative due to an increase in imports.

Commercial banks have increased lending to corporates in manufacturing, at a pace close to sectoral output growth, despite high indebtedness levels in 2017 (the ratio of assets subject to credit risk to gross sectoral value added amounted to 69.4%) and a higher share of assets subject to credit risk, at 22.6%, compared to other key sectors of the economy.

Consolidated government revenues recorded real growth due to robust tax revenues. To meet rising (by 2.4% in real terms in the first half of 2018) public debt payments, spending on public investment and transfers to local budgets were reduced, to generate a headline fiscal surplus of 5.5% of GDP. However, public debt pressures remain, as the public debt to GDP ratio amounted to 36.8% by the second quarter of 2018.

To maintain single-digit inflation, the National Bank continued monetary targeting. Annual average inflation slowed to 6% in 2017, and further to 5.6% by September 2018, although accelerating from 4.7% by the first half of 2018.

As inflation pressures stabilized, the benchmark interest rate was steadily cut during 2017-2018, from 17 to 10% by June 2018. As a result, lending rates fell, improving loan supply conditions and stimulating bank lending, which grew by about 11.5% in nominal terms y/y by mid-2018.

Still, the degree of dollarization remained high, with 67.2% of deposits denominated in foreign currency, while the share of the currency component of broad money went down, from almost 66% to 62% by the second quarter of 2018. However, the economy-wide ‘problem asset’ level at 13% (as of April 1, 2018) remains a concern.

The current account deficit narrowed substantially in 2017 before rising again in 2018. It fell to 1.7% of GDP from around 3% in 2015-2016, as more favourable terms of trade contributed to a growing value of goods and services exports. This factor, along with the continued net sale of foreign currency by households, helped maintain a stable nominal exchange rate until external market factors, such as the falling Russian currency, began to affect its dynamics.

Gross international reserves, after increasing to $7.3bn in 2017, remaining at $7.2bn by September 2018, with still limited coverage of two months of imports of goods and services. The net international investment position remains negative, totalling $41.5bn, or about 76.3% of GDP as of January 1, 2018, and deteriorating slightly to almost $42bn by mid-2018.


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