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Belarus Country Risk Report Q1 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

We forecast a full-year contraction of 1.0% in 2016 before the economy returns to growth of 1.8% in 2017, supported by rising oil prices and a recovery in Russia, its main trading partner. However, in the absence of reforms to the allocation of credit, it is difficult to see the Belarusian economy from growing at anywhere close to its potential over the coming years, which is why talks with the IMF over a possible USD3.0bn loan in return for structural reforms will be a crucial factor in determining the trajectory of the economy. The Belarusian government is looking for ways to use its increasing geopolitical significance to gain access to financing amid reduced support from Russia, which should result in greater cooperation with the West. Recent agreements inked with China should also provide Belarus with much-needed financial support. While Belarus' government debt remains low, this understates the fragility of its financial position. State-owned enterprises currently account for around half of economic output and two thirds of employment, and have accumulated large debts. Through the help of Russian concessional loans, Belarus has built up a large external debt load, which will act as a long-term drag on the primary income account. Current account deficits are likely to remain over the long term. Belarus has a longstanding inflation problem owing to the heavy state control over the economy and the rapid increase in the money supply that has occurred as a result of the lack of central bank independence and state-directed lending. Piecemeal reforms should ensure the inflation rate averages 11.6% over the next decade, much below long-term averages. Major Forecast Changes We have not made any significant forecast revisions in the Q416 report, but we note the increasing importance of ongoing negotiations with the IMF over a potential USD3.0bn loan agreement. Cementing such an agreement would potentially lead to significant growth opportunities in Belarus as reforms could open up the economy to foreign investment.

Table Of Contents

Belarus Country Risk Report Q1 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks ........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Economic Outlook Rests On Reform Prospects..........................................................................................................................8
We forecast a full-year contraction of 1.0% in 2016 before the economy returns to growth of 1.8% in 2017, supported by rising oil prices
and a recovery in Russia, its main trading partner. However, in the absence of reforms to the allocation of credit, it is difficult to see the
Belarusian economy growing at anywhere close to its potential over the coming years. This is why talks with the IMF over a possible
USD3.0bn loan in return for structural reforms will be a crucial factor in determining the trajectory of the economy.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Headline Fiscal Position Masks Fragilities.................................................................................................................................11
While Belarus' government debt remains low, this understates the fragility of the government's financial position. State-owned
enterprises currently account for around half of economic output and two thirds of employment, and have accumulated large
debts.
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................11
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................11
Outlook On External Position ................................................................................................................................. 12
External Debt To Weigh On Income Acount...............................................................................................................................12
Through the help of Russian concessional loans, Belarus has built up a large external debt load, which will act as a long term drag on
the primary income account. Current account deficits are likely to remain over the long term.
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................13
TABLE: TOP FIVE IMPORTS .................................................................................................................................................................................14
TABLE: TOP FIVE EXPORTS ................................................................................................................................................................................14
Monetary Policy Framework.................................................................................................................................... 15
Struggling To Tame The Inflation Beast......................................................................................................................................15
Belarus has a longstanding inflation problem owing to the heavy state control over the economy and the rapid increase in the money
supply that has occurred as a result of the lack of central bank independence and state-directed lending. Piecemeal reforms should
ensure the inflation rate averages 11.6% over the next decade, much below long term averages.
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................15
Chapter 2: 10-Year Forecast................................................................................................................... 17
The Belarusian Economy To 2025.......................................................................................................................... 17
Long-Term Growth Prospects Remain Subdued.......................................................................................................................17
We remain downbeat on Belarus' long-term growth potential due to the large footprint of the state on the economy, which will stifle
productivity and deter private fixed investment. We do, however, expect the country to pursue a modest degree of political liberalisation,
although we caution that meaningful democratisation is unlikely and that Moscow will remain Minsk's principal benefactor.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................17
Chapter 3: Political Outlook................................................................................................................... 19
SWOT Analysis......................................................................................................................................................... 19
BMI Political Risk Index........................................................................................................................................... 19
Domestic Politics .................................................................................................................................................... 20
Rising Geopolitical Significance To Bring Financial Gains......................................................................................................20
The Belarusian government is looking for ways to use its increasing geopolitical significance to gain access to financing amid reduced
support from Russia, which should result in greater cooperation with the West. Recent agreements inked with China should also provide
Belarus with much-needed financial support.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................20
Long-Term Political Outlook................................................................................................................................... 21
Lukashenko And Russia To Determine State Evolution............................................................................................................21
Belarus' long-term future depends almost entirely on two factors: the longevity of President Alexander Lukashenko, and the country's
relationship with Russia. Lukashenko is likely to remain in power for at least the next few years, due to opposition weakness, but he will
eventually prove vulnerable to removal. Regardless of who succeeds Lukashenko, Belarus' history and geography suggest that Russia
will play the dominant role in its future development.
Chapter 4: Operational Risk................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
Operational Risk Index............................................................................................................................................ 25
Operational Risk ...................................................................................................................................................... 26
TABLE: OPERATIONAL RISK.................................................................................................................................................................................26
Market Size And Utilities ......................................................................................................................................... 27
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK ...............................................................................................................28
Labour Costs ........................................................................................................................................................... 30
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 31
Chapter 5: BMI Global Macro Outlook................................................................................................... 35
Global Macro Outlook.............................................................................................................................................. 35
EMs Past The Worst, But Structural Problems Persist.............................................................................................................35
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................35
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................36
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................37
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................39

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