On The Verge Of Another Crisis

BMI View: The Belarusian economy is set to suffer a prolonged period of economic instability and decline as a result of a decline in global potash prices and an escalating trade war with Russia. If Russo-Belarusian relations cannot be patched up, state revenues are set to decline considerably, the net exports deficit will widen significantly and real GDP growth will decline significantly.

The Belarusian economy has stood on the edge of a precipice ever since the inflation crisis of 2011, with low productivity, a lack of infrastructure and an oppressive state bureaucracy impeding investment and real GDP growth. The recent actions of the government with regard to the break-up of the Belarusian Potash Corporation (BPC) joint-venture between Russian producer Uralkali and Belarusian state-owned firm Belaruskali, and the subsequent diplomatic spat between the two states, may well tip the economy into the chasm.

While in the first quarter of 2013 much of Belarus's economic data was positive, with real GDP growth recorded at 4.0% year-on-year (y-o-y), the substantial decline in potash prices and production volumes that our Agribusiness team forecasts ( see 'More Troubles For Potash Producers', July 31) is set to weigh heavily on net exports in Q413 and going into 2014. The decline in potash prices and production will also weigh on government expenditure, with around 12% of state revenues coming from the production and export of potash in 2012. We have therefore revised down our real GDP forecasts for Belarus in 2013 and 2014 from 1.3% and -1.1% to -0.4% and -2.2% respectively.

Net Exports Set To Decline Sharply
Belarus - Components of Real GDP By Expenditure, BYRbn and Real GDP, % chg y-o-y

BMI View: The Belarusian economy is set to suffer a prolonged period of economic instability and decline as a result of a decline in global potash prices and an escalating trade war with Russia. If Russo-Belarusian relations cannot be patched up, state revenues are set to decline considerably, the net exports deficit will widen significantly and real GDP growth will decline significantly.

The Belarusian economy has stood on the edge of a precipice ever since the inflation crisis of 2011, with low productivity, a lack of infrastructure and an oppressive state bureaucracy impeding investment and real GDP growth. The recent actions of the government with regard to the break-up of the Belarusian Potash Corporation (BPC) joint-venture between Russian producer Uralkali and Belarusian state-owned firm Belaruskali, and the subsequent diplomatic spat between the two states, may well tip the economy into the chasm.

While in the first quarter of 2013 much of Belarus's economic data was positive, with real GDP growth recorded at 4.0% year-on-year (y-o-y), the substantial decline in potash prices and production volumes that our Agribusiness team forecasts ( see 'More Troubles For Potash Producers', July 31) is set to weigh heavily on net exports in Q413 and going into 2014. The decline in potash prices and production will also weigh on government expenditure, with around 12% of state revenues coming from the production and export of potash in 2012. We have therefore revised down our real GDP forecasts for Belarus in 2013 and 2014 from 1.3% and -1.1% to -0.4% and -2.2% respectively.

Net Exports Set To Decline Sharply
Belarus - Components of Real GDP By Expenditure, BYRbn and Real GDP, % chg y-o-y

Private Consumption

While private consumption recorded strong growth in Q113, expanding by 17.6% y-o-y according to official estimates, we do not expect this trend to continue through to Q413 or into 2014, given the our expectations for a decline in industrial production hitting real wage growth and the weaker Belarusian ruble raising the cost of imports. The strong growth in household expenditure has been supported by declining interest rates (the refinancing rate has been reduced by 650 basis points since January) and rising real wages, which increased an average 20.4% y-o-y in H113 as government hiked wages in many key state-run industries. The government has already set out a target of 6.0% real wage growth in 2014, which would result in a slowdown in private consumption growth as individuals find their wage packets expanding at a much slower rate.

Wage Growth Set To Decline Further
Belarus - Real Wage Growth, % chg y-o-y

In tandem with strong wage growth, retail sales have also continued to expand at an impressive rate during the course of 2013 so far, increasing by 19.2% in H113. We expect retail sales to slow in Q413 and into 2014 as a potential uptick in consumer price inflation deters consumption as the likely extreme weakness of the Belarusian ruble pushes up the cost of imported goods.

Consumer Demand Set For A Fall
Belarus - Retail Sales, % chg y-o-y

Government Expenditure

Belarusian state expenditure is set to decline in the final months of 2013 and throughout 2014 as our forecast for a decline in potash prices and production reduces government revenues significantly. While both revenues and expenditure have posted double-digit growth throughout the year so far, the former expanding by 26.7% in H113, and the latter by 25.1%, this rate is likely to prove unsustainable as the government sees its inflows dry up. We have revised down our forecast for government spending in 2013 and 2014 to contractions of 5.0% and 1.0%, from growth of 0.2% and 1.5% previously. This substantial revision is due to not just the likely revenue losses from a decline in potash production, with the government stating in September that Belaruskali would not have to pay any tax for the remainder of 2013, but also the potential loss of excise duties on refined petroleum products following Russia's decision to cut oil flows to Belarus by 25% in the wake of the potash scandal.

Budget In Surplus, For Now
Belarus - Government Revenue and Expenditure, % chg y-o-y (RHS) and YTD Budget Balance, BYRbn

Fixed Capital Formation

We have revised down our forecasts for fixed investment in Belarus in 2013 and 2014 to - 5.0% and -3.0%, from -3.0% and -0.5% previously. While in the long term there is potential for an uptick in fixed capital formation as a result of the Chinese government's plan to build a new export hub on the outskirts of Minsk, in 2013 and 2014 fixed investment is set to be hit by a collapse in diplomatic and business relations between Russia and Belarus. With 61.8% of total Belarusian FDI coming from Russia in 2012, the government of President Alexander Lukashenko will have to perform a remarkable U-turn to woo any further investment from Moscow. Industrial production was already in negative territory before the demise of BPC ( see chart below), and we see little chance of a significant upswing in the months ahead, with uncertainty surrounding the country's economic future likely to dissuade any potential investment.

Little Chance Of A Rebound
Belarus - Industrial Production, % chg y-o-y and 12mma

Net Exports

While the Belarusian state statistical agency does not release quarterly data for the import and export components of real GDP, the most recent data shows a substantial decline in nominal net exports in Q113. The net exports balance fell into negative territory, running a deficit of BYR2.0trn (US$224.8mn), compared to a positive balance of BYR1.2trn in Q112, an annualised decline of 276%. With monthly trade figures recording a 24.9% decline in exports in H113 compared to a 12.0% fall in imports over the same period there is little chance that net exports will provide a positive contribution to real GDP in 2013 or 2014. As mentioned previously, potash and petroleum product exports are set to suffer as a result of the brewing trade war with Russia. But in addition hog and pork product exports to Russia, which totalled around US$1bn in 2012, have been banned and there is potential for a similar ban on dairy products, both on the premise of concerns over quality ( see 'Retaliatory Measures Reinforce Livestock Strategy', August 30).

Risks To Outlook

If the Belarusian government can very rapidly patch up relations with their Russian counterparts, starting with the release of Uralkali chief executive Vladislav Baumgertner, we could see resumption in oil flows and an end to the pork embargo. The chairman of Uralkali has also refused to rule out a resumption of the BPC cartel with Belaruskali. If the joint venture did resume trading it would likely lead to an increase in potash prices and Belarusian production, filling state coffers and potentially averting a significant economic downturn.

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Sector: Country Risk
Geography: Belarus
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