By Volha Dudko
International agency Standard&Poors in April increased the Belarus credit rating from B- (negative) to B (stable). The agency i observed the signs of financial stabilisation in Belarus economy. Although inflation is still too high, it began to slow down, the pressure on devaluation of Belarus ruble decreased and foreign reserves increased.
Just in September 2011 Standard&Poors reduced Belarus sovereign rating from B to B- due to foreign currency crisis which started in March of that year. Even though the stabilisation measures were made in Belarus economy, the question remains – for how long will the stability last and what factors can undermine it?
Postponed Loan
At the end of February Belarus was supposed to receive the third tranche of the loan ($440 mln) from Eurasian Anti-Crisis Fund, but it did not come. The fund management explained it by the reason that it wants to be sure that Belarus continues to implement tight monetary policy and finally starts privatisation.
According to the terms of the loan agreement, approved in June 2011, Belarus has to cut monetary financing of state programmes to the maximum 4% of GDP. And the government had really cut the financing of these programmes, but it is still above 4.5% of GDP, as showed statistics for 2011. And the Fund’s representative states that it is still too high indicator. Another condition – the privatisation of state property has not even started. Belarus has to privatise state enterprises in total amount of $2.5 bln this year.
The concerns of Eurasian fund leadership about the macroeconomic stability of Belarus economy are justified. Belarus government has again started to mention the monthly salary increase target of $500. This is a minimum level which has to be reached this year. It is a quite expected rhetoric before parliament elections which has to be held in September this year. The trend in salary increase over the past 17 years indicates that substantial increase occurs mainly before important political events (elections or referendums).
$500 average salary reached by monetary measures (money printing) before presidential elections at the end of 2010 became a trigger for foreign currency crisis started in March 2011
The $500 average salary reached by monetary measures (money printing) before presidential elections at the end of 2010 became a trigger for foreign currency crisis started in March 2011. It led to the threefold devaluation of Belarus ruble and hyperinflation that reached 108.7% at the end of 2011. It eventually resulted in the decrease of the average salary to $250.
Factors of Stabilisation
But since then Belarus government was able to stabilise the economy to some extent. The sale of the last part of transportation company Beltransgaz to Gazprom in December 2011 brought Belarus another $2.5 bln and more advantageous prices for gas. In 2011 Belarus paid $265 per 1000 m3 of gas, but in 2012 the average price will be only $165.6. Thanks to this deal rather poor foreign currency reserves increased from $4,631 mln (in November 2011) to $7,355.1 mln (in December 2011). At the moment the total foreign currency reserves make $8,085 USD (April 2012). It gives the government opportunity to intervene on the foreign currency market and regulate exchange rate if necessary.
Another positive impact on Belarus economy made increase in export of oil products during 2011. As a part of Common Economic Area and Custom Union from 2011 Belarus government was able to negotiate duty free supply of crude oil to Belarusian refineries. According to trade statistics Belarusian export increased by 62.6% in 2011 and was $41.1 bln. In January – February 2012 Belarus was even able to reach trade surplus in amount of $838.6 mln.
Two thirds of the export is generated by oil products, and it increased by 39.2% to 15.6 mln tones in 2011. From this 12.3 mln tones were sold to European Union. The trade surplus with European countries was $6.5 . Export in this direction in general increased from 29% in 2010 to 38.5% in 2011. At the time when diplomatic relations with European Union are on the worst possible level since Belarus independence, trade statistics indicates that it remains one of the main economic partners for Belarus and export market for Belarusian oil products.
A positive trend can be observed and with Belarusian ruble which stabilise and even appreciated in March this year. Stabilisation of exchange rate became a result of tight monetary policy and very high refinancing rate – at the end of 2011 it was 45%. That was a necessary measure to cope with inflation, but it has obviously paralysed the lending market as commercial banks derive their interest rates from the refinancing rate set up by National Bank.
But the stability of exchange rate will not last long if government continues to stimulate economic growth by monetary measures. In few months the seeding period in agriculture will begin and it is the time when Belarus government usually infuses money into this sector through preferential loans. As a result money supply increases what creates pressure on Belarus ruble devaluation and inflation increase.
Starting from February government began to decrease the refinancing rate - first to 43%, then to 38% (in March) and to 36% (in April). It should be reduced to 19-20% till the end of the year. In competitive and efficient economic system the refinancing rate normally should not be higher than 10%. But in Belarus the reached macroeconomic stability is not accompanied by reforms to increase competitiveness of the economy.
In this case the risk of Belarus ruble devaluation and high inflation still remains. Belarus government plans to reach 5-5.5% GDP growth this year and maintain inflation in 19-22%. But according to IMF and World Bank experts these results can hardly be reached. In its recent analysis of Belarus economy World Bank forecasted 38% of inflation to the end of the year and GDP growth not more than 4.5%.
Loan Only for Reforms
The present stability of Belarus economy is reached mainly by foreign borrowing, lower energy prices and positive trend in oil export. Instead of implementing real reforms Belarus government continues to seek for external financing. The foreign debt has already reached is $34 bln, or 62% of GPD. It increased by 19.8% from the last year. This year Belarus has to pay off $1.2 bln of interest for external dept and $3 bln of the main external debt – it is half of foreign currency reserves.
The head of National Bank of Belarus Nadzeja Ermakova has already announced that Belarus would apply again to IMF for another stabilisation loan. But it is very unlikely that the fund would agree for another program with Belarus. The official representative Natalia Kolyadina left Belarus at the beginning of April. She noticed that IMF would not start new program with Belarus government before the considerable steps in reformation of present economic system would be made. The presence of political prisoners and rather tight diplomatic relations with European Union is also a serious obstacle for another IMF stand-by loan.
The rather fragile stability of Belarus economy can be easily undermined if government would attempt to reach high economic growth with monetary tools instead of reforms. If it happens Belarus can fall even into more severe crisis from which it would be hard to get out. The recent delay of third tranche of the loan from Eurasian fund only indicates that even Russia is no more eager to support economy in the absence of real reforms.