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Fitch’s analysis of the Belarusian economy: What are the main risks?

Belarus’ long-term rating as a foreign currency issuer remains at ‘RD’ (Restricted Default), Fitch Ratings said. Fitch explains that Belarus continues to pay its USD-denominated Eurobond in the local currency, contrary to bond documentation which does not allow for settlement in alternative currencies.

Fitch Agency rates Belarus economy

Holding on for now

In the country analysis, the agency indicates that the Belarusian economy has been hit by sanctions. The main impact of the sanctions was a forced reorientation of trade flows away from the EU and the US.

In the first nine months of the year the economy shrank by 4.7% year-on-year. The rate of decline has slowed – experts believe that the economy is beginning to adapt. Russia’s import restrictions have created more opportunities for Belarusian goods, and the depreciation of the Belarusian ruble against the Russian ruble has improved competitiveness. Uninterrupted production at state-owned enterprises has been maintained, leading to a significant accumulation of inventories.

 

Growth outlook gloomy

Fitch expects the economy to continue contracting in 2023 and 2024. The reorientation of trade flows will continue. Current high commodity prices, which Belarus produces, allow local producers to cover rising costs in the form of margins, but the advantage could be lost if prices fall.

Another risk is that if the inventory build-up continues, it could put financial pressure on state-owned enterprises, which have so far maintained employment and wages.

“The outlook for investment seems poor, structural reforms have been put on hold, skilled workers have left the country, and policies pose risks to macro-financial conditions,” the report said.

 

Price control will not stop inflation

Monetary policy in Belarus is now relatively loose and geared to support economic growth. Real interest rates are at their lowest level since policy reforms in the mid-2010s, and local currency liquidity is abundant thanks to central bank purchases of surplus foreign currency.

However, all this is not leading to credit growth due to high credit risks and bank lending standards. Inflation in the country continues to be fuelled by high commodity prices and supply chain problems related to sanctions. Experts expect double-digit inflation in Belarus over the next two years. “New pricing rules were introduced in October, but previous use of similar policies was ineffective,” the report notes.

 

Budget will have to increase spending

Budget room for manoeuvre has narrowed, with revenues hit by weak economic performance caused by the sanctions, while additional support measures have led to increased spending. Fitch forecasts that the budget deficit will increase to 4% of GDP in 2022 from 0.2% in 2021. The state will have to increase spending on earmarked transfers and on projects previously financed by international financial funds that were close to completion.

Financing is almost entirely from domestic bonds in local currency with a maturity of more than one year. A similar financing strategy is likely to be implemented next year, supplemented by the issuance of Russian rouble-denominated bonds on the Russian market.

Exports will not be able to outweigh imports for a long time

The balance of payments has so far withstood the disruption of trade flows relatively well. The current account was in surplus during the 1st half of the year 2022, as higher trade flows were observed. 2022, as higher prices for key exports have almost offset the decline in volumes, while imports have fallen faster due to sanctions and a squeeze on domestic revenues.

But in the future, the costs of trade diversion and if export prices fall, will lead to a current account deficit. Fitch forecasts that the current account surplus will fall from 2.9% of GDP in 2022 to a deficit of 1.4% in 2024.

Foreign exchange reserves decreased by $0.9bn in the first nine months of the year to $7.5bn. This was partly due to falling gold prices. Net FDI inflows (which are almost entirely reinvested earnings) remained high in the first half of 2022.

Although reserves will remain low (an average of 1.8 months of current external payments in 2022-2024), the expected repayment of local currency liabilities in USD and EUR will significantly ease the pressure on the balance of payments.

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