Fitch affirms Belarus’ IDR at ‘B’; Outlook Negative

<p> MINSK, May 12 - PrimePress. Fitch Ratings has affirmed Belarus’ Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Negative Outlook. </p> <p>   </p> <p> As previously reported, in November 2020, Fitch Ratings revised the Outlook on Belarus’ Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B’ amid the political crisis in the country. Also in November, Fitch noted that Belarusian banks were facing weakening asset quality and liquidity pressures. In Dec 2020, Fitch reported that greater political unrest in Belarus could lead to additional pressure on international reserves and deposit outflows, increasing risks for macroeconomic and financial stability. S&amp;P Global Ratings affirmed in early October 2020 the long-term and short-term sovereign credit ratings of Belarus for liabilities in foreign and national currencies at ‘B’, Outlook Negative (as of September 2020). </p> <p>   </p> <p> “Belarus’ ratings balance high income per capita, an improved economic policy framework and a clean debt repayment record against low foreign exchange reserves, subdued growth prospects, government debt highly exposed to foreign currency risks, a weak banking sector, high external indebtedness and weak governance indicators relative to rating peers. The Negative Outlook reflects vulnerabilities that have been elevated by the post-election political crisis that pose risks to macroeconomic and financial stability.” </p> <p>   </p> <p> Fitch expects no tangible change in public sector </p> <p>   </p> <p> The standoff between the government and opposition following the Aug 2020 contested elections remains unresolved. Public protests have waned in the face of a hostile response and the space for a splintering opposition is shrinking. The governing regime appears united. A constitutional reform process is progressing, with a new document that could formalise revised power structures subject to a referendum likely in early 2022. Fitch does not expect any material changes in governance prior to this. The government is tightening its relationship with Russia in response to international condemnation and financial considerations. </p> <p>   </p> <p> Fitch assumes that the authorities will maintain the pre-pandemic economic policy stance that prioritised macroeconomic stability. However, there has been some uncertainty over the direction of policy, with SOEs and regulation playing an important role in the response to the shocks of 2020 and political pressure placed publicly on the central bank. The policy (refinancing) rate turned negative in real terms in February from 4.3% at end-2019, before a 75bp hike in the nominal rate in April. A deterioration in policy credibility could exacerbate macro-financial vulnerabilities. </p> <p>   </p> <p> Government's 2021 FX debt payments manageable </p> <p>   </p> <p> Fitch points out that pressure on the external sector has eased since the sharp fall in foreign exchange reserves in 3Q20, but the sovereign's external position remains strained. FX reserves dropped by $2.6 billion (47%) last year, reflecting central bank sales in the face of deposit outflows and foreign-currency debt repayments, although the decline in international reserves was softened by higher gold prices. International reserves were just 2.2 months of current external payments at end-2020 </p> <p>   </p> <p> Fitch says total sovereign foreign currency debt repayments in 2021 look manageable at $2.77 billion (with $880 million paid in 1Q21). Of the $2.39 billion of external debt repayments, around 45% is due to Russia and a further 17% to the Eurasian Fund for Stabilisation and Development and 22% to China. A $500 million disbursement has been agreed with Russia and the authorities will use USD1.6 billion in foreign currency budget revenues and the Russian and local markets for the remainder. Foreign-currency external debt repayments are of a similar value in 2022, before jumping to $3.5 billion in 2023 due to a Eurobond maturity. </p> <p>   </p> <p> Banks’ asset quality likely to be much weaker than reported </p> <p>   </p> <p> Bank deposits have stabilised after retail outflows around the political turmoil in 2020, but liquidity remains vulnerable to shifts in sentiment. Forbearance measures have been extended to the end of this year and complicate the assessment of asset quality. </p> <p>   </p> <p> Fitch considers it likely to be considerably weaker than reported (5% non-performing loans) when assessed in terms of IFRS 9 impaired loans. Credit to SOEs from state-owned banks (around 60% of sector is state owned) was increased last year to support the economy and a debt restructuring this year reflects concerns about leverage at some SOEs. </p> <p>   </p> <p> Banks remain vulnerable to exchange rate risk, reflecting substantial unhedged FX borrowing, with an open foreign-currency position of around 4% of capital. Access to FX from the Russian market and foreign parents have enabled banks to meet external financing requirements. </p> <p>   </p> <p> Upward trend for expanded government debt to be sustained </p> <p>   </p> <p> General government finances were hit by the pandemic, but cuts to non-core expenditure and a response to the pandemic that had a larger component of guarantees than on-budget spending limited the consolidated general government deficit to 1.8% of GDP. </p> <p>   </p> <p> The revised 2021 budget projects a worsening of the deficit to 5.6% of GDP. Revenues are projected to fall due to the absence of one-off inflows received in 2020. Revenue measures worth Br1.2 billion ($473.3m) have been introduced to offset losses from the Russian oil tax manoeuvre. Higher expenditure stems from an SOE debt restructuring (with a budgetary cost of 1% of GDP and a similar impact on foreign-currency denominated government debt) implemented in 1Q21. </p> <p>   </p> <p> Fitch assumes expenditure restraint in the event of revenue shortfalls. General government debt including guarantees jumped to 48.4% of GDP at end-2020, largely due to exchange rate depreciation (around 90% of debt is foreign currency-denominated). </p> <p>   </p> <p> Guarantees rose to 6.9% of GDP, ending a multi-year downward trend, but still less than half the level of five years ago. Fitch expects debt to remain on an upward trend reflecting deficit financing needs and exchange rate depreciation, although at a projected 53.3% at end-2023 it compares favourably with the forecast peer median of 70.5%. </p> <p>   </p> <p> Weak mid-term growth prospects </p> <p>   </p> <p> The economy returned to growth in 1Q21, at 0.9%, after contracting by only 0.9% in 2020, despite shocks from the oil sector, pandemic and political developments. Growth in 1Q21 benefited from base effects as a disruption to the supply of oil from Russia in Q1 2020 hindered operations at Belarus's refineries, and strength in net trade, likely supported by the sale of inventories built up by SOEs last year. </p> <p>   </p> <p> Both these effects will fade, and while 2Q21 will provided yoy momentum due to the onset of the pandemic, Fitch is projecting growth of just 0.7% in 2021 as weak domestic demand will outweigh an improved external environment as the year progresses. Medium-term growth prospects appear weak in Fitch's opinion. </p> <p>   </p> <p> Business confidence is weak and constrained availability of credit for the private sector and concerns around the overleverage position of SOEs will hinder investment. </p> <p>   </p> <p> The impact of the fallout from the political developments in 2020 is likely to linger, notably for IT companies, which face a tougher operating environment. </p> <p>   </p> <p> Sanctions add to challenges for growth, although at the moment primarily as an informal deterrent to investment and trade. Engagement with many IFIs has been affected either directly by sanctions or by the stance of key shareholders. End </p>

2021-05-13

Primepress