ANALYSIS: Belarus’ economy maintains negative dynamics in 2020

MINSK, Jan 26 – PrimePress. Belarus’ economy would remain negative in 2002 despite the efforts of the authorities. The country’s GDP did not get out of the negative zone, inflation accelerated significantly, negative expectations increased and the social stratification in terms of income level grew. At the same time, Belarus is going through a political crisis following the August 2020 presidential election, which has affected residents’ economic behaviour and has led to increased external isolation of the country. Table 1. Key indicators of Belarus’ macroeconomic performance: <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> Indicator </td> <td> Real figures, Jan-Dec 2020, billion Belarusian rubles </td> <td> Jan-Dec 2020 on Jan-Dec 2019, % </td> <td> Official forecast for 2020, % </td> </tr> <tr> <td> GDP </td> <td> 147.0 </td> <td> minus 0.9% </td> <td> +2.8% </td> </tr> <tr> <td> Industrial output </td> <td> 116.5 </td> <td> minus 0.7% </td> <td> +2.2% </td> </tr> <tr> <td> Fixed capital investments </td> <td> 28.7 </td> <td> minus 6.8% </td> <td> +4% </td> </tr> <tr> <td> Inflation growth since early 2017, % </td> <td> 7.4 </td> <td> 1.2* </td> <td> 5% at most </td> </tr> <tr> <td> Foreign trade balance (goods and services), USD million </td> <td> +1,980** (+3.6% of GDP) </td> <td> +233.7*** (+0.4% of GDP) </td> <td> + 1% of GDP in 2020 </td> </tr> <tr> <td> Real disposable household incomes, year on year, % </td> <td> +4.4** </td> <td> +6.4*** </td> <td> annual forecast +2.4% </td> </tr> </tbody> </table> * Dec 2020 on Dec 2019 ** Jan-Nov 2020 *** Jan-Nov 2020 GDP stays below forecast again Over the past 10 years (from 2010 to 2020), the official forecast for economic growth has been realised only once - in 2017. Back then the Council of Ministers expected GDP to grow in real terms by 1.7%, while in fact this indicator grew by 2.5%. However, the Year 2017 witnessed recovery growth after two consecutive years of decline. For example, in 2015 GDP fell by 3.8% and by 2.5% in 2016. When preparing the forecast for 2020, the government was guided by the so-called baseline scenario, which did not foresee any significant economic shocks. In reality, it turned out to be much worse than expected. In Q1 Belarusian refineries had to operate under conditions of an acute shortage of crude supplies from Russia. In Q2, the country’s economy was shaken by the consequences of the global crisis amid the coronavirus pandemic. In Q3-Q4, negative expectations of economic entities and private households increased sharply, which also had a negative impact on the dynamics of key indicators. As a result, the National Statistical Committee of Belarus (Belstat) reports a 0.9% year-on-year GDP decline for 2020, amounting to Br147.0bn against the initial forecast for 2020m, which stood at +2.8%. It can be noted that economic decline in Belarus proved to be less drastic that the forecast projections made by international institutions (minus 2-3%), but the authorities also failed to reduce the GDP decline to zero (as demanded by the president and promised by the prime minister). The government led by Roman Golovchenko (appointed in June) was quick to set the goal of preventing a GDP decline in 2020. Almost immediately, administrative levers were deployed to achieve the necessary result – they started expanding directed lending and discharging warehouses of industrial enterprises with the help of the Ministry of Finance and state-owned leasing companies. Without these measures Belarus’ economic decline would have been even more significant. Agriculture and the ITC sector made a positive contribution to mitigating GDP decline in 2020. Agricultural output grew by 2019 due to a good crop harvest, while the ITC sector was pushed forward by IT companies. It is worth noting that there is a noticeable slowdown in value added growth in the ITC sector after August. This phenomenon can be attributed to the partial relocation of Belarusian IT businesses. If this trend persists during 2021, the IT sector may fall out of the ranks of the drivers of Belarus’ GDP. Gross value added (GVA) in industry grew by only 0.1%, despite state support. This is due to lower output in oil refining, machine building, metallurgy, equipment production and the energy sector. Wood processing and pulp-and-paper companies as well as the pharmaceutical, transport and food industries helped to mitigate the decline in these sectors. The fall in manufacturing industries could have been even greater, had it not been for the “produce-to-stock” strategy. During the past year, warehouse inventory levels remained elevated. Some reduction in warehouse stockpiles only occurred towards the end of the year and not without intervention of the government and state-owned leasing companies. As of January 1, 2021, stocks of finished goods in warehouses of Belarusian industrial enterprises amounted to Br5.075bn, or 65.3% of the average monthly industrial output to compare with 66.3% as of January 1, 2020. According to the official forecast, Belarus' GDP should grow by at least 1.8% in 2021. As for the forecasts of international financial institutions and rating agencies, they differ significantly in their estimates. The optimistic forecasts by the IMF and S&P are based on their negative estimates of Belarus' GDP failure in 2020. Therefore, as early as in spring their estimates for 2021 will be adjusted downwards considerably. The Eurasian Development Bank’s (EDB) forecast of a 0.1% GDP decline is based on analytical assumptions about fiscal risks and balance of payments gaps that may create systemic risks to financial stability. It can be assumed that the official GDP growth forecast of 1.8% has a chance of materialising under a combination of favourable circumstances: high oil and potash prices, a halt or deceleration of IT business exodus from the country, a stable recovery of economic activity in Russia with no significant new sanctions from the West on Russia and Belarus. GDP growth will also benefit from a relatively low comparative base in 2020. Belarus rolls back several years in inflation terms The increase in directed lending, coupled with the devaluation of the Belarusian ruble, has pushed consumer inflation to multi-month highs. In late December 2020, year-on-year inflation accelerated to 7.4% (December 2020 on December 2019) from 6.6% in November (November 2020 on November 2019), a record high in the last 47 months. According to Belstat, consumer prices in Belarus rose by 1.2% month on month in December 2020: food prices rose by 1.6% (+6.2% year on year in December) and non-food prices by 0.4% (+8.1%). Tariffs for services rose by 1.7% (+8.4% year on year). According to estimates by the National Bank, “the fact that inflation exceeded the end-of-year forecast is due to the weakening of the Belarusian ruble, deteriorating economic sentiment and rising inflationary expectations, as well as supply shocks for some food products.” It is worth reminding that initially the authorities had intended to keep inflation within 5% in 2020, but in recent months the forecasts have started to deteriorate. The latest revised forecast by the National Bank was made public in early November. Then NBB chairman Pavel Kallaur said that the year-end consumer price growth was expected to be around 6%. After that, the regulator refrained from any forecasts, which indirectly indicates some loss of control over inflationary processes. According to the National Bank, annual core inflation in Belarus accelerated to 7.1% in December 2020 from 6.4% in November 2020. Trend inflation in December was 5.6% versus 5.1% in November. Administered prices and tariffs increased by 6.7% year-on-year against 6.5% a month earlier. Seasonal prices (for fruit and vegetable products) rose by 16% vs. 10.5%. Correspondingly, the contribution of these components to the overall inflation rate increased. Thus, income stimulation and public sector financing with preferential lending increases inflationary risks. At the same time, the political crisis has an additional negative impact on inflation expectations. The inflation backdrop will remain elevated in Q1 2021. Amendments to the Tax Code came into force on January 1, according to which the rates of some taxes and fees were indexed to match inflation, while the Council of Ministers increased the VAT rates for some groups of goods. Also, at the beginning of the year they would raise the tariffs for housing and utilities services. At the same time, despite the risks, this year the authorities expect a slowdown in inflationary processes. According to the approved Monetary Policy Guidelines for 2021, the regulator's monetary policy will be aimed at keeping inflation within 5% at the end of the year. It is not ruled out that consumer price growth will be restrained using administrative methods. December sees seasonal wage growth In December, Belarus traditionally records a sharp increase in average wages, which is associated with the payment of annual bonuses by many companies to their employees. December 2020 was no exception, despite the economic crisis. According to Belstat, in December 2020, the average wage in Belarus amounted to Br1,475, a 13.4% increase in nominal terms month on month (+18.4% to December 2019). In real terms, the average wages grew by 10.2% year on year in December 2020. In view of accelerating inflation and the worsening situation in the economy as a whole, such an increase seems unjustified. Moreover, the gap between wage growth and economic growth itself poses additional risks to both price stability and the stability of the national currency. The growth of average accrued wages also took place in US dollar terms, but due to the depreciation of the Belarusian ruble it could not exceed the December 2019 level. Based on the average exchange rate per month calculated by the National Bank, the dollar equivalent of the average wage in December 2020 was $576.6, compared to $503.9 a month earlier and $587.8 in December 2019. Minsk traditionally remained the leader in terms of wage levels in December 2020, with an average salary of Br2,151. The lowest average nominal wage is in Mogilev Oblast - Br1,176. Minsk is far ahead not only of the outsider in this indicator, but the second place, taken by Minsk Oblast. There, the average gross salary in December 2020 amounted to Br1.427 thousand. The ITC sector retained the first place by the size of the average wage in December 2020 among other economic sectors - Br4,838. Financial activities and insurance services occupy the second place with a significant lag - Br2,631. December’s lowest average salary (by disaggregated types of economic activity) on the basis of Belstat data has been recorded in the field of accommodation and catering - Br907.4. This sector was the only one in December that showed negative dynamics of wage levels (minus 1.6% compared to December 2019), which is due to the crisis effects because of the pandemic. However, it should be noted that agriculture, forestry and fisheries (Br977.6 in December) and education (Br990.6) are traditionally among the outsiders in wage terms. In January, Belstat also published data on the median wage, which are closer to reality. According to Belstat data, the median wage of employees of Belarusian organizations in November 2020 amounted to Br944.4, a year-on-year increase of 11.3%. The median wage was 27.4% lower than the average nominal wage, which is the most commonly used by the Belarusian authorities. A year ago, the gap between these indicators was 23.8%. It may be noted here that in November 2019 statistics showed the first narrowing of the gap between the median and average wage in six years. Until 2019, the gap had been widening, indicating an increase in income stratification. In November 2020, the gap began to widen again, indicating the greater vulnerability of the low-paid population to the current economic crisis. A difference of between 20-25% between the median and average wage is considered normal. Thus, if we compare the pace of wage growth with the growth rate of the economy as a whole, we can note that the topic of income increases continues to be under the scrutiny of the authorities and the election year was no exception. Wage growth has been outpacing the pace of economic growth and does not take into account the capacity of Belarus’ economy (except for the hi-tech sector). Existing risks jeopardise govt’s plans To summarise, there are significant risks which individually or collectively may undermine the plans of the authorities. Among them are the threat of the fourth package of sanctions that may be imposed against Belarus by the European Union, the return of US sanctions against Belarus’ petrochemical industries (suspended until April 2021), increased relocation of IT sector personnel, weak demand for oil products in external markets due to the coronavirus pandemic. There are risks of man-made destabilisation by the authorities. If the adopted target plan is not fulfilled within a year, the president will have a formal reason to demand new incentives for the public sector for the sake of achieving the figures spelled out in the approved documents. The short-term effect of administrative incentives to the public sector (increased directed lending, lower interest rates) is likely to show, but they will end up sacrificing macroeconomic stability, which is itself the enabler of sustained economic growth. PrimePress Business Analysis Agency

2021-01-27

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ANALYSIS: Belarus’ economy maintains negative dynamics in 2020

MINSK, Jan 26 – PrimePress. Belarus’ economy would remain negative in 2002 despite the efforts of the authorities. The country’s GDP did not get out of the negative zone, inflation accelerated significantly, negative expectations increased and the social stratification in terms of income level grew. At the same time, Belarus is going through a political crisis following the August 2020 presidential election, which has affected residents’ economic behaviour and has led to increased external isolation of the country.

Table 1. Key indicators of Belarus’ macroeconomic performance:

Indicator	Real figures, Jan-Dec 2020, billion Belarusian rubles	Jan-Dec 2020 on Jan-Dec 2019, %	Official forecast for 2020, %
GDP	147.0	minus 0.9%	+2.8%
Industrial output	116.5	minus 0.7%	+2.2%
Fixed capital investments	28.7	minus 6.8%	+4%
Inflation growth since early 2017, %	7.4	1.2*	5% at most
Foreign trade balance (goods and services), USD million	+1,980** (+3.6% of GDP)	+233.7*** (+0.4% of GDP)	+ 1% of GDP in 2020
Real disposable household incomes, year on year, %	+4.4**	+6.4***	annual forecast +2.4%

* Dec 2020 on Dec 2019

** Jan-Nov 2020

*** Jan-Nov 2020

GDP stays below forecast again

Over the past 10 years (from 2010 to 2020), the official forecast for economic growth has been realised only once - in 2017. Back then the Council of Ministers expected GDP to grow in real terms by 1.7%, while in fact this indicator grew by 2.5%. However, the Year 2017 witnessed recovery growth after two consecutive years of decline. For example, in 2015 GDP fell by 3.8% and by 2.5% in 2016.

When preparing the forecast for 2020, the government was guided by the so-called baseline scenario, which did not foresee any significant economic shocks. In reality, it turned out to be much worse than expected. In Q1 Belarusian refineries had to operate under conditions of an acute shortage of crude supplies from Russia. In Q2, the country’s economy was shaken by the consequences of the global crisis amid the coronavirus pandemic. In Q3-Q4, negative expectations of economic entities and private households increased sharply, which also had a negative impact on the dynamics of key indicators.

As a result, the National Statistical Committee of Belarus (Belstat) reports a 0.9% year-on-year GDP decline for 2020, amounting to Br147.0bn against the initial forecast for 2020m, which stood at +2.8%.

It can be noted that economic decline in Belarus proved to be less drastic that the forecast projections made by international institutions (minus 2-3%), but the authorities also failed to reduce the GDP decline to zero (as demanded by the president and promised by the prime minister).

The government led by Roman Golovchenko (appointed in June) was quick to set the goal of preventing a GDP decline in 2020. Almost immediately, administrative levers were deployed to achieve the necessary result – they started expanding directed lending and discharging warehouses of industrial enterprises with the help of the Ministry of Finance and state-owned leasing companies. Without these measures Belarus’ economic decline would have been even more significant.

Agriculture and the ITC sector made a positive contribution to mitigating GDP decline in 2020. Agricultural output grew by 2019 due to a good crop harvest, while the ITC sector was pushed forward by IT companies.

It is worth noting that there is a noticeable slowdown in value added growth in the ITC sector after August. This phenomenon can be attributed to the partial relocation of Belarusian IT businesses. If this trend persists during 2021, the IT sector may fall out of the ranks of the drivers of Belarus’ GDP.

Gross value added (GVA) in industry grew by only 0.1%, despite state support. This is due to lower output in oil refining, machine building, metallurgy, equipment production and the energy sector. Wood processing and pulp-and-paper companies as well as the pharmaceutical, transport and food industries helped to mitigate the decline in these sectors.

The fall in manufacturing industries could have been even greater, had it not been for the “produce-to-stock” strategy. During the past year, warehouse inventory levels remained elevated. Some reduction in warehouse stockpiles only occurred towards the end of the year and not without intervention of the government and state-owned leasing companies.

As of January 1, 2021, stocks of finished goods in warehouses of Belarusian industrial enterprises amounted to Br5.075bn, or 65.3% of the average monthly industrial output to compare with 66.3% as of January 1, 2020.

According to the official forecast, Belarus' GDP should grow by at least 1.8% in 2021. As for the forecasts of international financial institutions and rating agencies, they differ significantly in their estimates.

The optimistic forecasts by the IMF and S&P are based on their negative estimates of Belarus' GDP failure in 2020. Therefore, as early as in spring their estimates for 2021 will be adjusted downwards considerably. The Eurasian Development Bank’s (EDB) forecast of a 0.1% GDP decline is based on analytical assumptions about fiscal risks and balance of payments gaps that may create systemic risks to financial stability.

It can be assumed that the official GDP growth forecast of 1.8% has a chance of materialising under a combination of favourable circumstances: high oil and potash prices, a halt or deceleration of IT business exodus from the country, a stable recovery of economic activity in Russia with no significant new sanctions from the West on Russia and Belarus. GDP growth will also benefit from a relatively low comparative base in 2020.

Belarus rolls back several years in inflation terms

The increase in directed lending, coupled with the devaluation of the Belarusian ruble, has pushed consumer inflation to multi-month highs. In late December 2020, year-on-year inflation accelerated to 7.4% (December 2020 on December 2019) from 6.6% in November (November 2020 on November 2019), a record high in the last 47 months.

According to Belstat, consumer prices in Belarus rose by 1.2% month on month in December 2020: food prices rose by 1.6% (+6.2% year on year in December) and non-food prices by 0.4% (+8.1%). Tariffs for services rose by 1.7% (+8.4% year on year).

According to estimates by the National Bank, “the fact that inflation exceeded the end-of-year forecast is due to the weakening of the Belarusian ruble, deteriorating economic sentiment and rising inflationary expectations, as well as supply shocks for some food products.”

It is worth reminding that initially the authorities had intended to keep inflation within 5% in 2020, but in recent months the forecasts have started to deteriorate. The latest revised forecast by the National Bank was made public in early November. Then NBB chairman Pavel Kallaur said that the year-end consumer price growth was expected to be around 6%. After that, the regulator refrained from any forecasts, which indirectly indicates some loss of control over inflationary processes.

According to the National Bank, annual core inflation in Belarus accelerated to 7.1% in December 2020 from 6.4% in November 2020. Trend inflation in December was 5.6% versus 5.1% in November. Administered prices and tariffs increased by 6.7% year-on-year against 6.5% a month earlier. Seasonal prices (for fruit and vegetable products) rose by 16% vs. 10.5%. Correspondingly, the contribution of these components to the overall inflation rate increased.

Thus, income stimulation and public sector financing with preferential lending increases inflationary risks. At the same time, the political crisis has an additional negative impact on inflation expectations.

The inflation backdrop will remain elevated in Q1 2021. Amendments to the Tax Code came into force on January 1, according to which the rates of some taxes and fees were indexed to match inflation, while the Council of Ministers increased the VAT rates for some groups of goods. Also, at the beginning of the year they would raise the tariffs for housing and utilities services.

At the same time, despite the risks, this year the authorities expect a slowdown in inflationary processes. According to the approved Monetary Policy Guidelines for 2021, the regulator's monetary policy will be aimed at keeping inflation within 5% at the end of the year. It is not ruled out that consumer price growth will be restrained using administrative methods.

December sees seasonal wage growth

In December, Belarus traditionally records a sharp increase in average wages, which is associated with the payment of annual bonuses by many companies to their employees. December 2020 was no exception, despite the economic crisis.

According to Belstat, in December 2020, the average wage in Belarus amounted to Br1,475, a 13.4% increase in nominal terms month on month (+18.4% to December 2019). In real terms, the average wages grew by 10.2% year on year in December 2020.

In view of accelerating inflation and the worsening situation in the economy as a whole, such an increase seems unjustified. Moreover, the gap between wage growth and economic growth itself poses additional risks to both price stability and the stability of the national currency.

The growth of average accrued wages also took place in US dollar terms, but due to the depreciation of the Belarusian ruble it could not exceed the December 2019 level. Based on the average exchange rate per month calculated by the National Bank, the dollar equivalent of the average wage in December 2020 was $576.6, compared to $503.9 a month earlier and $587.8 in December 2019.

Minsk traditionally remained the leader in terms of wage levels in December 2020, with an average salary of Br2,151. The lowest average nominal wage is in Mogilev Oblast - Br1,176. Minsk is far ahead not only of the outsider in this indicator, but the second place, taken by Minsk Oblast. There, the average gross salary in December 2020 amounted to Br1.427 thousand.

The ITC sector retained the first place by the size of the average wage in December 2020 among other economic sectors - Br4,838. Financial activities and insurance services occupy the second place with a significant lag - Br2,631.

December’s lowest average salary (by disaggregated types of economic activity) on the basis of Belstat data has been recorded in the field of accommodation and catering - Br907.4. This sector was the only one in December that showed negative dynamics of wage levels (minus 1.6% compared to December 2019), which is due to the crisis effects because of the pandemic.

However, it should be noted that agriculture, forestry and fisheries (Br977.6 in December) and education (Br990.6) are traditionally among the outsiders in wage terms.

In January, Belstat also published data on the median wage, which are closer to reality.

According to Belstat data, the median wage of employees of Belarusian organizations in November 2020 amounted to Br944.4, a year-on-year increase of 11.3%. The median wage was 27.4% lower than the average nominal wage, which is the most commonly used by the Belarusian authorities. A year ago, the gap between these indicators was 23.8%.

It may be noted here that in November 2019 statistics showed the first narrowing of the gap between the median and average wage in six years. Until 2019, the gap had been widening, indicating an increase in income stratification. In November 2020, the gap began to widen again, indicating the greater vulnerability of the low-paid population to the current economic crisis.

A difference of between 20-25% between the median and average wage is considered normal.

Thus, if we compare the pace of wage growth with the growth rate of the economy as a whole, we can note that the topic of income increases continues to be under the scrutiny of the authorities and the election year was no exception. Wage growth has been outpacing the pace of economic growth and does not take into account the capacity of Belarus’ economy (except for the hi-tech sector).

Existing risks jeopardise govt’s plans

To summarise, there are significant risks which individually or collectively may undermine the plans of the authorities. Among them are the threat of the fourth package of sanctions that may be imposed against Belarus by the European Union, the return of US sanctions against Belarus’ petrochemical industries (suspended until April 2021), increased relocation of IT sector personnel, weak demand for oil products in external markets due to the coronavirus pandemic.

There are risks of man-made destabilisation by the authorities. If the adopted target plan is not fulfilled within a year, the president will have a formal reason to demand new incentives for the public sector for the sake of achieving the figures spelled out in the approved documents.

The short-term effect of administrative incentives to the public sector (increased directed lending, lower interest rates) is likely to show, but they will end up sacrificing macroeconomic stability, which is itself the enabler of sustained economic growth.

PrimePress Business Analysis Agency

2021-01-27

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