ANALYSIS: Belarus’ economy slowing down, overdue debts piling up

MINSK, Mar 30 – PrimePress. Although petrochemical and potash mining industries recovered output, Belarus’ economy has already started demonstrating a downturn as early as January-February. At the same time, persisting uncertainty and increased pressure on private business increase the risks of financial instability and stimulate negative expectations of economic entities. Since early 2021, there has been an increase in bad debts in corporate settlements. In this situation, the actions of the Belarusian authorities are aimed at solving the current financial problems of individual industries and enterprises, including by means of directed lending and other administrative methods. Such methods not only stimulate tension in the economy, but also fuel inflation. Table 1. Key indicators of Belarus’ macroeconomic performance: <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> Indicator </td> <td> Real figures, Jan 2021, billion Belarusian rubles </td> <td> Jan 2021 on Jan 2020, % </td> <td> Official forecast for 2021, % </td> </tr> <tr> <td> GDP </td> <td> 23.327 </td> <td> +0.8% </td> <td> +1.8% </td> </tr> <tr> <td> Industrial output </td> <td> 21.354 </td> <td> +8.3% </td> <td> no forecast </td> </tr> <tr> <td> Fixed capital investments </td> <td> 3.357 (14.4% of GDP) </td> <td> minus 8.5% </td> <td> 21.3-21.7% of GDP </td> </tr> <tr> <td> Inflation growth since early 2017, % </td> <td> 1.9* </td> <td> 8.7 (Feb 2021 on Feb 2020) </td> <td> 5% at most </td> </tr> <tr> <td> Foreign trade balance (goods and services), USD million </td> <td> +425.4** </td> <td> +261.8** </td> <td> no forecast </td> </tr> <tr> <td> Real disposable household incomes, year on year, % </td> <td> +4.1** </td> <td> +6.8*** </td> <td> +1.6% </td> </tr> </tbody> </table> * month on month ** Jan 2021 *** Jan 2020 Belarus achieves GDP growth thanks to low comparative base After 1.3% GDP growth seen in January this year, the Jan-Feb dynamics of the index has worsened. According to the National Statistical Committee of Belarus (Belstat), the country’s GDP increased by 0.8% in January-February 2021 to Br23.327 billion. GDP growth slowed down compared to January, when it stood at 1.3%. Industrial output increased by 8.3% to Br21.354 billion (+8.5% in January 2021). The slowdown in GDP growth in comparison with the January level was mainly caused by the dynamics of the comparative base. There was a deceleration of the GDP decline in February 2020. However, last year’s growth driver was agriculture, thanks to an abnormally warm winter and early preparations for spring field work. This year, the manufacturing industry as well as “the supply of electricity, gas, steam, hot water and air-conditioning services” are acting as GDP drivers. In January-February 2021 the volume of the gross added value created in the manufacturing sector increased by 7.8% year on year in comparable prices up to Br5.285 billion, while in the energy sector it expanded by 16% to Br961 million. The accelerated growth in the energy sector was due to this year’s prolonged cold winter. In turn, the manufacturing industry is accelerating due to the loading of petrochemical complex, which operated with minimal load at the beginning of last year. According to Belstat, the production of coke and refined petroleum products increased by 44.1% year on year in January-February 2021 up to Br2.759 billion, while chemical products - by 30% up to Br1.808 billion. As for other industries, the positive dynamics of the gross added value was also observed in the information and communication sector (+2.9% up to Br1.607 billion in January-February 2020), in wholesale and retail trade (+0.5% up to Br2.033 billion). The reduction of the gross added value in January-February is registered in construction (minus 11.8% down to Br948.1 million), as well as in transportation (minus 8.5% to Br1.242 billion). Against this background, it can be assumed that GDP dynamics will largely depend on the comparative base, while support fr om traditional drivers (industry, IT, trade) will decrease. Growing arrears – new trend observed in early 2021 One of the channels through which the crisis is manifesting itself in the economy is the growth of problem debts in settlements between enterprises. Belstat says the total debt as of February 1, 2021 (the data is published with a delay) amounted to Br157.3 billion, down 0.7% month on month. The overdue debt on that date amounted to Br10.624 billion, up 4% month on month. Accounts receivable decreased by 0.4% to Br49.929 billion in Jan 2021, including overdue debt - up 3.9% to Br8.060 billion. Accounts payable decreased by 2.4% year to date to Br60.011 billion, including overdue payables - up 4.8% to Br7.796 billion as of February 1, 2021. Attention is drawn to the fact of accelerated growth of overdue debt in such items as taxes and fees, social security and welfare (+7.4% in January this year to Br189.9 million as of February 1), as well as the debt for fuel and energy resources (+12.3% to Br1.103 billion). In turn, companies' debt on credits and loans increased by 0.4% to Br97.281 billion as of February 1, 2021, including overdue credit debts - by 2% to Br2.828 billion. Based on the Belstat data, Belarusian business entities spent on the repayment of bank loans in January 2021 an average of 27.6% of their revenue, compared with 30.3% a year earlier. The decrease can be attributed to the recently tightened lending terms and reduced resources provided by banks amid the lack of ruble liquidity. In the near term, deteriorating financial discipline in the corporate sector could have a negative impact on budget revenues, the efficiency of the banking system, and the stability of the economy as a whole. Inflation expectations on the rise in Belarus’ corporate sector In 2020, the National Bank failed for the first time in several years to meet the key inflation target. Instead of the target of 5%, consumer prices rose by 7.4% at the end of the year. Inflation continues to accelerate in 2021. At the end of February, year-on-year cumulative inflation stood at 8.7%. At the same time, the official forecast for December 2021 remains unchanged - not more than 5%. Considering the tendencies, it is highly probable that this year’s forecast will not be fulfilled - this time, not only by the efforts of the government, but also due to the inaction of the National Bank, which is losing its operational independence. Since 2007, the National Bank of Belarus has organised monthly surveys of real sector enterprises regarding their expectations of consumer inflation rates over the next three months. After a surge of pro-inflation sentiment in 2020, the corporate sector’s expectations have not returned to the levels seen in 2017-2019 amid the post-crisis normalisation of monetary policy. The current expectations of businesses are more in line with the crisis periods of 2014-2016, which poses a significant threat if expectations remain at these levels. High inflation expectations could become self-sustaining. By now, a set of prerequisites has already emerged for this: the gradual loss of the National Bank’s operational independence, the public’s negative assessment of officials’ statements on pricing, the general crisis in the economy and the growing risks of losing financial stability in a manual regime. At that, not only the National Bank’s specialists, but also by independent experts admit the increased inflation expectations. The results of February’s IPM survey indicate that Belarusian companies still expect the acceleration of inflation; moreover, inflation expectations increased in February 2021. According to the survey results, the proportion of companies that plan to increase selling prices in the next two to three months is 49.2%. 41.6% of respondents have already increased their selling prices in the previous two to three months. The composite IPM index was prepared based on data from an online survey of companies, including clients of the IPM Business School, which polled company owners and top managers. Meanwhile, according to Belstat, consumer prices in Belarus rose by 1.9% month on month in February 2021, which was the highest monthly increase in the last five years. Foodstuffs prices rose by 1.8% on the month (+7.8% in February 2021 against February 2020), non-food products - by 1.1% (+9.4%). Tariffs for services rose by 3.4% (+9.2% year-on-year). According to the Ministry of Antimonopoly Regulation and Trade (MART), “the increased price growth is due to the continued adverse impact of higher prices of imported goods, as well as the abolition of tax exemptions”. According to the National Bank, annual core inflation in Belarus accelerated to 8.3% in February 2021 against 7.5% a month earlier. Trend inflation amounted to 6.5% in February against 5.9% in January. Regulated prices and tariffs increased by 8.5% year-on-year against 7.3% a month before. Seasonal prices (for fruit and vegetable products) - by 15.9% vs. 12.5%. It is worth reminding that in 2021, the government included consumer price index for socially important goods into the forecast of socio-economic development for the first time. It is calculated by the National Statistical Committee with regard to 72 consumer goods, which include meat, milk and dairy products, sausages, fish, groceries, bread, butter, vegetables, motor fuel and certain medicines. According to the government’s forecasts, this figure should not exceed 4.9% by the end of the year. However, consumer prices for socially important goods have already risen by 3.5% in the first two months of 2021. In year-on-year terms, according to the Ministry of Antimonopoly Regulation and Trade (MART), the increase was 7.2% in February against 5.9% in January this year. Thus, Belarus continues to experience an elevated inflationary environment, exacerbated by the actions of the authorities in search of additional budget revenues. The Eurasian Development Bank (EDB) estimated in March that inflation in Belarus will start to slow down in the second half of 2021, while remaining above 7% in year-on-year terms for most of the year. Growth rate of household incomes keeps slowing down According to Belstat, real disposable household incomes (cash income after taxes, fees and contributions, adjusted for consumer price index for goods and services) grew 4.1% year on year in January 2021 (6.8% in January 2020 against January 2019). At the same time, the official forecast for the current year envisages a slowdown in the growth rate of real disposable income to 1.6% for the year. The slowdown is due to a seasonal decline in average nominal wages against the backdrop of sharply accelerated inflation. The main sources of cash income are wages and transfers to private households, whose share in total cash income was 87.6% in January 2021 compared to 87.5% a year ago. Shares of other sources at the beginning of this year were distributed as follows: income from entrepreneurial and other income-generating activities - 7.4% (7.6% a year ago), property income - 2.3% (2.5%), other income - 2.7% (2.4%). As for the nominal wage, according to Belstat, in February, the average salary in Belarus amounted to Br1,277, down 1% month on month in nominal terms (+13.3% to February 2020). In real terms, wages rose by 4.2% year on year in February 2021, down 2.8% month on month. In U.S. dollar terms, average gross wages fell in February. Based on the average exchange rate per month calculated by the National Bank, the dollar equivalent of the average wage in February 2021 stood at $490.5, compared to $502.6 in Jan 2021 and $510.9 in February 2020. In general, it can be noted that the dynamics of the average wage in Belarus looks out of touch with the real capabilities of the economy and is more a political indicator than an economic one. The fact that wage growth outpaces economic growth creates additional risks for both price stability and the stability of the national currency. Growing risks associated with administrative interference in economy The National Bank’s surveys indicate pessimistic economic sentiment in the real sector. In such an environment, investment activity tends to be depressed. The nature of growth in industry is unsustainable. The situation in the industry depends on the state of external demand, on which the largest exporting enterprises - Belaruskali, MTZ, BelAZ, MAZ, Naftan and Mozyr NPZ oil refinery - are heavily dependent. Potential demand for Belarusian products is constrained by, among other things, the coronavirus epidemic and likely sanctions on industry by the US and the EU. Further value-added growth in the energy sector may be hindered by political decisions of neighbouring countries. Parliaments and governments in the Baltic states and Ukraine are launching legislative mechanisms to nullify electricity imports from Belarus - for national security reasons. This would have a negative impact on the utilisation of the Belarusian nuclear power plant and the energy system as a whole, and on domestic energy production costs. Overall, economic management in Belarus is increasingly shifting to manual mode, as evidenced by the decisions to lim it price growth on the consumer market, targeted financial support to large enterprises, and the loss of operational independence of the National Bank. It appears that if the current course of events is sustained, the economic situation will unavoidably worsen, especially in terms of financial stability. PrimePress Business Analysis Agency

2021-03-31

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ANALYSIS: Belarus’ economy slowing down, overdue debts piling up

MINSK, Mar 30 – PrimePress. Although petrochemical and potash mining industries recovered output, Belarus’ economy has already started demonstrating a downturn as early as January-February. At the same time, persisting uncertainty and increased pressure on private business increase the risks of financial instability and stimulate negative expectations of economic entities.

Since early 2021, there has been an increase in bad debts in corporate settlements. In this situation, the actions of the Belarusian authorities are aimed at solving the current financial problems of individual industries and enterprises, including by means of directed lending and other administrative methods. Such methods not only stimulate tension in the economy, but also fuel inflation.

Table 1. Key indicators of Belarus’ macroeconomic performance:

Indicator	Real figures, Jan 2021, billion Belarusian rubles	Jan 2021 on Jan 2020, %	Official forecast for 2021, %
GDP	23.327	+0.8%	+1.8%
Industrial output	21.354	+8.3%	no forecast
Fixed capital investments	3.357 (14.4% of GDP)	minus 8.5%	21.3-21.7% of GDP
Inflation growth since early 2017, %	1.9*	8.7 (Feb 2021 on Feb 2020)	5% at most
Foreign trade balance (goods and services), USD million	+425.4**	+261.8**	no forecast
Real disposable household incomes, year on year, %	+4.1**	+6.8***	+1.6%

* month on month

** Jan 2021

*** Jan 2020

Belarus achieves GDP growth thanks to low comparative base

After 1.3% GDP growth seen in January this year, the Jan-Feb dynamics of the index has worsened.

According to the National Statistical Committee of Belarus (Belstat), the country’s GDP increased by 0.8% in January-February 2021 to Br23.327 billion. GDP growth slowed down compared to January, when it stood at 1.3%.

Industrial output increased by 8.3% to Br21.354 billion (+8.5% in January 2021).

The slowdown in GDP growth in comparison with the January level was mainly caused by the dynamics of the comparative base. There was a deceleration of the GDP decline in February 2020. However, last year’s growth driver was agriculture, thanks to an abnormally warm winter and early preparations for spring field work.

This year, the manufacturing industry as well as “the supply of electricity, gas, steam, hot water and air-conditioning services” are acting as GDP drivers. In January-February 2021 the volume of the gross added value created in the manufacturing sector increased by 7.8% year on year in comparable prices up to Br5.285 billion, while in the energy sector it expanded by 16% to Br961 million.

The accelerated growth in the energy sector was due to this year’s prolonged cold winter. In turn, the manufacturing industry is accelerating due to the loading of petrochemical complex, which operated with minimal load at the beginning of last year.

According to Belstat, the production of coke and refined petroleum products increased by 44.1% year on year in January-February 2021 up to Br2.759 billion, while chemical products - by 30% up to Br1.808 billion.

As for other industries, the positive dynamics of the gross added value was also observed in the information and communication sector (+2.9% up to Br1.607 billion in January-February 2020), in wholesale and retail trade (+0.5% up to Br2.033 billion). The reduction of the gross added value in January-February is registered in construction (minus 11.8% down to Br948.1 million), as well as in transportation (minus 8.5% to Br1.242 billion).

Against this background, it can be assumed that GDP dynamics will largely depend on the comparative base, while support fr om traditional drivers (industry, IT, trade) will decrease.

Growing arrears – new trend observed in early 2021

One of the channels through which the crisis is manifesting itself in the economy is the growth of problem debts in settlements between enterprises.

Belstat says the total debt as of February 1, 2021 (the data is published with a delay) amounted to Br157.3 billion, down 0.7% month on month. The overdue debt on that date amounted to Br10.624 billion, up 4% month on month.

Accounts receivable decreased by 0.4% to Br49.929 billion in Jan 2021, including overdue debt - up 3.9% to Br8.060 billion. Accounts payable decreased by 2.4% year to date to Br60.011 billion, including overdue payables - up 4.8% to Br7.796 billion as of February 1, 2021.

Attention is drawn to the fact of accelerated growth of overdue debt in such items as taxes and fees, social security and welfare (+7.4% in January this year to Br189.9 million as of February 1), as well as the debt for fuel and energy resources (+12.3% to Br1.103 billion).

In turn, companies' debt on credits and loans increased by 0.4% to Br97.281 billion as of February 1, 2021, including overdue credit debts - by 2% to Br2.828 billion.

Based on the Belstat data, Belarusian business entities spent on the repayment of bank loans in January 2021 an average of 27.6% of their revenue, compared with 30.3% a year earlier. The decrease can be attributed to the recently tightened lending terms and reduced resources provided by banks amid the lack of ruble liquidity.

In the near term, deteriorating financial discipline in the corporate sector could have a negative impact on budget revenues, the efficiency of the banking system, and the stability of the economy as a whole.

Inflation expectations on the rise in Belarus’ corporate sector

In 2020, the National Bank failed for the first time in several years to meet the key inflation target. Instead of the target of 5%, consumer prices rose by 7.4% at the end of the year. Inflation continues to accelerate in 2021. At the end of February, year-on-year cumulative inflation stood at 8.7%. At the same time, the official forecast for December 2021 remains unchanged - not more than 5%.

Considering the tendencies, it is highly probable that this year’s forecast will not be fulfilled - this time, not only by the efforts of the government, but also due to the inaction of the National Bank, which is losing its operational independence.

Since 2007, the National Bank of Belarus has organised monthly surveys of real sector enterprises regarding their expectations of consumer inflation rates over the next three months. After a surge of pro-inflation sentiment in 2020, the corporate sector’s expectations have not returned to the levels seen in 2017-2019 amid the post-crisis normalisation of monetary policy. The current expectations of businesses are more in line with the crisis periods of 2014-2016, which poses a significant threat if expectations remain at these levels.

High inflation expectations could become self-sustaining. By now, a set of prerequisites has already emerged for this: the gradual loss of the National Bank’s operational independence, the public’s negative assessment of officials’ statements on pricing, the general crisis in the economy and the growing risks of losing financial stability in a manual regime.

At that, not only the National Bank’s specialists, but also by independent experts admit the increased inflation expectations. The results of February’s IPM survey indicate that Belarusian companies still expect the acceleration of inflation; moreover, inflation expectations increased in February 2021.

According to the survey results, the proportion of companies that plan to increase selling prices in the next two to three months is 49.2%. 41.6% of respondents have already increased their selling prices in the previous two to three months.

The composite IPM index was prepared based on data from an online survey of companies, including clients of the IPM Business School, which polled company owners and top managers.

Meanwhile, according to Belstat, consumer prices in Belarus rose by 1.9% month on month in February 2021, which was the highest monthly increase in the last five years. Foodstuffs prices rose by 1.8% on the month (+7.8% in February 2021 against February 2020), non-food products - by 1.1% (+9.4%). Tariffs for services rose by 3.4% (+9.2% year-on-year).

According to the Ministry of Antimonopoly Regulation and Trade (MART), “the increased price growth is due to the continued adverse impact of higher prices of imported goods, as well as the abolition of tax exemptions”.

According to the National Bank, annual core inflation in Belarus accelerated to 8.3% in February 2021 against 7.5% a month earlier. Trend inflation amounted to 6.5% in February against 5.9% in January. Regulated prices and tariffs increased by 8.5% year-on-year against 7.3% a month before. Seasonal prices (for fruit and vegetable products) - by 15.9% vs. 12.5%.

It is worth reminding that in 2021, the government included consumer price index for socially important goods into the forecast of socio-economic development for the first time. It is calculated by the National Statistical Committee with regard to 72 consumer goods, which include meat, milk and dairy products, sausages, fish, groceries, bread, butter, vegetables, motor fuel and certain medicines. According to the government’s forecasts, this figure should not exceed 4.9% by the end of the year. However, consumer prices for socially important goods have already risen by 3.5% in the first two months of 2021. In year-on-year terms, according to the Ministry of Antimonopoly Regulation and Trade (MART), the increase was 7.2% in February against 5.9% in January this year.

Thus, Belarus continues to experience an elevated inflationary environment, exacerbated by the actions of the authorities in search of additional budget revenues. The Eurasian Development Bank (EDB) estimated in March that inflation in Belarus will start to slow down in the second half of 2021, while remaining above 7% in year-on-year terms for most of the year.

Growth rate of household incomes keeps slowing down

According to Belstat, real disposable household incomes (cash income after taxes, fees and contributions, adjusted for consumer price index for goods and services) grew 4.1% year on year in January 2021 (6.8% in January 2020 against January 2019). At the same time, the official forecast for the current year envisages a slowdown in the growth rate of real disposable income to 1.6% for the year.

The slowdown is due to a seasonal decline in average nominal wages against the backdrop of sharply accelerated inflation.

The main sources of cash income are wages and transfers to private households, whose share in total cash income was 87.6% in January 2021 compared to 87.5% a year ago. Shares of other sources at the beginning of this year were distributed as follows: income from entrepreneurial and other income-generating activities - 7.4% (7.6% a year ago), property income - 2.3% (2.5%), other income - 2.7% (2.4%).

As for the nominal wage, according to Belstat, in February, the average salary in Belarus amounted to Br1,277, down 1% month on month in nominal terms (+13.3% to February 2020). In real terms, wages rose by 4.2% year on year in February 2021, down 2.8% month on month.

In U.S. dollar terms, average gross wages fell in February. Based on the average exchange rate per month calculated by the National Bank, the dollar equivalent of the average wage in February 2021 stood at $490.5, compared to $502.6 in Jan 2021 and $510.9 in February 2020.

In general, it can be noted that the dynamics of the average wage in Belarus looks out of touch with the real capabilities of the economy and is more a political indicator than an economic one. The fact that wage growth outpaces economic growth creates additional risks for both price stability and the stability of the national currency.

Growing risks associated with administrative interference in economy

The National Bank’s surveys indicate pessimistic economic sentiment in the real sector. In such an environment, investment activity tends to be depressed.

The nature of growth in industry is unsustainable. The situation in the industry depends on the state of external demand, on which the largest exporting enterprises - Belaruskali, MTZ, BelAZ, MAZ, Naftan and Mozyr NPZ oil refinery - are heavily dependent. Potential demand for Belarusian products is constrained by, among other things, the coronavirus epidemic and likely sanctions on industry by the US and the EU.

Further value-added growth in the energy sector may be hindered by political decisions of neighbouring countries. Parliaments and governments in the Baltic states and Ukraine are launching legislative mechanisms to nullify electricity imports from Belarus - for national security reasons. This would have a negative impact on the utilisation of the Belarusian nuclear power plant and the energy system as a whole, and on domestic energy production costs.

Overall, economic management in Belarus is increasingly shifting to manual mode, as evidenced by the decisions to lim it price growth on the consumer market, targeted financial support to large enterprises, and the loss of operational independence of the National Bank.

It appears that if the current course of events is sustained, the economic situation will unavoidably worsen, especially in terms of financial stability.

PrimePress Business Analysis Agency

2021-03-31

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