Coface Group
Belarus

Belarus

Population 9.5 million
GDP per capita 6,283 US$
C
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 2.5 3.0 1.3 1.7
Inflation (yearly average, %) 6.0 5.6 5.8 5.5
Budget balance * (% GDP) -0.3 -1.3 -3.0 -2.0
Current account balance (% GDP) -1.7 -0.1 -2.3 -3.0
Public debt * (% GDP) 53.4 48.7 55.0 58.0

 

*Including guarantee of debts of public companies. (e): Estimate. (f): forecast

STRENGTHS

  • Strategically located between Russia and the European Union with a well-developed transport network: bridgehead for China’s Silk Road
  • Member of the Eurasian Economic Union
  • Relatively well trained and skilled workforce
  • Large industrial sector (26% of GDP)
  • Little inequality and poverty is rare

WEAKNESSES

  • High energy and financial dependence on Russia
  • Low geographical and sectoral diversification of exports
  • Sensitive to the level of petroleum product prices (purchase price negotiated with Russia)
  • State plays a massive role in the economy (56% of value added, 70% of GDP)
  • Poor governance (high corruption, weak legal system, institutional rigidity, lack of pluralism)
  • Shrinking labour force
  • Geographically isolated between NATO and Russia

Risk assessment

Weak growth exposed to influence

After peaking in 2018, growth has fallen back to a low level, below its potential, which is estimated at 2%. In 2020, household consumption (53% of GDP) is expected to be the most vigorous component. However, if wages and pensions continue to head upwards in the run-up to the presidential election in August 2020, this increase will be partially offset by inflation fuelled by rising food prices, as well as by higher prices for services, including regulated services, as a result of higher wages. While credit is expanding because of the reduction in the key interest rate (to 9.5% in October 2019), which was made possible by the stabilisation of inflation, the real rate remains high. In addition, monetary policy’s effect on prices is limited by high dollarization of the money supply (> 50%), the persistently elevated share of directed credit (28%) and the persistently small share of credit in the economy (61% of GDP). Investment (26% of GDP) is not expected to increase much: in the case of the domestic portion (dominated by the public sector), this will be due to budgetary constraints; in the case of the foreign portion, it will be because of uncertainty about the country’s future relationship with Russia. External demand for chemicals (potash fertilisers, plastics), oil, food (dairy, beef and veal), agriculture (livestock and cereals), steel, as well as trucks and construction machinery will remain negatively impacted by the poor health of the Russian economy and the rest of Europe. There is also the possibility of further untimely Russian embargoes, similar to those placed on apples, meat and dairy products in 2019. The growth outlook could worsen if the impact of the change in Russia’s tax treatment of hydrocarbon production is not offset. By 2023, customs duties on Russian hydrocarbon exports will have disappeared, offset by an increase in extraction tax. As Belarusian imports of Russian oil are largely exempt from these customs duties, the switchover will be costly. Without adjustments (under negotiation), growth will be reduced. Overall, agriculture and retail trade should be in the best shape, but these sectors represent only 7% and 12% of the economy respectively.

 

Public accounts burdened by a massive and inefficient public sector

The election period makes it difficult to control expenses. This, added to the impact of Russian tax changes on the proceeds from re-exporting oil products, could widen the deficit and increase the debt, of which the foreign currency share stands at 97%. Guarantees from central or local government to state-owned companies (which account for 31% of GDP and 28% of employment) and banks (which hold 66% of banking assets) alone are equivalent to 10% of GDP. The public commercial sector is plagued by inefficiency and government instructions that are not always relevant. Consolidation of the public sector will be difficult due to budgetary constraints, especially since the State continues to wield its influence, particularly by directing credit. Privatisation and reorganisation projects, which are potentially costly in terms of employment and popularity, have been shelved, at least during the election period, delaying the conclusion of a financial programme with the IMF.

 

Fragile external accounts influenced by Russia

The merchandise trade balance will remain negative. Baltic States and Poland refuse to buy power produced by the Astraviets nuclear power plant. However, the start-up of the plant will be accompanied by a decrease in gas imports. This deficit will be offset by the surplus in services related to the transit of goods and gas between Russia and Western Europe. Accordingly, the current account deficit will result from the income deficit related to the payment of debt interest. Even if foreign direct investment falls, it will still finance the deficit. Repayment of the external debt (65% of GDP), which is more or less equally divided between the State and companies, will be dependent on refinancing from Russia, which is the main creditor despite a recent USD 500 million loan from China. Foreign exchange reserves only cover two months of imports, or three months when gold is included. The external financing requirement of 26% of GDP is sensitive to exchange rate developments. The Belarusian ruble, which operates under a managed float against a basket of currencies (ruble, US dollar and euro), is not immune to weakness, particularly in relation to the Russian ruble. Finally, the absence of an agreement with Russia would see the current account deficit deepen from 2% in 2020 to 4% in 2023.

 

A President maintaining the balance between Russia and the West

President Alexandr Lukashenko (65), in power since 1994, was re-elected for the fifth time in 2015 and is expected to run again in August 2020. In the November 2019 parliamentary elections, candidates supporting him won all the seats against a fragmented and unstable political opposition. The President must deal tactfully with Russia, while building relations with other countries to reduce his dependence on Moscow. He needs to obtain compensation to mitigate the negative impact of changes to the way that Russia taxes hydrocarbons, refinancing of the substantial debt owed to Russia, a discount on the price of gas, as well as a favourable price for the transit of hydrocarbons. China’s use of the country as a production and export base under its Belt and Road initiative, and use of Chinese financing are helping to diversify the country’s partners.

 

Last update: February 2020

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