ANALYSIS: Belarus’ economy affected by domestic political crisis

MINSK, Oct 28 – PrimePress. The lingering political crisis has been producing a negative effect on economic processes in Belarus. Attempts by the authorities to stimulate the economy and to restrain the pace of economic decline have so far yielded an increase in warehouse inventories, an increase in accounts receivable and accelerated inflation. At the same time, the growing uncertainty in the political and economic life of Belarus is driving the outflow of skilled labour. Table 1. Key indicators of Belarus’ macroeconomic performance: <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> Indicator </td> <td> Real figures, Jan-Sep 2020, billion Belarusian rubles </td> <td> Jan-Sep 2020 on Jan-Sep 2019, % </td> <td> Official forecast for 2020, % </td> </tr> <tr> <td> GDP </td> <td> 106.584 </td> <td> minus 1.3% </td> <td> +2.8% (+2.2% in Jan-Sep) </td> </tr> <tr> <td> Industrial output </td> <td> 83.092 </td> <td> minus 1.8% </td> <td> +2.2% (+1.5% in Jan-Sep) </td> </tr> <tr> <td> Fixed capital investments </td> <td> 20.459 </td> <td> minus 2% </td> <td> +4% (+3.1% in Jan-Sep) </td> </tr> <tr> <td> Inflation growth since early 2017, % </td> <td> 4.7 </td> <td> 6.1* </td> <td> 5% at most (not more than 3.6% in Sep 2020 compared to the level of Dec 2019) </td> </tr> <tr> <td> Foreign trade balance (goods and services), USD million </td> <td> +1,176.1** (+3% of GDP) </td> <td> +438.3*** (+1.1% of GDP) </td> <td> +$650m or + 1% of GDP in 2020 (+$794m or +1.6% in Jan-Sep 2020) </td> </tr> <tr> <td> Real disposable household incomes, year on year, % </td> <td> +5.2** </td> <td> +7.1*** </td> <td> annual forecast +2.4% (+1.6% in Jan-Sep 2020) </td> </tr> </tbody> </table> * Sep 2020 on Sep 2019 ** Jan-Aug 2020 *** Jan-Aug 2020 Industries’ produce-to-stock policy prevents GDP fall After analyzing economic performance of all sectors in Jan-Sep 2020, the National Statistical Committee of Belarus (Belstat) registered a decline in the country's GDP. Belstat says, Belarus’ GDP fell by 1.3% year on year in January-September 2020 to Br106.6 billion, while the forecast for January-September 2020 stands +2.2%. Thus, three months before the end of the year the authorities are not only unable to meet their initial forecast, but are still far fr om later estimates of GDP dynamics, according to which at the end of this year GDP growth should reach zero. This year’s negative GDP dynamics is primarily due to the worsening situation in transport, warehousing, postal and courier services, as well as a fall in industrial production. Belstat says, the volume of gross value added in the transport sector decreased by 9.5% year on year in January-September 2020 to Br5.481 billion, in manufacturing - by 1.4% to Br22.742 billion. The main positive contribution to GDP dynamics was provided by the ITC sector, as well as agriculture. Belstat says the IT industry’s gross value added grew by 8.2% in Jan-Sep 2020 to Br7.806 billion, to compare with agriculture, forestry and fisheries, wh ere this indicator expanded by 5.5% to Br7.575 billion. In addition, the produce-to-stock strategy followed by a lot of companies at the time of crisis has kept Belarusian GDP from falling further. Official statistics show that stocks of finished goods at industrial enterprises' warehouses amounted to Br5.057bn as of 1 October 2020, or 68.5% of the average monthly industrial output, compared to 71.5% a month earlier and 63.1% as of October 1, 2019. This looks like a positive trend in month-on-month terms, but a year-on-year comparison, which takes into account the influence of seasonal factors, shows the administered nature of growing warehouse inventories. Instead of preserving a financial cushion, Belarusian companies actually froze their own (as well as borrowed) resources in warehouses. In addition, it is possible that even the current elevated inventory levels do not fully reflect the real picture. Based on official statistics, it can be assumed that part of the warehouse stock of companies has recently been transformed into their accounts receivable, including external debts. Belstat says, as of September 1 2020, the accounts receivable of industrial companies amounted to Br24.143 billion, up 5.1% month on month (+15.6% year to date). This includes external accounts receivable, which amounted to Br7.557 billion as of Sep 1, 2020, up 18.3% month on month (+43% year to date). In other words, products are shipped but not paid for. In other words, Belarusian manufacturers could be shipping products to their own trading houses (dealerships) in Russia. Thus, contrary to the statement of the authorities and their hopes for a rapid recovery of demand on the world markets after the coronavirus pandemic, the stock situation is not improving, but is gradually transforming into financial problems for both the real sector and banks. Economic crisis affects investment inflow Political uncertainty scares away not only foreign investors, but also domestic ones. The situation is worsened by the lack of resources in the state budget, as well as by the ruble liquidity of banks against the background of instability of the national currency exchange rate. Under these circumstances, companies have to rely mainly on their own resources. According to Belstat, Belarus’ fixed-capital investments decreased by 2% year on year in Jan-Sep 2020, to compare with 4.3% growth in Jan-Sep 2019. The total volume of fixed-capital investments stood at Br20.459bn as of Oct 1, 2020. This includes construction and installation works (including equipment installation works), which totalled Br10.934bn, up 4.8% year on year. The expenditures for purchase of machinery and equipment made Br7.400bn, down 10%. Thus, this year there has been a decrease in investments in the active part of fixed assets that are directly involved in production (machinery, equipment, transport vehicles, etc.). 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 Jan-Sep 2020 they accounted for Br8.724bn, or 42.6% of the total volume of fixed-capital investments (41.5% in Jan-Sep 2019). The year-on-year decrease totalled 0.1% 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 Jan-Sep 2020 they came at Br4.073bn, down 2.7% year on year. Their share in the total volume of investments slightly increased to 19.9% from 20.2%. The third largest portion of fixed-capital investments was at the expense of bank credits (loans), which increased by 1.6% in Jan-Sep 2020, totalling Br2.769bn. At the same time, the share of this source in the total volume of investments made 13.5% as a result of January-September 2020 versus 13% a year ago. The policy to gradually relax monetary policy and reduce credit rates in H1 yielded to a deficit of ruble liquidity in Q3. The National Bank of Belarus had to resort to this measure in order to prevent an even more serious drop in the level of the country’s international reserves and the Belarusian ruble exchange rate. Given that the restrictions imposed by the National Bank on the provision of liquidity support instruments will remain in force until at least the beginning of next year, an upsurge in investment lending cannot be expected. Also, referring to the structure of the sources of financing for fixed capital investments, it is worth mentioning a decline in foreign investments (excluding loans from foreign banks). According to Belstat data, these amounted to Br555.9 million in January-September 2020, down 42% year on year. Their share in the total volume of investments in foreign capital decreased to 2.7% against 4.6% a year earlier. Inflation continues to accelerate, National Bank downgrades annual forecast The inflation rate is higher than the forecast for H2 2020. In September 2020, consumer prices grew 6.1% year on year against the initial forecast of 5% for the whole year. The accelerated growth of inflation was conditioned largely by an increase in prices for imported goods due to the weakening of the Belarusian ruble in August against the background of increased demand for foreign currency. Negative expectations of economic agents also play an important role. According to the National Statistical Committee (Belstat), in September consumer prices in Belarus increased by 0.9% month on month, and by 4.7% since early 2020. In particular, foodstuff prices rose by 0.5% month on month (+3% since early 2020), non-food prices - by 2% (+6.3%), tariffs for services increased by 0.4% (+5.8%). To compare, in Russia consumer prices decreased by 0.1% month on month in September 2020, and in Kazakhstan - by 0.3%. Since early 2020, inflation in these countries has been 2.9% and 4.9%, respectively. Annual core inflation in September 2020 was 5.4% compared to 4.3% in August 2020. Trend inflation accelerated to 4.2% in September compared to 3.5% in August. Administered prices and tariffs increased by 5.6% year on year, compared to 6.4% in August 2020. On 14 October 2020, an additional meeting of the Monetary Policy Board of the National Bank was held, during which it was decided to maintain the refinancing rate and interest rates on operations of liquidity regulation of the National Bank without changes. At the end of the meeting the regulator noted not only the actual acceleration of inflationary processes, but also voiced a forecast for the remainder of the year, according to which the growth of consumer prices at the end of the year will be about 6%. At the same time, “in the medium term, the prevalence of long-term disinflationary factors is projected to prevail, which will contribute to the return of inflation to the target trajectory of about 5%,” the regulator said. Average wage decreasing, Belarus sees labour outflow The positive dynamics of the average wage index, largely due to the election policy of the authorities, yielded to a decline in August-September 2020, especially in dollar terms. Belstat says, the average nominal accrued salary in the country in September 2020 amounted to Br1,265, down 0.9% month on month, but increased by 13.6% year on year. In real terms, the average wages (adjusted for the increase in consumer prices) decreased by 1.8% month on month in September 2020, but increased by 7.1% year on year. In dollars terms, September’s average wages also continued to decrease compared to previous months, which was due not only to the reduction in the ruble equivalent of wages, but also to the dynamics of the national currency. Based on the average monthly rate calculated by the National Bank, the dollar equivalent of the average wage in September 2020 was $484 compared to $511 in August 2020 and $533.6 in September 2019. Due to the quarantine and a decline in business activity, hidden unemployment is on the rise in the partner countries of Belarus. According to Belstat, in January-August 2020, 133,100 workers (4.6% of the total number of workers on average for January-August) worked in the mode of forced part-time employment, compared to 49,100 people (1.7%) in January-August 2019. There were 125,200 people (4.3%) in full-time (full-time) part-time work, compared to 56,300 in January-August 2019. The total number of workdays due to forced underemployment in January-August 2020 was 1.353 million, compared to 506,500 workdays in the same period last year. This equates to 8,100 people not working every day (3,000 in January-August 2019). Due to the quarantine imposed by many countries, the number of Belarusians working abroad has decreased. According to a random household survey, 83,200 people worked abroad in January-August 2020, down 11.2% year on year. Of these, 66.9% worked in Russia. It can also be noted that the outflow of skilled labour poses a serious threat to the country's future. According to the Ministry of Internal Affairs, 10,000 people have moved to Poland since September, 3,000 to Ukraine, and about 500 to Lithuania and Latvia. At the same time, the Ministry of Internal Affairs did not specify the number of people who had left for Russia (due to the absence of border control with Russia). Belstat says, the migration inflow to Belarus in 2019 amounted to 13.9 thousand people, in 2018 - 9.4 thousand, in 2017 - 3.9 thousand. If the negative trend in 2020 continues until December, it is possible to zero migration inflow even according to the calculations of the authorities, which do not fully take into account emigration from Belarus. Political risks clearly prevail over economic risks Hence, the main risks to the economy are the increasing political and economic isolation of Belarus and attempts to put the financial sector back on the command and control track. At the same time, political risks significantly prevail over economic risks. In the current political environment of the economy there is growing uncertainty which is forcing businesses to reconsider their plans for the near future. However, there are no clear signals from the authorities about the country’s economic development strategy, and attention to economic processes remains secondary. Under the influence of negative expectations of economic actors, as well as government pressure on the National Bank to further relax monetary policy, inflation is increasing. At the same time, the financial situation of companies is worsening, and public and investor confidence in the current economic policy is decreasing. An additional risk is the outflow of qualified labour. PrimePress Business Analysis Agency

2020-10-30

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ANALYSIS: Belarus’ economy affected by domestic political crisis

MINSK, Oct 28 – PrimePress. The lingering political crisis has been producing a negative effect on economic processes in Belarus. Attempts by the authorities to stimulate the economy and to restrain the pace of economic decline have so far yielded an increase in warehouse inventories, an increase in accounts receivable and accelerated inflation. At the same time, the growing uncertainty in the political and economic life of Belarus is driving the outflow of skilled labour.

Table 1. Key indicators of Belarus’ macroeconomic performance:

Indicator	Real figures, Jan-Sep 2020, billion Belarusian rubles	Jan-Sep 2020 on Jan-Sep 2019, %	Official forecast for 2020, %
GDP	106.584	minus 1.3%	+2.8% (+2.2% in Jan-Sep)
Industrial output	83.092	minus 1.8%	+2.2% (+1.5% in Jan-Sep)
Fixed capital investments	20.459	minus 2%	+4% (+3.1% in Jan-Sep)
Inflation growth since early 2017, %	4.7	6.1*	5% at most (not more than 3.6% in Sep 2020 compared to the level of Dec 2019)
Foreign trade balance (goods and services), USD million	+1,176.1** (+3% of GDP)	+438.3*** (+1.1% of GDP)	+$650m or + 1% of GDP in 2020 (+$794m or +1.6% in Jan-Sep 2020)
Real disposable household incomes, year on year, %	+5.2**	+7.1***	annual forecast +2.4% (+1.6% in Jan-Sep 2020)

* Sep 2020 on Sep 2019

** Jan-Aug 2020

*** Jan-Aug 2020

Industries’ produce-to-stock policy prevents GDP fall

After analyzing economic performance of all sectors in Jan-Sep 2020, the National Statistical Committee of Belarus (Belstat) registered a decline in the country's GDP.

Belstat says, Belarus’ GDP fell by 1.3% year on year in January-September 2020 to Br106.6 billion, while the forecast for January-September 2020 stands +2.2%. Thus, three months before the end of the year the authorities are not only unable to meet their initial forecast, but are still far fr om later estimates of GDP dynamics, according to which at the end of this year GDP growth should reach zero.

This year’s negative GDP dynamics is primarily due to the worsening situation in transport, warehousing, postal and courier services, as well as a fall in industrial production. Belstat says, the volume of gross value added in the transport sector decreased by 9.5% year on year in January-September 2020 to Br5.481 billion, in manufacturing - by 1.4% to Br22.742 billion.

The main positive contribution to GDP dynamics was provided by the ITC sector, as well as agriculture. Belstat says the IT industry’s gross value added grew by 8.2% in Jan-Sep 2020 to Br7.806 billion, to compare with agriculture, forestry and fisheries, wh ere this indicator expanded by 5.5% to Br7.575 billion.

In addition, the produce-to-stock strategy followed by a lot of companies at the time of crisis has kept Belarusian GDP from falling further. Official statistics show that stocks of finished goods at industrial enterprises' warehouses amounted to Br5.057bn as of 1 October 2020, or 68.5% of the average monthly industrial output, compared to 71.5% a month earlier and 63.1% as of October 1, 2019.

This looks like a positive trend in month-on-month terms, but a year-on-year comparison, which takes into account the influence of seasonal factors, shows the administered nature of growing warehouse inventories. Instead of preserving a financial cushion, Belarusian companies actually froze their own (as well as borrowed) resources in warehouses.

In addition, it is possible that even the current elevated inventory levels do not fully reflect the real picture. Based on official statistics, it can be assumed that part of the warehouse stock of companies has recently been transformed into their accounts receivable, including external debts.

Belstat says, as of September 1 2020, the accounts receivable of industrial companies amounted to Br24.143 billion, up 5.1% month on month (+15.6% year to date). This includes external accounts receivable, which amounted to Br7.557 billion as of Sep 1, 2020, up 18.3% month on month (+43% year to date). In other words, products are shipped but not paid for. In other words, Belarusian manufacturers could be shipping products to their own trading houses (dealerships) in Russia.

Thus, contrary to the statement of the authorities and their hopes for a rapid recovery of demand on the world markets after the coronavirus pandemic, the stock situation is not improving, but is gradually transforming into financial problems for both the real sector and banks.

Economic crisis affects investment inflow

Political uncertainty scares away not only foreign investors, but also domestic ones. The situation is worsened by the lack of resources in the state budget, as well as by the ruble liquidity of banks against the background of instability of the national currency exchange rate. Under these circumstances, companies have to rely mainly on their own resources.

According to Belstat, Belarus’ fixed-capital investments decreased by 2% year on year in Jan-Sep 2020, to compare with 4.3% growth in Jan-Sep 2019.

The total volume of fixed-capital investments stood at Br20.459bn as of Oct 1, 2020. This includes construction and installation works (including equipment installation works), which totalled Br10.934bn, up 4.8% year on year. The expenditures for purchase of machinery and equipment made Br7.400bn, down 10%.

Thus, this year there has been a decrease in investments in the active part of fixed assets that are directly involved in production (machinery, equipment, transport vehicles, etc.).

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 Jan-Sep 2020 they accounted for Br8.724bn, or 42.6% of the total volume of fixed-capital investments (41.5% in Jan-Sep 2019). The year-on-year decrease totalled 0.1% 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 Jan-Sep 2020 they came at Br4.073bn, down 2.7% year on year. Their share in the total volume of investments slightly increased to 19.9% from 20.2%.

The third largest portion of fixed-capital investments was at the expense of bank credits (loans), which increased by 1.6% in Jan-Sep 2020, totalling Br2.769bn. At the same time, the share of this source in the total volume of investments made 13.5% as a result of January-September 2020 versus 13% a year ago.

The policy to gradually relax monetary policy and reduce credit rates in H1 yielded to a deficit of ruble liquidity in Q3. The National Bank of Belarus had to resort to this measure in order to prevent an even more serious drop in the level of the country’s international reserves and the Belarusian ruble exchange rate. Given that the restrictions imposed by the National Bank on the provision of liquidity support instruments will remain in force until at least the beginning of next year, an upsurge in investment lending cannot be expected.

Also, referring to the structure of the sources of financing for fixed capital investments, it is worth mentioning a decline in foreign investments (excluding loans from foreign banks). According to Belstat data, these amounted to Br555.9 million in January-September 2020, down 42% year on year. Their share in the total volume of investments in foreign capital decreased to 2.7% against 4.6% a year earlier.

Inflation continues to accelerate, National Bank downgrades annual forecast

The inflation rate is higher than the forecast for H2 2020. In September 2020, consumer prices grew 6.1% year on year against the initial forecast of 5% for the whole year. The accelerated growth of inflation was conditioned largely by an increase in prices for imported goods due to the weakening of the Belarusian ruble in August against the background of increased demand for foreign currency. Negative expectations of economic agents also play an important role.

According to the National Statistical Committee (Belstat), in September consumer prices in Belarus increased by 0.9% month on month, and by 4.7% since early 2020. In particular, foodstuff prices rose by 0.5% month on month (+3% since early 2020), non-food prices - by 2% (+6.3%), tariffs for services increased by 0.4% (+5.8%).

To compare, in Russia consumer prices decreased by 0.1% month on month in September 2020, and in Kazakhstan - by 0.3%. Since early 2020, inflation in these countries has been 2.9% and 4.9%, respectively.

Annual core inflation in September 2020 was 5.4% compared to 4.3% in August 2020. Trend inflation accelerated to 4.2% in September compared to 3.5% in August. Administered prices and tariffs increased by 5.6% year on year, compared to 6.4% in August 2020.

On 14 October 2020, an additional meeting of the Monetary Policy Board of the National Bank was held, during which it was decided to maintain the refinancing rate and interest rates on operations of liquidity regulation of the National Bank without changes. At the end of the meeting the regulator noted not only the actual acceleration of inflationary processes, but also voiced a forecast for the remainder of the year, according to which the growth of consumer prices at the end of the year will be about 6%.

At the same time, “in the medium term, the prevalence of long-term disinflationary factors is projected to prevail, which will contribute to the return of inflation to the target trajectory of about 5%,” the regulator said.

Average wage decreasing, Belarus sees labour outflow

The positive dynamics of the average wage index, largely due to the election policy of the authorities, yielded to a decline in August-September 2020, especially in dollar terms. Belstat says, the average nominal accrued salary in the country in September 2020 amounted to Br1,265, down 0.9% month on month, but increased by 13.6% year on year.

In real terms, the average wages (adjusted for the increase in consumer prices) decreased by 1.8% month on month in September 2020, but increased by 7.1% year on year.

In dollars terms, September’s average wages also continued to decrease compared to previous months, which was due not only to the reduction in the ruble equivalent of wages, but also to the dynamics of the national currency. Based on the average monthly rate calculated by the National Bank, the dollar equivalent of the average wage in September 2020 was $484 compared to $511 in August 2020 and $533.6 in September 2019.

Due to the quarantine and a decline in business activity, hidden unemployment is on the rise in the partner countries of Belarus. According to Belstat, in January-August 2020, 133,100 workers (4.6% of the total number of workers on average for January-August) worked in the mode of forced part-time employment, compared to 49,100 people (1.7%) in January-August 2019. There were 125,200 people (4.3%) in full-time (full-time) part-time work, compared to 56,300 in January-August 2019.

The total number of workdays due to forced underemployment in January-August 2020 was 1.353 million, compared to 506,500 workdays in the same period last year. This equates to 8,100 people not working every day (3,000 in January-August 2019).

Due to the quarantine imposed by many countries, the number of Belarusians working abroad has decreased. According to a random household survey, 83,200 people worked abroad in January-August 2020, down 11.2% year on year. Of these, 66.9% worked in Russia.

It can also be noted that the outflow of skilled labour poses a serious threat to the country's future. According to the Ministry of Internal Affairs, 10,000 people have moved to Poland since September, 3,000 to Ukraine, and about 500 to Lithuania and Latvia. At the same time, the Ministry of Internal Affairs did not specify the number of people who had left for Russia (due to the absence of border control with Russia).

Belstat says, the migration inflow to Belarus in 2019 amounted to 13.9 thousand people, in 2018 - 9.4 thousand, in 2017 - 3.9 thousand. If the negative trend in 2020 continues until December, it is possible to zero migration inflow even according to the calculations of the authorities, which do not fully take into account emigration from Belarus.

Political risks clearly prevail over economic risks

Hence, the main risks to the economy are the increasing political and economic isolation of Belarus and attempts to put the financial sector back on the command and control track. At the same time, political risks significantly prevail over economic risks.

In the current political environment of the economy there is growing uncertainty which is forcing businesses to reconsider their plans for the near future. However, there are no clear signals from the authorities about the country’s economic development strategy, and attention to economic processes remains secondary.

Under the influence of negative expectations of economic actors, as well as government pressure on the National Bank to further relax monetary policy, inflation is increasing. At the same time, the financial situation of companies is worsening, and public and investor confidence in the current economic policy is decreasing. An additional risk is the outflow of qualified labour.

PrimePress Business Analysis Agency

2020-10-30

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