Economy recuperates but slower than forecasted

While economic growth seems to be recuperating in January and February, it remains below the wishful forecasts of the government.

At the same time, the situation with current account balance continues to be the pressing matter, as the government is looking for the money both to repay the debts and to finance its modernization projects.

The economic policy is once again trying to accommodate both the stagnating real sector and the need for macroeconomic stabilisation necessary to attract foreign funds.

GDP and the real sector

In January 2013 the year-on-year GDP growth was at the level of 103.1 per cent.  It is significantly below the official forecast of 8.5 per cent for 2013. Compared to the same period of last year the slowdown in growth took place in most economic activities.

The ban on exports of solvents and thinners, reduced export of potash and some deterioration in terms of oil deliveries from Russia explain the negative dynamics in manufacturing.

In January 2013, growth in the inventories of finished goods in stock accompanied output growth. If at the beginning of January 2013 the stock of inventories in manufacturing industry was equal to 52.8% of average monthly industrial production, and on February 1, 2013 it grew to 79.1%.

In the first months of 2013, the companies, according to the National Bank report, report reduction in volume of production and demand. At the same time demand for loans increases, and the liquidity-constrained banking system cannot meet this demand.

Incomes, Savings and Consumer Market

In January 2013, an average wage decreased in nominal and real terms relative to December 2012. Average nominal wage amounted to 4368 thousand roubles (505 U.S. dollars), while last month it was 4741.3 thousand roubles (552.2 U.S. dollars). At the beginning of the year decline in revenue in general and population wages in particular had seasonal nature. Traditionally, wages grow at the end of each year due to bonuses and other additional payments.

A similar dynamic is also typical for consumer market. In January 2013 compared to the same period of previous year the retail trade turnover increased by 20.3%. At the same time, the reduction of the indicator relative to December 2012 was 21.9%. Retail trade boom in New Year and Christmas time stimulates the rise in consumer demand.

However, at the beginning of the next year businesses slow down and consumption declines. In January 2013 a decline of wages and consumption took place against the household deposit growth in national and foreign currencies. High degree of confidence to the banking system and income growth in previous periods stimulated the growth of household deposits, but also contributed to the decline in consumption.

Monetary System and Exchange Rate

In January 2013, the banking system was experiencing the lack of rouble liquidity. Credit growth at the second half of 2012 and decline of real sector deposits in national currency in January 2013 have predetermined the shortage of rouble resources. Some factors, i.e. slowdown in production sector and reduction of sales, explain the reduction of rouble resources at the accounts of enterprises.

Because of problems with liquidity in January and early February 2013 the interest rates on interbank market reached the level of 37-38% per annum. National Bank was forced to carry out a number of operations in order to maintain short-term liquidity of commercial banks.

As a result, the lack of resources has been eliminated from the second decade of February. Interest rates at the interbank market declined to 19-20% per annum. Moreover, since the second half of February, there was a surplus of Belarusan roubles at the banking system.

The situation at the currency market can be characterised as relatively stable. In January-February 2013, the fluctuations of Belarusan rouble were more of opportunistic nature and ranged from 8570-8680 roubles per U.S. dollar. One of the negative factors on currency market was the excess demand for foreign currency from the enterprises in January 2013. The net demand on foreign currency at this segment of currency market has developed as the result of reduction of foreign revenue.

At the currency market for population the excess demand on foreign currency compared to supply has been observed since the middle of 2012. Incomes growth and weak confidence to Belarusan rouble are the main reasons of the increased currency demand.

In February 2013, the Government has been considering the possibility to allow lending in foreign currency. However, the National Bank decided that this measure is untimely.

Eurobonds

2013 and 2014 are the years when Belarus will have to make major payments on foreign debt. The amounts to be paid in 2013 and 2014 are equal to USD 1.7 bn and USD 1.4 bn. There are three possible ways to attract additional financing, which are Eurobonds, privatization and FDI, and foreign loans.

Because of the economic crisis of 2011, in 2012 Belarus was not able to attract foreign capital through Eurobonds. Yields of 2015 and 2018 Belarusan Eurobonds were highly volatile throughout the last year. However, wise policy implemented by the authorities and National Bank, focused on macroeconomic stability together with punctual repayment of external liabilities, had a positive impact on the quotes of placed notes.

As a result, in the middle of February yields declined. Active preparation to the next issue of Belarusan Eurobonds started at the end of 2012. In November, a road show in Singapore and Hong Kong was organised with support of Russian banks “VTB Capital” and “Sberbank CIB”. In February, a similar event occurred in Europe. The placement of the next issue (worth around USD 700-900 mln) is expected to occur in March 2013.

Privatisation and Foreign Direct Investment

Among other sources of external financing, foreign loans and privatisation continue to be the most important one. At the end of January Belarus received the 4th tranche of USD 440 mln of EvrAzES loan. In 2012, despite obtaining 3rd and 4th tranches, Belarus was not able to fulfil the requirements of state assets privatisation at amount of at least USD 2.5 bln.

Therefore, results of negotiations on allocation of 5th and 6th tranches will depend on success of privatisation process. According to the agreement, Belarus will have to sell at least USD 2.5 bln of state assets to obtain the rest of the loan.

However, there are threats of a slowdown in privatisation process in the nearest future. The law “On Amendments to the Law on Privatisation of State Property and Transformation of State Enterprises into Joint Stock Companies” will most probably come into force in April 2013 and will revive the golden share institute, which was cancelled in 2008.  This law brings changes to the management of the enterprises. It assumes appointment of state representatives even in joint stock companies without government ownership shares.

In joint stock companies, which were privatised or created on the base of rental companies, the governors will appoint state representative who will protect rights of the citizens/minority shareholders. State representatives will obtain the right to attend general meetings and represent votes of minority shareholders as well as to impose ban on decisions of general meeting of shareholders.

This law will have a negative impact on investors’ interest in Belarusan state assets or assets with minority shareholders, as their property rights would not be protected. Therefore, we can expect low demand on small and mediums state-owned enterprises. The only privatisation that one can realistically expect is the privatisation of big government enterprises by Russian corporations affiliated with Russian government.

BEROC