ANALYSIS: Economic downturn in Belarus continues, authorities plan to prevent a year-end decline

MINSK, Jul 31 – PrimePress Analysis. As the calendar gets closer to the presidential Election Day in Belarus, the authorities intensify their positive rhetoric. Despite the lack of reliable sources of growth and forecasts for the rapid recovery of the economies of Belarus’ main partners, the government confidently declares that the situation in the country’s economy is improving and that they are determined to prevent a year-on-year decline at the end of 2020. In July, the Economy Ministry presented its vision of Belarus’ GDP dynamics until the end of the year and in 2021. On July 17, Economy Minister Alexander Chervyakov said that “industry is beginning to recover in terms of production and supply”, partly due to new contracts for potash fertilizer supplies to China and India, as well as the ending decline in oil refining. The minister noted that although the country’s GDP shrank by 1.7% year on year in Jan-Jun 2020, Belarus may close the year with a zero economic decline. However, the main macroeconomic indicators, including the dynamics of GDP and inflation, do not look very optimistic so far. Table 1. Key indicators of Belarus’ macroeconomic performance: <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> Indicator </td> <td> Real figures, Jan-Jun 2020, billion Belarusian rubles </td> <td> Jan-Jun 2020 on Jan-Jun 2019, % </td> <td> Official forecast for 2020, % </td> </tr> <tr> <td> GDP </td> <td> 66.298 </td> <td> minus 1.7% </td> <td> +2.8% (+1.6% in H1) </td> </tr> <tr> <td> Industrial output </td> <td> 52.948 </td> <td> minus 3.1% </td> <td> +2.2% (+1% in H1) </td> </tr> <tr> <td> Fixed capital investments </td> <td> 12.764 </td> <td> minus 1.2% </td> <td> +4% (+1.7% in H1) </td> </tr> <tr> <td> Inflation growth since early 2017, % </td> <td> 3.4 </td> <td> 5.2* </td> <td> 5% at most (not more than 3.2% in June 2020 compared to the level of Dec 2019) </td> </tr> <tr> <td> Foreign trade balance (goods and services), USD million </td> <td> ++682.6** (+3.1% of GDP) </td> <td> +114.4*** (+0.5% of GDP) </td> <td> +$650m or + 1% of GDP in 2020 (+$533.7m or +1.8% in H1) </td> </tr> <tr> <td> Real disposable household incomes, year on year, % </td> <td> +5.4** </td> <td> +7.1*** </td> <td> annual forecast +2.4% (+1.3% in Q1) </td> </tr> </tbody> </table> * Jun 2020 on Jun 2019 ** Jan-May 2020 *** Jan-May 2020 GDP growth remains negative On July 23, Belarusian President Alexander Lukashenko held a meeting with the top managers responsible for economic development. Prime Minister Roman Golovchenko said during the meeting that “due to timely decisions taken by the country’s leadership, this year’s GDP decline has happened to be way less significant that in the neighbouring countries with much stronger economies”. Golovchenko confirmed that "the government expects to meet the targets set by the head of state and at least maintain GDP flat year on year”. The National Statistics Committee (Belstat) says the country’s GDP decreased by 1.7%year on year in H1 2020 to Br66.298bn, while the H1 forecast implies that the economy is supposed to expand by 1.6%. Officials see agriculture as one of the drivers of economic recovery. Indeed, over six months, with a 1.6% decline in total value added, the value added in agriculture increased by 3.9%. According to the Ministry of Agriculture, exports of Belarusian agricultural products and food products in January-May 2020 increased by 4.4% year on year to $2.2 billion. Also still in the “green” zone are the construction sector and the information and communication sector. Gross indicators on information and communication are determined by the High Technology Park and such telecommunication companies as Beltelecom, MTS and A1. The value added in construction is increasing due to positive dynamics of construction and installation works (+5.5% by 2019). In 2020, the commissioning of new housing is growing - 1.774m sq m for 6 months, up 4.1% year on year. Transport has been an apparent outsider in 2020. This happens for two reasons. Firstly, because of the coronavirus epidemic, passenger traffic has significantly decreased. Secondly, freight traffic has degraded due to a decrease in exports of oil products and potash fertilizers. Among the modes of transportation with high traffic, the railroad transport suffered the most. The railway cargo turnover fell by 16.5% over the six months, while the volume of cargo transportation fell by 18.6%. Transit freight traffic by rail decreased by 38%, cargo turnover - by 26.2%. The decrease of value added in the sector of commerce has been primarily due to its wholesale component. The main Belarusian goods sold wholesale are fertilizers, ferrous metals and their products, oil and oil products, engineering products. In the first half of the year, the wholesale turnover decreased by 8.9% year on year. At the same time, the decline occurred despite low comparative benchmarks: in January-June 2019, wholesale sales fell by 3.4%. At that time, the economy was affected by the oil contamination incident at the Druzhba trunk pipeline. Retail turnover in the first half of this year grew by 2.6%. This growth was shown at the expense of the first quarter results (+7.9% by 2019). In the second quarter, retail sales fell by 2.1%. Gross value added in manufacturing declined by 3.2% in January-June 2020, while output fell by 3.3%. At the same time, the first signs of recovery appeared already in June: value added increased by 0.8% year on year, while production - by 0.7%. At the same time, the recovery of industrial production is accompanied by an increase in inventories. Thus, as of July 1, industrial warehouse stocks reached Br5.524bn, which is 13.8% higher than 12 months earlier. Belstat says warehouse inventories of finished products accounted for 78.1% of the average monthly output (63.4% as of July 1, 2019), the worst ratio of warehouse inventories to production output since 2014. Thus, the Belarusian industry continues operating in a crisis mode, while a small increase in output can be the result of the produce-to-stock policy of Belarusian enterprises. Investment dynamics remain uncertain The global economic crisis continues to have a negative impact on investment dynamics. Investors seek to secure their resources and are wary of high-risk markets, one of which is Belarus. According to Belstat, Belarus’ fixed-capital investments decreased by 1.2% year on year in Jan-Jun 2020, to compare with 5% growth in Jan-Jun 2019. The total volume of fixed-capital investments stood at Br12.764bn as of July 1, 2020. This includes construction and installation works (including equipment installation works), which totalled Br6.84bn, up 5.5% year on year. The expenditures for purchase of machinery and equipment made Br4.565bn, down 9%. Thus, this year there is a decrease in investments in the active part of fixed assets that are directly involved in production (machinery, equipment, transport vehicles, etc.). This fact may indicate a decrease in the efficiency of investments in Belarus, since the increase in investments in buildings that produce nothing by themselves is unlikely to quickly pay back in the future. As concerns the structure of sources of financing of investments in fixed assets, it is still possible to note the dominating share of companies’ own funds. In H1 2020 accounted for Br5.462bn, or 42.8% of the total volume of fixed-capital investments (41.6% in H1 2019). The year-on-year increase totalled 0.6% in comparable prices. The second largest portion of investments was at the expense of the consolidated budget, despite the announced intentions of the authorities to considerably reduce the volume of state support. In H1 2020 they came at Br2.553bn, down 0.4% year on year. Their share in the total volume of investments slightly increased from 19.9% to 20%. The third largest portion of fixed-capital investments was at the expense of bank credits (loans), which in H1 2020 increased by 7%, totalling Br1.735bn. At the same time, the share of this source in the total volume of investments made 13.6% as a result of January-June 2020 versus 12.5% a year ago. With relaxed monetary policy and reduced of credit interest rates, the share of lending in the total investment volume will grow further in the second half of 2020. It should be kept in mind that Lukashenko personally demanded to soften not only the monetary policy, but also the approaches used banks to assess solvency of potential borrowers. Year-on-year inflation accelerates in June After May’s 0.1% deflation, consumer prices returned to the growth trajectory in June, adding 0.2% month on month. As a result, in year-on-year terms Belarus’ inflation climbed to 5.2%, which exceeds the ceiling for the current year. Belstat says consumer prices in Belarus increased by 3.4% since early 2020. Food prices rose by 3.2% in Jan-Jun 2020 (up 0.4% month on month in June), while non-food products rose by 3% (down 0.2%). Tariffs on services rose by 4.2% (up 0.4% in June). Inflation dynamics at the end of the six-month period deteriorated primarily due to accelerated growth in fruit and vegetable prices from May’s 11.5% in year-on-year terms to 21.5% in June this year. At the same time, the contribution of this indicator to the overall dynamics of consumer prices increased from 0.43 p.p. to 0.85 p.p. June’s annual core inflation totalled 3.7% to compare with 3.9% in May 2020. Trend inflation in June slowed down to 3.1% against 3.4% in May this year. Administered prices and tariffs increased by 6.7% year on year, which corresponds to the level of the previous month. However, the National Bank remains optimistic about fulfilling the forecast inflation rate by the end of the year. Deputy Chairman of the National Bank of Belarus Sergey Kalechits said an interview published in the newspaper Respublika: “A significant disinflationary effect is felt from the weak external and internal demand. And it will remain so at least as long as the global economy and the domestic economy of Belarus can overcome the consequences of the coronavirus pandemic. Together, these factors speak in favour of slowing down price growth and make 5% inflation quite achievable by the end of 2020.” At the same time, inflation risks in Belarus are growing due to the instability of the Belarusian ruble, administered wage growth, as well as active moves to relax the regulator’s monetary policy. Authorities plan to increase GDP against all odds The situation in the Belarusian economy in the second half of 2020 depends on the speed of recovery of demand in the neighbouring markets and primarily in the Russian market. However, the government expects that demand for Belarusian products in foreign markets will decrease by 2.7% in 2020. The authorities plan to compensate for this decline by increasing domestic demand (by 2.7%) by the end of the year, which will be achieved by increasing the state budget deficit and reducing credit interest rates. This policy has already become noticeable in June, when the budget deficit rose sharply from Br69 million in January-May to Br1.8 billion in January-June. This year the Ministry of Finance can still cover the deficit at the expense of balances of surpluses of previous years, return of guarantees and new credits and loans. By 2021, budget reserves will be depleted. If they continue injecting money into the economy through a soft fiscal and monetary policy, it will create risks of uncontrolledly heating up the economy, which will lead to a new recession. PrimePress Business Analysis Agency

2020-08-01

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ANALYSIS: Economic downturn in Belarus continues, authorities plan to prevent a year-end decline

MINSK, Jul 31 – PrimePress Analysis. As the calendar gets closer to the presidential Election Day in Belarus, the authorities intensify their positive rhetoric. Despite the lack of reliable sources of growth and forecasts for the rapid recovery of the economies of Belarus’ main partners, the government confidently declares that the situation in the country’s economy is improving and that they are determined to prevent a year-on-year decline at the end of 2020.

In July, the Economy Ministry presented its vision of Belarus’ GDP dynamics until the end of the year and in 2021. On July 17, Economy Minister Alexander Chervyakov said that “industry is beginning to recover in terms of production and supply”, partly due to new contracts for potash fertilizer supplies to China and India, as well as the ending decline in oil refining. The minister noted that although the country’s GDP shrank by 1.7% year on year in Jan-Jun 2020, Belarus may close the year with a zero economic decline.

However, the main macroeconomic indicators, including the dynamics of GDP and inflation, do not look very optimistic so far.

Table 1. Key indicators of Belarus’ macroeconomic performance:

Indicator	Real figures, Jan-Jun 2020, billion Belarusian rubles	Jan-Jun 2020 on Jan-Jun 2019, %	Official forecast for 2020, %
GDP	66.298	minus 1.7%	+2.8% (+1.6% in H1)
Industrial output	52.948	minus 3.1%	+2.2% (+1% in H1)
Fixed capital investments	12.764	minus 1.2%	+4% (+1.7% in H1)
Inflation growth since early 2017, %	3.4	5.2*	5% at most (not more than 3.2% in June 2020 compared to the level of Dec 2019)
Foreign trade balance (goods and services), USD million	++682.6** (+3.1% of GDP)	+114.4*** (+0.5% of GDP)	+$650m or + 1% of GDP in 2020 (+$533.7m or +1.8% in H1)
Real disposable household incomes, year on year, %	+5.4**	+7.1***	annual forecast +2.4% (+1.3% in Q1)

* Jun 2020 on Jun 2019

** Jan-May 2020

*** Jan-May 2020

GDP growth remains negative

On July 23, Belarusian President Alexander Lukashenko held a meeting with the top managers responsible for economic development. Prime Minister Roman Golovchenko said during the meeting that “due to timely decisions taken by the country’s leadership, this year’s GDP decline has happened to be way less significant that in the neighbouring countries with much stronger economies”.

Golovchenko confirmed that "the government expects to meet the targets set by the head of state and at least maintain GDP flat year on year”.

The National Statistics Committee (Belstat) says the country’s GDP decreased by 1.7%year on year in H1 2020 to Br66.298bn, while the H1 forecast implies that the economy is supposed to expand by 1.6%.

Officials see agriculture as one of the drivers of economic recovery. Indeed, over six months, with a 1.6% decline in total value added, the value added in agriculture increased by 3.9%. According to the Ministry of Agriculture, exports of Belarusian agricultural products and food products in January-May 2020 increased by 4.4% year on year to $2.2 billion.

Also still in the “green” zone are the construction sector and the information and communication sector. Gross indicators on information and communication are determined by the High Technology Park and such telecommunication companies as Beltelecom, MTS and A1.

The value added in construction is increasing due to positive dynamics of construction and installation works (+5.5% by 2019). In 2020, the commissioning of new housing is growing - 1.774m sq m for 6 months, up 4.1% year on year.

Transport has been an apparent outsider in 2020. This happens for two reasons. Firstly, because of the coronavirus epidemic, passenger traffic has significantly decreased. Secondly, freight traffic has degraded due to a decrease in exports of oil products and potash fertilizers.

Among the modes of transportation with high traffic, the railroad transport suffered the most. The railway cargo turnover fell by 16.5% over the six months, while the volume of cargo transportation fell by 18.6%. Transit freight traffic by rail decreased by 38%, cargo turnover - by 26.2%.

The decrease of value added in the sector of commerce has been primarily due to its wholesale component. The main Belarusian goods sold wholesale are fertilizers, ferrous metals and their products, oil and oil products, engineering products.

In the first half of the year, the wholesale turnover decreased by 8.9% year on year. At the same time, the decline occurred despite low comparative benchmarks: in January-June 2019, wholesale sales fell by 3.4%. At that time, the economy was affected by the oil contamination incident at the Druzhba trunk pipeline.

Retail turnover in the first half of this year grew by 2.6%. This growth was shown at the expense of the first quarter results (+7.9% by 2019). In the second quarter, retail sales fell by 2.1%.

Gross value added in manufacturing declined by 3.2% in January-June 2020, while output fell by 3.3%. At the same time, the first signs of recovery appeared already in June: value added increased by 0.8% year on year, while production - by 0.7%. At the same time, the recovery of industrial production is accompanied by an increase in inventories. Thus, as of July 1, industrial warehouse stocks reached Br5.524bn, which is 13.8% higher than 12 months earlier.

Belstat says warehouse inventories of finished products accounted for 78.1% of the average monthly output (63.4% as of July 1, 2019), the worst ratio of warehouse inventories to production output since 2014.

Thus, the Belarusian industry continues operating in a crisis mode, while a small increase in output can be the result of the produce-to-stock policy of Belarusian enterprises.

Investment dynamics remain uncertain

The global economic crisis continues to have a negative impact on investment dynamics. Investors seek to secure their resources and are wary of high-risk markets, one of which is Belarus.

According to Belstat, Belarus’ fixed-capital investments decreased by 1.2% year on year in Jan-Jun 2020, to compare with 5% growth in Jan-Jun 2019.

The total volume of fixed-capital investments stood at Br12.764bn as of July 1, 2020. This includes construction and installation works (including equipment installation works), which totalled Br6.84bn, up 5.5% year on year. The expenditures for purchase of machinery and equipment made Br4.565bn, down 9%.

Thus, this year there is a decrease in investments in the active part of fixed assets that are directly involved in production (machinery, equipment, transport vehicles, etc.). This fact may indicate a decrease in the efficiency of investments in Belarus, since the increase in investments in buildings that produce nothing by themselves is unlikely to quickly pay back in the future.

As concerns the structure of sources of financing of investments in fixed assets, it is still possible to note the dominating share of companies’ own funds. In H1 2020 accounted for Br5.462bn, or 42.8% of the total volume of fixed-capital investments (41.6% in H1 2019). The year-on-year increase totalled 0.6% in comparable prices.

The second largest portion of investments was at the expense of the consolidated budget, despite the announced intentions of the authorities to considerably reduce the volume of state support. In H1 2020 they came at Br2.553bn, down 0.4% year on year. Their share in the total volume of investments slightly increased from 19.9% to 20%.

The third largest portion of fixed-capital investments was at the expense of bank credits (loans), which in H1 2020 increased by 7%, totalling Br1.735bn. At the same time, the share of this source in the total volume of investments made 13.6% as a result of January-June 2020 versus 12.5% a year ago.

With relaxed monetary policy and reduced of credit interest rates, the share of lending in the total investment volume will grow further in the second half of 2020. It should be kept in mind that Lukashenko personally demanded to soften not only the monetary policy, but also the approaches used banks to assess solvency of potential borrowers.

Year-on-year inflation accelerates in June

After May’s 0.1% deflation, consumer prices returned to the growth trajectory in June, adding 0.2% month on month. As a result, in year-on-year terms Belarus’ inflation climbed to 5.2%, which exceeds the ceiling for the current year.

Belstat says consumer prices in Belarus increased by 3.4% since early 2020. Food prices rose by 3.2% in Jan-Jun 2020 (up 0.4% month on month in June), while non-food products rose by 3% (down 0.2%). Tariffs on services rose by 4.2% (up 0.4% in June).

Inflation dynamics at the end of the six-month period deteriorated primarily due to accelerated growth in fruit and vegetable prices from May’s 11.5% in year-on-year terms to 21.5% in June this year. At the same time, the contribution of this indicator to the overall dynamics of consumer prices increased from 0.43 p.p. to 0.85 p.p.

June’s annual core inflation totalled 3.7% to compare with 3.9% in May 2020. Trend inflation in June slowed down to 3.1% against 3.4% in May this year. Administered prices and tariffs increased by 6.7% year on year, which corresponds to the level of the previous month.

However, the National Bank remains optimistic about fulfilling the forecast inflation rate by the end of the year.

Deputy Chairman of the National Bank of Belarus Sergey Kalechits said an interview published in the newspaper Respublika: “A significant disinflationary effect is felt from the weak external and internal demand. And it will remain so at least as long as the global economy and the domestic economy of Belarus can overcome the consequences of the coronavirus pandemic. Together, these factors speak in favour of slowing down price growth and make 5% inflation quite achievable by the end of 2020.”

At the same time, inflation risks in Belarus are growing due to the instability of the Belarusian ruble, administered wage growth, as well as active moves to relax the regulator’s monetary policy.

Authorities plan to increase GDP against all odds

The situation in the Belarusian economy in the second half of 2020 depends on the speed of recovery of demand in the neighbouring markets and primarily in the Russian market. However, the government expects that demand for Belarusian products in foreign markets will decrease by 2.7% in 2020. The authorities plan to compensate for this decline by increasing domestic demand (by 2.7%) by the end of the year, which will be achieved by increasing the state budget deficit and reducing credit interest rates.

This policy has already become noticeable in June, when the budget deficit rose sharply from Br69 million in January-May to Br1.8 billion in January-June. This year the Ministry of Finance can still cover the deficit at the expense of balances of surpluses of previous years, return of guarantees and new credits and loans. By 2021, budget reserves will be depleted. If they continue injecting money into the economy through a soft fiscal and monetary policy, it will create risks of uncontrolledly heating up the economy, which will lead to a new recession.

PrimePress Business Analysis Agency

2020-08-01

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