POLITICAL OUTLOOK

Belarus’ outlook for 2021 is very uncertain, as in addition to external shocks from the global slowdown – and Russia’s slowdown in particular – and the ongoing coronavirus (COVID-19) pandemic, its economy is under pressure from the widespread mass protests against Belarus' self-appointed President Alexander Lukashenko, who massively falsified the August 9 presidential elections.

By the end of August Lukashenko looked like he was in trouble and might be forced out of office, until the Kremlin stepped in and Russian President Vladimir Putin stated that he was willing to send a special military unit to quell the protests “if necessary” on August 27.

Since then, Russia has propped Lukashenko up and will continue to ensure that there is no violent or sudden change of president. Russia is now insisting on constitutional changes, as proposed by Lukashenko himself for several years, as a way of defusing the crisis.

At the end of 2020 as bne IntelliNews  reported the Kremlin is preparing a new pro-Russia party, “The Right of the People”, among others. The game plan appears to be to change the constitution, weaken the president’s role and install a parliament that is friendly to the Kremlin. Lukashenko’s role in this new setup is unclear, but one likely scenario is he will remain as a figurehead for a while before eventually being eased out of office after a suitable face-saving amount of time has passed.

This process will take time and will probably continue throughout 2021, as the constitutional changes need to go through a formal process to give them a veneer of legitimacy, and then new parliamentary elections need to be organised. While Russia’s own changes to its constitution made in 2020 happened rapidly, the whole process still took about half a year to complete.

In the meantime the protests continue, but they have lost some of their momentum following opposition leader Svetlana Tikhanovskaya’s “People’s Ultimatum” demanding Lukashenko step down by October 26. Tikhanovskaya threatened a general strike if Lukashenko failed to go, but the strike has largely failed and the protests fragmented into small local affairs as the cold weather arrived in November. With smaller more manageable groups to deal with, Lukashenko ramped up the police brutality and detentions again in the autumn. At the time of writing more than 30,000 have been detained and reports of torture and beatings are widespread as the security services try to break the population’s resolve.

As 2020 came to an end the situation had developed into a stand-off between Lukashenko and the protesters, with neither side backing down, but neither side having sufficient leverage over the other to resolve the crisis.

Russia has been spending as little as it can to keep Belarus going so the economy is stable but struggling. Of the approximately $2bn Russia has extended as “loans”, most of it has been debt relief or moving Belarusian debt to Russian corporates onto the Russian sovereign balance sheet and so avoiding an embarrassing defaults. The actual cash extended to Lukashenko’s government is only about $500mn, which is a third of the cash withdrawn by the population from banks at the start of the protests in August. By the end of the year some $1.9bn had been withdrawn leaving the state with $7.5bn in gross international reserves (GIR), less than the three months of import cover needed to ensure the stability of the currency.

However, Moscow will ensure that there is no economic or financial crisis until it has finished re-engineering Belarus’ political system to its liking.

Despite sanctions imposed by the West on Lukashenko’s elite, including the president himself, the West has almost no leverage over either Lukashenko or Belarus at all. There is little investment and limited borrowing. The US aid programme to Belarus amounted to only $50mn and the sanctions are more of a symbolic gesture. Moreover, Tikhanovskaya and the Coordinating Council that represents the opposition have made it clear they want to end up with good relations with Russia as the key trade partner and have resisted allowing Belarus to get dragged into the geopolitical stand-off between the West and Russia. The EU remains largely an observer in the current confrontation, which remains between Lukashenko and his people.

MACRO OUTLOOK

The protests are country-wide, but the crucial blue collar workers that staff Belarus’ large industrial assets have largely failed to join, afraid for their livelihoods and repressed by the factory directors that universally remain loyal to Lukashenko, the guarantor of their privileged position.

Belarus’ world-class IT sector has been badly damaged and was the engine of growth for the economy, but with the factories still working the economy has a solid production base that is still functioning and will return to growth in 2021. Russia’s expected return to growth in 2021 will also lift the Belarusian economy, which is joined at the hip to that of Russia.

Nevertheless, the pandemic and protests will remain a major drag on Belarus’ economy and growth will be below par.

The first signs of a recovery appeared in the third quarter of 2020 as Russia’s economy also started to recover from the worst of the crisis in the summer. The slight improvement in Belarus was also helped by higher agricultural production and a smaller decrease in the manufacturing sector. Consumption plays almost no role, as domestic demand remained weak and retail sales soft in the third quarter, as protests dragged on domestic activity.

Belarus’ economy is expected to end 2020 with a relatively mild  2.8% contraction, according to the World Bank.

FocusEconomics panellists project the economy to expand 2% in 2021 and in 2022, but the outlook remains very uncertain.

Fitch forecasts 0.7% growth in 2021 and 1% in 2022.

By contrast, the World Bank doesn't see any growth at all in 2021: “The economy is expected to contract by 2.8% in 2020, following the drag from COVID-19 and headwinds from increased political tensions. The recession is expected to deepen in 2021, reflecting a significant retrenchment in household spending and investment demand due to heightened uncertainty and the lack of fiscal and monetary policy space to support the economy.”

The government itself predicts that the economy will expand by 1.8% in 2021, according to Prime Minister Roman Golovchenko in a statement made in October.

Industrial production expanded 4.3% in November, up slightly from October's +4.2%, but that represented a bounce-back and was the best result since December 2019. The growth in industrial production in November also highlights the failure of the general strike and sporadic industrial action to cause widespread economic disruption.

FocusEconomics panellists project that industrial output will increase by 1.3% in 2021, before climbing to 2.7% in 2022.

• CPI

Consumer prices firmed 0.66% on the previous month in November, picking up from the 0.59% increase logged in October, reports FocusEconomics. The slight uptick was driven by greater price rises for both food and services.

But given the devaluation of the Belarusian ruble and economic chaos, inflation forces have been extremely mild. Overall, inflation came in at 6.6% in November, which was up from October’s 6.2%, but still at manageable levels.

November's figure represented the highest inflation rate since February 2017, and a result of the feed through from the sharp devaluation of the Belarusian ruble of 18% between January and November and 8% in August alone, caused by residents empting their accounts of dollars and the effects of political uncertainty on the exchange rate.

FocusEconomics analysts project inflation to average 5.6% in 2021, and average 5.4% in 2022, while Fitch predicts average inflation at 5.4% in 2020 and to climb and remain close to 6% in 2021-2022. The central bank’s target rate is 5%.

• Fiscal

The protests have derailed what was an improving economic story. At its 11 November meeting, the National Bank of the Republic of Belarus (NBRB) kept the refinancing rate unchanged at its record low of 7.75%, after easing its stance by a cumulative 125 basis points at several meetings earlier in the year as it tried to deal with the various shocks.

However, with inflation rising at the end of the year due to new inflationary pressure caused by the devaluation of the ruble, the central bank’s easing cycle is now over for the present and it may be forced to hike rates in the new year.

The NBRB said that the outflow of funds from the banking system eased during September-October, which has helped to steady the ruble somewhat. This dynamic, if maintained, could stabilise inflation ahead.

Looking forward, the NBRB did not provide explicit guidance on the direction of rates. It did, however, state that current inflationary pressures are temporary and that inflation should approach the 5% target by end-2021, which could suggest possible room for easing ahead, according to FocusEconomics.

That said, the outlook for rate cuts remains unpredictable. The next monetary policy meeting is scheduled for 12 February 2021. FocusEconomics Consensus Forecast panellists project the refinancing rate to end 2021 at 7.91% and 2022 at 8.39%.

BUDGET OUTLOOK

Fitch forecasts the adjusted general government budget deficit will reach 3.4% of GDP in 2020 versus a surplus of 1.6% in 2019, reflecting a deficit of 2.6% of GDP in the officially reported consolidated budget (2.4% of GDP surplus in 2019), lower than previously anticipated nuclear power plant-related capex (1.3% of GDP against originally budgeted 3.2%) and net off-budget outlays of -0.5% of GDP reflecting SOE debt repayments to the government despite the materialisation of some guarantees.

“The 2021 budget is currently under preparation, but we project the adjusted general government deficit to increase to 4.7% of GDP in 2021, as we now expect a more gradual fiscal consolidation, with an officially reported consolidated deficit declining to 2.1% of GDP. The 2021 budget does not include compensation for Russia's oil tax manoeuvre, but authorities have still to outline a longer-term plan to compensate the gradual reduction in oil custom duties. Belarus's track record of generating surpluses at the consolidated budget level and limited financing sources that constrain large deficits underpin our expectation for fiscal consolidation post-crisis,” Fitch said in a note in December.

BANKS AND FINANCE OUTLOOK

Belarus has been isolated from the international debt markets by the crisis and is now entirely dependent on Russia for funding.

The banking sector has also been hit by the double whammy of massive withdrawals and the steep devaluation, but the ratings agencies say that so far, with a capital adequacy ratio (CAR) of 16.5%, which is well above the mandatory minimum of 10%, the sector has been coping with the shock.

For comparison, in recent years in the aftermath of the 2014 oil price shock Russian banks' CAR fell to an uncomfortably low 12%, whereas in good times emerging market banks like to keep their CAR at around 20% to be able to weather the periodic shocks.

“Reduced domestic confidence will also maintain pressure on banks' liquidity and asset quality. Foreign currency deposits fell by 7% in August-September, with household deposits declining by 15%, or $1.1bn. Over the same period, local currency deposits declined by 6% (including a 5% rebound in September),” Fitch said.

As 60% of the system is state-owned, it represents a contingent liability for the sovereign and could require additional capital injections.

In November Fitch revised the outlook on Belarus's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'B'.

Banking liquidity pressures have increased as deposit withdrawals accelerated after the summer, with foreign exchange deposits falling 6% month on month in August alone.

International reserves have shrunk by 20% since January (by $1.4bn in August alone) and reached roughly $7.5bn by the end of the year.

Fitch forecast reserves to decline to $6.8bn in 2021 and $6.2bn in 2022 (1.7 months of imports), weakening its position relative to peers; the B-rated countries have a median reserve coverage of 3.7 months of imports equivalent as reserves.

Despite the headwinds, Belarus remains underleveraged and so able to weather most of the shocks on its own meagre resources.

The republic had some $3bn of debt redemptions in 2020, but as luck would have it, the increasingly prudent Ministry of Finance had already paid off most of this before the August events began: the sovereign paid close to 80% of its $2.5bn foreign currency amortisations in January-October through external market issuance, including a $1.25bn Eurobond in June, domestic debt issuance and state-owned enterprises' (SOEs) repayments of government loans.

A $500mn loan disbursement from the Russia-lead Eurasian Fund for Stabilisation and Development (EFSD) will complete 2020 financing, while additional local issuance and $500mn loan from Russia will help pre-finance part of the 2021 $1.8bn foreign currency debt amortisation. Russia has agreed to provide an additional $500mn in 2021.

Of Belarus’ approximately $16bn, half is owed to Russia. China and Russia-related debt (including the EFSD) account for 72% of government external debt and an average 87% of external debt amortisations in 2021-2022.

Public and publicly guaranteed debt amounted to 43.3% of GDP, but Fitch predicts this will rise to 52.8% of GDP in 2020 and will continue to grow to reach 53.8% by the end of 2022 – still a relatively modest level by European standards.

“Nevertheless, debt dynamics are highly vulnerable to currency risk due to the large share of foreign-currency debt (91%). The risk of crystallisation of additional contingent liabilities from the large SOE sector is high, given weak growth prospects and the potential for additional depreciation,” Fitch said in a note.