Against the tide: No economic recovery in sight
Last year, the entire global economy was dominated by a single issue – the COVID-19 pandemic. With a GDP decline of 0.9%, Belarus made it through the crisis relatively unscratched. This can be explained primarily by the almost complete absence of local lockdown measures.
High degree of uncertainty clouds economic prospects
After contracting by a comparatively low 0.9% last year, the Belarusian economy is currently showing signs of recovery: in the first 5 months of the year, GDP grew by 3.1%. However, this development should not be overestimated, as it is mainly driven by base effects. For the year as a whole, a further GDP decline of 0.4% and rather a stagnation of the economy should be expected from today’s perspective. However, this outlook is accompanied by a very high degree of uncertainty. The currently discussed economic and financial sanctions by the EU and possible actions by other countries will be an important factor, even though the exact extent of their impact is not yet fully foreseeable. The current tensions in the wake of the political crisis can be seen most clearly on the Eurobond market, where yields on Belarusian government bonds have recently risen significantly.
- Real GDP will continue to contract in 2021 (-0.4%) despite global recovery, with forecast uncertainty remaining high
- In sectoral perspective, the development (5M2021) is extremely heterogeneous: manufacturing +11.6%; construction -14.1%
- Inflation currently at 9.4% (May-21), well above the target set by the National Bank, which reacted late by raising interest rates to 8.5%. Slight decline in inflation expected towards the end of 2021
- Strong depreciation of the exchange rate in 2020 (-21%), currently some stabilisation. International reserves at USD 7.8 bn in May-21; import cover remains low (2.4 months)
- Budget deficit will widen to -3.8% of GDP in 2021, but decline in debt ratio to 45.7% of GDP expected; options for refinancing remain limited
- Current account deficit of -0.3% of GDP in 2021 remains roughly at previous year’s level
- After foreign trade contracted in 2020, there is currently (4M2021) a strong recovery due to base and price effects (exports +35%, imports +25%)
Government financing. Eurobond yields reflect the uncertainty of the current situation
Administrative price regulations. Such measures are not the right instrument for tackling inflation
Export financing. Timid reform of state export financing initiated
COVID-19. Decreasing case numbers, but still quite high incidence. So far, barely any vaccinations
Timid reform of the state-supported export financing
Belarus has reformed export financing for the first time in several years. So far, state-supported export financing was largely monopolised at the Belarusian Development Bank. In the area of medium- and long-term export financing, there has been no possibility for commercial banks to offer export credits with state-supported interest rates since 2016. The recent legal amendment, which took place in February 2021, moderately expands the possibilities of commercial banks in the areas of export production financing, export factoring and small export credits. The Development Bank can also access new business areas, such as export production financing and export factoring. Overall, however, the reform falls well short of expectations.
The Belarusian banking sector faces new challenges
At first glance, not much has changed in the Belarusian banking sector. The number of banks has been constant for years at a total of 24. The size of the sector, measured by the ratio of assets to GDP, has also remained relatively stable. At the same time, about two-thirds of the sector is dominated by state-owned banks, which primarily provide financing to state-owned enterprises. Banks with Russian capital also play an important role, which leaves private (including Western) banks with a correspondingly small market share.
Domestic bond markets as an alternative financing source
The Belarusian economy is currently in a recession, facing capital outflows and devaluation of its currency. The banking sector is highly exposed to state enterprises, and may be strained further as borrowers’ solvency deteriorates. Over the long term, developing local currency instruments in the domestic capital markets could make the financial system more resilient, and reduce reliance on a fragile banking system. There is significant potential in the domestic bond market as many enterprises have already issued in the market. However, local currency instruments are under-developed, reflecting the wider substitution of foreign currency in the financial system, and pricing and allocation of such bonds has been largely on non-market terms
Current trends in the ICT sector: Pandemic as opportunity?
After the Belarusian ICT sector had already undergone impressive development in previous years, the current COVID-19 crisis has further accelerated this trend: in the first seven months of the year, the ICT sector’s share in GDP reached 7.6% – significantly higher than in the previous year (6.2%). A key factor is the sector’s strong export orientation, which generated total revenues of USD 2.4 bn in 2019 (equivalent to 25% of total service exports).
COVID-19 pandemic glooms economic outlook
After a significant slowdown in 2019, the Belarusian economy slides into recession in 2020. The projected decline in real GDP of 6% mainly reflects the influence of external factors: globally low energy prices and other repercussions of the COVID-19 pandemic, but also renewed problems with oil supplies from Russia and the continuation of the Russian tax manoeuvre. The latter is steadily increasing the pressure on the national budget and leaves little room for any public stimulus packages. The depreciation of the currency and rising wages in the run-up to the presidential elections in August 2020 imply substantial challenges to the National Bank; nevertheless, inflation remains well under control. Debt repayments and foreign exchange interventions have diminished FX reserves, implying additional risks against the background of a deteriorating current account. We expect the economy to recover in 2021, but this will not fully compensate for the losses in 2020.
The economic impact of the Russian oil tax manoeuvre
While most observers focus on the current turmoil in global oil markets and the resulting steep price decline, Belarus is currently facing an additional challenge. By the end of 2024 the price of oil imported by Belarus from Russia will increase by 30% due to a reform of oil taxation in Russia – the so-called “Russian tax manoeuvre”. It is clear that the manoeuvre will have a significant impact on the Belarussian economy – especially on its oil refineries which contribute significantly to exports and budget revenues. An analysis by GET suggests that the main impact will stem from increasing prices for fuels on the domestic market as refineries pass on the higher cost of oil which is bad news for private households and companies alike.
Economic growth continues to slow down
Economic growth slowed down significantly due to external factors and amounted to only 1.2% in 2019. High uncertainty about future supply conditions for Russian crude oil and gas, as well as ongoing structural problems, further dampen future growth prospects: the forecasts for 2020 (0.9%) and 2021 (0.5%) remain at a similarly low level.
Designing SME support programs: International experience and implications for Belarus
To date, SME support in Belarus has mainly consisted of concessional loans. The Belarusian government now wants to put SME supporton a broader footing and, above all, to include non-financial support instruments such as training and advisory services in its range of support offers.
Since the reorganization of SME support is beginning from scratch, Belarus has the opportunity to take account of international experienceand lessons learned.
The concept of entrepreneurship in the regulative frameworks of Germany and Belarus
Belarus has recently adopted some reforms that simplify and liberalize the registration of a number of economic activities.
We compare and assess the recent reforms with the concept of entrepreneurship in the German law with a special focus on
- Permission and registration requirements and
- The legal status of natural persons, who carry out economic activities.
Improving the Funding of Export Transactions
Export Promotion is a proven and valuable instrument for strengthening a Nation’s export performance. Through export promotion national companies gain experience in tackling international markets, they can improve their international competitiveness, attract export finance and get protection against the risk of non-payment of foreign contract partners. However, the design of an export promotion scheme needs to be done with caution, because many domestic and international aspects must be taken into consideration. For Belarus, not (yet) being a WTO member, the WTO Agreement on Subsidies and Countervailing Measures (ASCM) nevertheless should be an important benchmark concerning the ultimate borderline for state supported export finance and export credit insurance. Not only internationally, but also domestically aspects of protection of competition and avoidance of corruption and unfair business practices need to be considered.
Belarus-Russia: Is bilateral integration happening?
Since December 2018, Belarus and Russia have been in talks over the prospects of deepening their bilateral integration. The negotiations have taken place behind closed doors and provoked all sorts of rumours and fears in Belarus and the West. While difficult talks continue, the authorities in Minsk stress that national sovereignty is an absolute value and a “red line”.
Improving the business climate – Proposals from business
After the recession in 2015/2016, the Belarusian economy is back on a growth path. Nevertheless, more growth and investment of the private sector is required if Belarus is to catch up with the advanced economies. A joint study of GET Belarus together with three German business associations presents 35 proposals from German businesses on how to improve the business climate and unlock more private investment in Belarus.
External factors dampen economic growth
Due to external factors, the economic development is once again losing momentum. The forecast for 2019 has been revised downwards once again and now stands at only 1.8%. One of the main reasons for this is the pollution of the “Druzhba” oil pipeline, which has a negative impact on the production and export of oil products. The growth forecast for 2020 remains even weaker at 1.3%.
Banking sector weighed down by legacy of state-led lending
Belarus’ banking sector continues its recovery from the 2015-16 recession. Overall credit has again been growing since late 2017, with credit allocation shifting towards households and private enterprises. As the exchange rate stabilized and inflation has come down, local currency interest rates have markedly declined, encouraging a shift of deposits and lending into local currency. At the same time, it is still not clear that the sector is equipped to support further growth in the economy, and the long-overdue structural change towards private enterprises. In this regard, the legacy of delinquent loans of state-owned enterprises still needs to be resolved, and will require broader governance reform in the corporate sector. In this transition capital markets could become a more important source of funds.
Belarus-Russia: where are current tensions leading?
Like many times before, Belarus and Russia are disputing the terms of their special relationship. However, geopolitics and Russia’s oil tax manoeuvre have made current tensions more serious by aggravating fundamental contradictions between the allies. Belarusian- Russian relations await bumpy times ahead, with their future depending on whether Minsk and
Moscow will manage to find a mutually beneficial alliance model in the new geopolitical reality.
Economic recovery continues, but loses steam
The Belarusian economy continued to recover in 2018 (3.0%), with 2.4% growth forecast for 2019. The recovery, however, is cyclical in nature and already beyond its peak. Without any further economic reforms, medium- term growth is likely to remain capped at around 2.0% per annum.
The digital economy in Belarus: a liberal enclave
The information and communications technology (ICT) sector in Belarus has established itself as a significant source of employment, export revenues and innovation. This is a welcome source of dynamism, as the reform of state-owned manufacturing industries has not progressed significantly.
How can Belarus benefit from the Belt and Road Initiative?
Since the announcement of the Belt and Road Initia-tive (BRI) in 2013, the role of Belarus as an important transport gateway that links China with the EU be-came even more pronounced. How can the country benefit from the initiative and what are the implica-tions for the economy?
Economic conditions at mid-year: is this time different?
In the first half of 2018, economic and financial condi-tions further improved as compared to 2017, which marked the end of the recession during 2015-2016.
Diversification of Belarusian Exports: The Potential of the DCFTA-Countries Ukraine, Moldova and Georgia
Belarus is an open economy, with exports running at above 50% of GDP. The Russian Federation accounts for about half of Belarus’ total exports of goods. A diversification of Belarus’ exports to other markets would be a well-founded policy goal, increasing export sales and reducing the vulnerability to external shocks.
Belarus exports: new opportunities on traditional markets
Belarus is an open economy with exports exceeding 50% of GDP. However, about half of Belarus’ exports go to the Russian market. As such, regional diversification of exports has become one of the key priorities of economic policy.
Belarus-EU: growing cooperation without breakthroughs
Whereas in 2016 Belarus-EU relations saw progress on political matters with little economic effects, the year 2017 and the beginning of 2018 registered the opposite trend: Minsk and Brussels remain stuck in negotiations on landmark political issues, but demonstrate good dynamics in sectoral dialogues and project cooperation. Moreover, after a serious decline in 2015-2016, trade between Belarus and EU member states is on the rise.
Diversification of Belarusian Exports: The Potential of Machinery Exports on Non-Traditional Markets
Belarus is an open economy, with exports exceeding 50% of GDP. Within the basket of export goods, machinery and equipment exports play an important role. In 2017, they amounted to USD 5.3 bn, which implies a share of 18% in total goods exports. Vehicles are the largest category of Belarus machinery exports, accounting for 43% of total. This includes vehicles for the transportation of goods, tractors and motor cars. However, the geographical structure of machinery exports is – in line with the overall export structure – highly concentrated. Belarus’ traditional export destinations are the Eurasian Economic Union EAEU (including the Russian Federation), the CIS (outside the EAEU) and to some extent the EU. Taken together, these markets absorb a whopping 93% of Belarusian machinery exports.
Banking Sector: Gradual improvement, but challenges remain
The banking sector in Belarus mirrors the overall economic picture: After some rather difficult years 2015-2016, when credit extension was shrinking, the interest rates were very high, and the level of bad assets was rapidly increasing, some stabilisation and recovery has gained pace.
Strategic Options to Improve the Effectiveness of Investment Promotion Agencies (IPAs)
Not only competition between locations, but also between IPAs has significantly increased in the recent past. Taking into account international best practice, this policy study assesses strategic options to increase the effectiveness of IPAs in a competitive landscape.
Competition law enforcement: German experience and relevance for Belarus
Understanding the principles, the structure and organizational design of competition law enforcement in Germany could be of interest for Belarus as it is currently drafting its competition development program.
Recommendations for reforming the SME Definition in Belarus
The classification of small and medium-sized enterprises (SME) in Belarus is inappropriate. Consequently, the official statistical research and publications do not provide reliable data for policy makers, which hinders the development of efficient SME policy. We therefore recommend reforming the legislation that stipulates the SME definition.
Resolving Non-Performing Loans: Selected International Experience
Belarus is faced with a rapidly rising level of non-performing loans (NPLs) in its banking sector. This is not a unique feature; many countries in the world have experienced similar developments as NPL cycles are quite a regular feature of many financial systems around the globe. However, international experience also shows that high levels of NPLs pose a danger to financial and economic stability, and thus need to be comprehensively addressed by policymakers. A bank’s high NPL stock depresses its earnings as it generates less interest income, requires loan-loss recognition and increases operating costs related to NPLs’ management and work-out. Operating costs could be significant as the relevant skills are in short supply within the banking industry. Lack of profitability reduces the capital generated within banks, raises funding costs, and depresses credit growth. Credit will be constrained by all banks, impacting both healthy and distressed private sector borrowers.
International linkages and external shocks: A Global VAR perspective for Belarus. Evidence from different model specifications
Belarus as a small, open economy is closely integrated into the global economy via complex commodity, trade and financial channels. The empirical investigation of the impact of different external shocks, e.g. changes in the global price of crude oil, or a recession in Belarus’ main trading partners on its main macroeconomic variables like GDP, inflation and the exchange rate is of concern to policymakers and researchers alike.
In this policy study, we use a very modern and sophisticated econometric approach to investigate these issues further. The Global Vector Autoregression (GVAR) as a multi-country model has been specifically developed to study such global macroeconomic issues, and has to our knowledge not previously been applied to the case of Belarus.
Policy Options to Reform Free Economic Zones in Belarus
In Belarus, six Free Economic Zones (FEZs) exist in the country, with the first one (Brest) coming into existence 20 years ago. Their main objectives are according to the Law the promotion of the socio-economic development of Belarus and its regions, the attraction of investments aimed at the creation and development of export-oriented and import-substituting industries based on new and high technologies, as well as other purposes.
A more detailed assessment of their economic performance reveals a very mixed picture, though. While their contribution to the nations FDI and employment stock is relatively limited (5% and 3%, respectively), there have been worrying growth dynamics over the last years. The number of zone residents as well as the people employed in FEZ shrank over the last couple of years. The export share in FEZ is rather poor in international comparison, and they did not really contribute to the diversification of exports from traditional CIS markets towards new markets.