ANALYSIS: Belarus’ economy keeps slowing down, risks piling up

<p> Monthly overview of Belarus’ real economy sector, Jan-Oct 2021 </p> <p>   </p> <p> MINSK, Nov 30 - PrimePress. Belarus keeps facing a slowdown in the growth pace of key gross indicators, with accelerating inflation, a decline in fixed investment, low domestic demand, and a slow growth in real household incomes. Foreign trade shows a positive trend, but it is difficult to expect stability in this area in the long term due to sanctions uncertainty. </p> <p>   </p> <p> Table 1. Key indicators of Belarus’ macroeconomic performance: </p> <br> <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> <p>     Indicator </p> </td> <td> <p> Real figures, Jan-Oct 2021, billion Belarusian rubles </p> </td> <td> <p> Jan-Oct 2021 on Jan-Oct 2020, % </p> </td> <td> <p> Official forecast for 2021, % </p> </td> </tr> <tr> <td> <p> GDP </p> </td> <td> <p align="right"> 143.259 </p> </td> <td> <p align="right"> +2.4% </p> </td> <td> <p align="right"> +1.8% </p> </td> </tr> <tr> <td> <p> Industrial output </p> </td> <td> <p align="right"> 125.154 </p> </td> <td> <p align="right"> +7.1% </p> </td> <td> <p align="right"> no forecast </p> </td> </tr> <tr> <td> <p> Fixed capital investments </p> </td> <td> <p align="right"> 23.334 (16.3% of GDP) </p> </td> <td> <p align="right"> minus 7.8% </p> </td> <td> <p align="right"> 21.3-21.7% of GDP </p> </td> </tr> <tr> <td> <p> Inflation growth since early 2021, % </p> </td> <td> <p align="right"> 8.5* </p> </td> <td> <p align="right"> 10.5 (Oct 2021 on Oct 2020) </p> </td> <td> <p align="right"> 5% at most </p> </td> </tr> <tr> <td> <p> Foreign trade balance (goods and services), USD billion </p> </td> <td> <p align="right"> +2.738** </p> </td> <td> <p align="right"> +1.567** </p> </td> <td> <p align="right"> no forecast </p> </td> </tr> <tr> <td> <p> Real disposable household incomes, year on year, % </p> </td> <td> <p align="right"> +2.6** </p> </td> <td> <p align="right"> +5.1*** </p> </td> <td> <p align="right"> +1.6% (+1.7% in Jan-Sep 2021) </p> </td> </tr> </tbody> </table> <br> <p> * year to date </p> <p> ** Jan-Sep 2021 </p> <p> *** Jan-Sep 2020 </p> <p>   </p> <p> GDP growth slowing down amid subdued economic activity </p> <p>   </p> <p> The Eurasian Development Bank (EDB) expects the pace of Belarus’ GDP growth to slow down to 0.7% in 2022. EDB Senior Analyst Anatoli Kharitonchik released these figures while presenting the bank’s 2022 macroeconomic forecast for Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan on 25 November. </p> <p>   </p> <p> “Due to the expansion of external demand and the dynamics of the IT sector, GDP growth in Belarus is estimated to be close to 2% at the end of 2021. However, the period of strong economic recovery came to an end during the second quarter, which resulted in a GDP growth of 1.5-2% above the pre-pandemic level. Later on, the dynamics of economic activity weakened and in the fourth quarter of 2021 the GDP volume is estimated to be close to the pre-pandemic level,” said Kharitonchik. </p> <p>   </p> <p> The EDB assesses economic activity in Belarus in 2022 as subdued. This is due to heightened uncertainty, the impact of sanctions restrictions and the bank’s projected constrained market credit conditions. </p> <p>   </p> <p> The downward trend in Belarusian GDP is confirmed by official statistics. In January-October 2021, the National Statistical Committee of Belarus (Belstat) recorded a 2.4% year-on-year increase in GDP to Br143.3 billion. At the same time, a month earlier, the GDP growth indicator stood at 2.7%. The slowdown has been recorded for the fourth month in a row. </p> <p>   </p> <p> Based on Belstat data on the influence of the main economic activities on the GDP growth in January-October 2021, the positive contribution of industry to the GDP growth was 1.7%, information and communication - 0.7%, wholesale and retail trade (including repair of cars and motorbikes) - 0.3%. Construction (minus 0.8% of total growth) and agriculture, forestry and fisheries (minus 0.3%) slowed down the GDP dynamics. </p> <p>   </p> <p> According to Belstat, in January-September this year, labour productivity in GDP terms grew by 3.7% year on year in comparable prices, while real wages grew by 4.9% over this period. Thus, the imbalance between wage growth and labour productivity persists. </p> <p>   </p> <p> Overall, according to EDB estimates, the potential growth rate of Belarus’ GDP in the medium term is around 1% per annum. The rationale for the macroeconomic forecast notes that the impulse from external demand for Belarusian GDP will weaken, as GDP growth of key trading partners will slow down after a strong recovery phase. In 2022, high commodity prices will continue to support Belarusian exports, but in the baseline scenario the EBD expects its gradual weakening as global demand normalizes. Domestic investment and consumer activity in 2022 is expected to be subdued. </p> <p>   </p> <p> Belarusian economy enjoying temporary rise in profits </p> <p>   </p> <p> In November, Belstat published quarterly financial results for large and medium-sized enterprises. Their revenues from sales of products, goods, works and services in Jan-Sep 2021 stood at Br228.526 billion, up 23.8% on the year; the cost of sold products, goods, works and services amounted to Br183.326 billion, up 24.5% on the year; net profit - Br18.715bn, up 28.6%. </p> <p>   </p> <p> The share of loss-making organizations in the total number of organizations in Jan-Sep 2021 amounted to 14.9% against 16.3% in Jan-Sep 2020. However, it should be taken into account that the operational data include information on agriculture, including state support, the amount of which still has a significant impact on the performance of the sector. While in January-September 6% of farms were unprofitable with state support, more than half were unprofitable without state support. This fact has a distorting effect on the share of unprofitable enterprises in the sample as a whole. </p> <p>   </p> <p> The GDP deflator for January-September 2021 was 115.4%, reflecting the aggregate growth of prices in the economy. Consequently, the real growth rate of the financial indicators was significantly lower than the nominal. </p> <p>   </p> <p> The increase in production costs outstrips the growth in revenues. This is most likely due to the rising cost of raw materials and semi-finished goods after the global economy emerged from the crisis. If companies do not take measures to optimise production costs, this will have a negative impact not only on their profitability, but also on efficiency as a whole in 2022. </p> <p>   </p> <p> Large and medium-sized Belarusian companies report a Br12.346bn net profit in Jan-Sep 2021, up 3.5 times year on year, according to Belstat. </p> <p>   </p> <p> The increase in net profit was due to both the increase in profitable enterprises’ profits and the decrease in losses of unprofitable ones. The net profit of profitable enterprises amounted to Br13.526 billion (+40.2% in nominal terms), while net losses of loss-making enterprises were Br1.181 billion (a 5.2 fold drop). The multiple reduction in losses is due to the following reasons. </p> <p>   </p> <p> Last year saw a significant devaluation of the Belarusian ruble, which resulted in negative exchange rate differences. In May 2020, Ordinance #159 “On restating the value of assets and liabilities” was adopted. According to this document, from 1 January 2020 to 31 December 2022 commercial organisations received the right to reflect the impact of exchange rate differences on net profit not in the period in which the differences were formed, but at the discretion of the head of the enterprise. </p> <p>   </p> <p> Banks, the Belarus Development Bank and non-bank financial institutions were excluded from the scope of Ordinance #159. However, this ordinance may have had a distorting effect on the financial statements of the vast majority of enterprises in terms of profits and losses from financial activities. </p> <p>   </p> <p> In addition, in February 2020, Ordinance #70 "On the development of the agro-industrial complex of Vitebsk Oblast" was adopted. This document entered into force on 27 February 2020 and provided significant state support to agricultural companies in the region. Enterprises were authorized to pay their debts in in instalments, awarded deferrals of payments on arrears, exemptions and privileges on a number of taxes and dues to the budget. The provision of state support resulted in a sharp increase in the profits of the Vitebsk Oblast’s agribusiness sector from investment and financial activities, and therefore in net profits. </p> <p>   </p> <p> Given the above-mentioned legal acts, as well as some other decisions of the Belarusian authorities, operational statistics on net profits should be treated with caution. In contrast to banks and non-bank financial institutions, real sector enterprises may have the distorting influence of ordinances #70, #159 and other similar documents in their reporting according to national standards, which makes it much more difficult to assess the real state of finance of Belarusian organizations. </p> <p>   </p> <p> In Jan-Sep 2021, about 21.7% of large and medium-sized enterprises in the Belstat sample had negative profitability (losses from sales), about 32.3% showed profitability ranging from 0% to 5%. Companies with profitability of sales of 0-5% are usually referred to as low-margin entities. </p> <p>   </p> <p> In the economy as a whole, the share of unprofitable and businesses with a low profit margin was about 54%. In 2021, the sector with the lowest share of unprofitable and low-profit companies (2.7%) and the highest share of highly profitable businesses (52.3% of businesses) was forestry and logging. </p> <p>   </p> <p> In January-September 2021, the above-average share of unprofitable (operationally unprofitable) companies was observed in retail trade (82.2%), temporary accommodation and catering (76.9%), energy (72.5%) and wholesale trade (68.9%). </p> <p>   </p> <p> However, it is worth noting that changes in companies’ financial performance usually follow changes in output dynamics with some lag. In this regard, the impact of the production cuts seen in recent months could manifest itself in companies’ finances as early as 2022. </p> <p>   </p> <p> National Bank expects inflation to slow down next year </p> <p>   </p> <p> Belarus’ inflation continues to accelerate. According to Belstat, in October 2021 consumer prices grew 10.5% year on year to compare with 10.2% in September, with the initial forecast for 2021 standing at 5%. Prices of staple goods, according to the Ministry of Antimonopoly Regulation and Trade (MART), also increased to 10.5% year on year in October against 9.9% year on year in September 2021. </p> <p>   </p> <p> Year-on-year core inflation slowed to 9.6% in October from 9.9% In September. At the same time, the growth of regulated prices and tariffs accelerated to 10.7% year on year against 10.4% in September. Fruit and vegetable prices increased by 24.8% year on year in Oct 2021 after a 14.2% increase in Sep 2021. The contribution of these aggregates to overall inflation changed accordingly. </p> <p>   </p> <p> According to MART, the accelerated growth of food prices was mainly due to continued negative trends on foreign markets: the annual increase in world food prices in October 2021 was 29.3% (calculated on the basis of FAO data), in Russia food prices rose by 12.1% year on year and vegetables by 48.6%. </p> <p>   </p> <p> Given that the end of the year is traditionally the most inflationary period, it can be assumed that the situation is unlikely to change for the better by the end of the year and we will see an increase in consumer prices of some 10% by the end of December. A similar forecast is contained in an overview review by the Eurasian Development Bank (EDB). EDB experts note an increased probability of annual inflation remaining close to 10% by the end of 2021. </p> <p>   </p> <p> A slowdown in inflation growth may occur in 2022 –they said so at a round table at the National Bank of Belarus (NBB) on 24 November 2021. Head research and strategic development at NBB Natalia Mironchik said the regulator aims to restrain inflation at 6% per annum in 2022 and maintain interest rates in the economy at a positive level: “The National Bank’s policy will aim to stabilise inflation with minimal cost to the economy. 6% is the inflation target for 2022”. </p> <p>   </p> <p> In meantime, the IMF forecast says Belarus will see 8.5% inflation in 2022, the World Bank - 7.1%, the Eurasian Development Bank - 6.5% (the bank will provide an updated macro-forecast, including an inflation forecast, on November 25). Fitch forecasts that Belarus’ annual average inflation still stand at 8.5% between 2021 and 2023. Thus, given the forecasts and the persistently high inflationary background in Russia and the rest of the world, there is a substantial likelihood that the official forecast for Belarus will not be fulfilled in 2022 as well. </p> <p>   </p> <p> Risks escalate amid migration crisis </p> <p>   </p> <p> The unpredictability of the authorities’ actions in the economic sphere does not allow economic agents to make long-term plans. In the emerging environment, many are forced to minimise economic activity. </p> <p>   </p> <p> The migration crisis artificially created at the border between Belarus and the EU creates additional tension. This may lead to a further deterioration of Belarus' relations with the outside world and to a move by Western countries to impose new portions of sanctions, which may painful for the economy. </p> <p>   </p> <p> The uncertainty of the impact of sanctions and the speed with which the Belarusian economy adapts to them is great, EDB analysts said. </p> <p>   </p> <p> “Our baseline scenario assumes a rapid adaptation of Belarus to the sanctions, partly thanks to Russia’s support. However, it cannot be ruled out that the adaptation process will take a long time. The full impact of the restrictions imposed by some Western countries will be felt towards the end of 2021 or in the first half of 2022. If things follow an unfavourable scenario in 2022, we cannot exclude the possibility of economic recession, the scale of which can reach 1-4%. If the risk materialises, pressure on the Belarusian ruble exchange rate can be expected due to lower export revenues, higher devaluation expectations and a worsening investment climate,” the macro forecast says. </p> <p>   </p> <p> EDB experts point out that inflation risks in Belarus will increase if unfavourable developments occur. In the event of increased restrictive measures by Western countries and retaliatory restrictions by the Belarusian authorities, established production chains may be disrupted. This will not only affect the output of goods and services, but may also lead to significant increases in the costs of enterprises in Belarus, including those associated with the search for new partners and markets. Adverse developments may lead to an increase in threats to debt and financial stability. </p> <p>   </p> <p> In addition, FX and liquidity risks for Belarusian sovereign debt remain relevant, as well as the likelihood of a significant build-up of non-market lending to stimulate economic growth. </p> <p>   </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-12-01

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