Belarus Economic Insights: Sanction impact to become visible towards end-2021

Despite positive economic dynamics in Jan-May 2021 with GDP growth of 3.1% yoy, given a buoyant industry and improvements in foreign trade, increasing EU and U.S. sanctions are set to reverse the positive trends and trigger a growth forecast revision to the downside.

Key financial figures
BYN 2018 2019 2020 2021 2022
Real GDP (% yoy) 3.0% 1.3% (0.9)% 0.5% 2.0%
Nominal GDP (EUR bn) 50.8 56.3 52.8 48.7 46.8
CPI Inflation (eop, % yoy) 5.6 4.7 7.4 11.0 7.8
Unemployment (avg, %) 4.8 4.2 4.0 4.5 4.0
Budget Balance (% of GDP) 4.1 2.7 (1.4) (2.7) (2.2)
Public Debt (% of GDP) 37.1 34.0 39.3 40.8 39.8
Current Account Balance (% of GDP) 0.0 (2.0) (0.2) (5.1) (2.8)
FX Reserves with Gold (EUR bn) 6.3 8.4 6.1 5.2 5.1
EUR/LCY (eop) 2.47 2.35 3.15 3.48 3.86
USD/LCY (eop) 2.2 2.1 2.6 2.9 3.1
Chart 1 - Real GDP growth (% yoy)
Belstat, Refinitiv, RBI/Raiffeisen RESEARCH
Q2 2021 projection based on Jan-May 2021 released estimate of 3.1% yoy

Sanctions and pandemic as risk factors for growth

The Ryanair incident on 23 May became a trigger for a series of European/Western sanctions against Belarus. European civil and cargo airlines were banned from flying over Belarus, and Belavia planes cannot long fly to the EU; U.S. sanctions against key Belarusian petrochemical companies were renewed; a 4th package of EU sanctions against 78 individuals and 8 companies was adopted; in addition, on 25 June the EU imposed sectoral sanctions covering the tobacco, petrochemical (including refined oil and potash products), defense and financial sectors — though the sectoral sanctions seem to contain key exemptions, weakening their initial impact, while leaving room for additional tightening.

Not to forget, the pandemic's third wave is in full swing, with more than 1,700 new cases at its peak. Nevertheless, there is now a downturn in daily new cases to less than 500. Vaccination with RU vaccine Sputnik V started slowly in Jan 2021 and reached 1% of the population in April. As of 13 of June (no newer data available), 7.4% of people received at least one dose of the COVID-19 vaccine, and 3.9% of the population is fully vaccinated against COVID-19.

Chart 2 - Real GDP growth in early 2021: Q1 vs Jan-May (% yoy)
Belstat, RBI/Raiffeisen Research

Positive industry dynamics in early 2021

The economy has recovered since the beginning of the year. In Q1 2021, GDP grew by 1.1% and accelerate further to 3.1% yoy (Jan-May), a maximum since 2018. Obviously this can be partly explained by the base effect, given the Corona induced slump in spring 2020. Meanwhile, industrial output remained the only supporter of GDP (with 9% yoy growth in Q1 and 11.1% yoy in Jan-May), while retail trade, agriculture and capital investments showed far weaker numbers. The unprecedented growth of the industrial output is explained on the one hand by the 2020-low comparative basis and on the other hand by the increased prices and demand on the world products and raw materials markets. Furthermore, the improved conditions in the Russian market for equipment and machine-building companies. In addition, it is necessary to note the negative trend of the IT sector, which used to be one of the economy’s driver. However, according to the results of Q1 2021, it also suffered a serious slowdown. In 5M 2021 the growth of IT and communication, which includes the IT sector, was 6.5% vs 10.4% in 5M 2020.

Chart 3 - Key indicator dynamics since 2020 (% yoy, real, cumulative)
Belstat, RBI/Raiffeisen Research
yoy cumulative: Comparison to respective period of previes yoear, e.g. Jan-May 2021 to Jan-May 2020

Forecast revised towards slower growth, higher rates and inflation

The sanctions not only from the U.S., but also from the EU, as well as a possible increase in competition in the Russian market from Chinese manufacturers make us cautious about the potential growth of the Belarusian economy. There are currently many uncertainties on potential further sanctions as well on the implementation and impact of the already known ones. To reflect the downside risks, we decided to trim our current growth forecasts for this year down to 0.5% growth in 2021, implying a slump of around -2% yoy in the second half of the year.

Meanwhile, the National Bank of Belarus (NBB) is still in the game and moderately hiked the (rather ineffective) key policy rate. Accelerated inflation let the NBB to raise the key rate from 7.75% to 8.5% for the first time in the last six years. However, despite the state-imposed price controls, after a slight decline in March, the inflation rate rose again in May, reaching 9.4% yoy. At the same time, authorities adjusted their forecast and expect inflation at the level of 7.2% by the end of 2021. In turn, we updated our forecast for CPI and expect even higher 11% yoy at end-2021. We also revised our key rate outlook and raised it to 10% eop for year-end 2021.

For our estimates, we relied on the assumptions that, on the one hand, the state will have to reduce support to the public sector; on the other hand we took the appreciation of the BYN during April-May and the foreign trade balance improvement into account. In addition, according to NBB, weak consumer and investment demand within the country will also somewhat limit inflation. We expect the peak of inflation in Q4 2021, followed by a downward trend. If inflation keeps its upward trend, NBB is likely to rise the key rate rather sooner than later.

Chart 4 - Inflation and policy rate dynamics (%)
NBB, Belstat, RBI/Raiffeisen Research

Fiscal deficit projected

This year's fiscal policy will be implemented with an emphasis on public sector support. Since the beginning of 2021, the budget deficit has been actively growing and reached BYN 1.7 bn in Q1 from BYN 165.5 mn in January.

Significant changes occurred in the expenditure structure. The share of national activities (including public debt service, support for the state apparatus) in expenditures has considerably expanded from 17.1% to 32.5%, while spending on the national economy, education and public utilities dropped. However, the limited sources of internal and external finance will force the government to redistribute available revenues to help the most important sectors of the economy. We are already seeing this in April and May. The consolidated budget was executed with a BYN 0.4 bn surplus for four months, and the excess of expenditures for national activities over the plan was over 2%. However, in January-May, the national-wide activities’ expenditures undershoot the plan by 1.5%, with a BYN 85 mn consolidated budget deficit. Budget revenues also underwent significant changes. In April and May, income tax and foreign trade revenues significantly exceeded the plan.

Taking into account early this year's funding of the SOEs and the bloated financing of the national-wide activities, we expect a 2.7% budget deficit of GDP in 2021.

Chart 5 - State budget execution in Jan-May (in % of the adjusted annual plan)
Minfin, RBI/Raiffeisen Research

External public debt repayments may put pressure on FX reserves

According to the Ministry of Finance after historical peak in January 2021 when public debt grew up by 3.3% to BYN 59.7 bn, in Q1 2021 it slightly decreased and amounted to BYN 59.3 bn. Due to BYN appreciation in April-May, public debt has shrunk to BYN 57.4 bn. The main reason for the new public debt record in the beginning of the year was a substantial internal debt increase. As of January 1, 2021, the internal public debt was BYN 9.9 bn, but by May 1, it reached BYN 11.5 bn. This domestic debt jump is explained by the USD 729 mn Minfin's bond issue.

However, external public debt dropped by 2.5% from the beginning of 2021 and amounted to USD 18.1 bn. The total external debt payments are estimated above USD 3.5 bn in 2021. For the 2021 monetary policy, public debt service will account for more than 11% of the state budget. The government plans to attract up to USD 1.0 bn in both domestic (USD 200 mn) and foreign markets (USD 775 mn) to refinance debt payments. Besides, for debt servicing, last year USD 740 mn-unplanned-borrowings of the state budget will also be used. Moreover, one more source to serve external obligations are FX reserves and potential USD 100 mn bond issue on the Russian stock exchange. According to official forecast, FX reserves will decrease to USD 6 bn, while public debt could reach 38.3% of GDP by the end of 2021. We estimate the fall of FX reserves to USD 6.3 bn and the public debt to surpass 41.2% of GDP.

Chart 6 - Public external debt stock vs FX reserves including gold (USD bn)
NBB, RBI/Raiffeisen Research

External imbalances to rise from low levels

In Q1 2021 foreign trade developed positively. Declining imports of consumer and investment goods led to a USD 0.8 bn foreign trade surplus in Q1 2021, compared to USD 0.4 bn in Q1 2020. Also, the growth rate of exports exceeds the growth rate of imports. These dynamics had a positive supporting impact on the domestic FX market, allowing BYN to appreciate and NBB to replenish FX reserves.

Taking into account the sanctions, we expect that a negative effect will start materializing at the end of Q3 and beginning of Q4, we revised our foreign trade forecast downward. We expect an increase in the merchandise trade deficit to USD 4.2bn or 7.2% of GDP, while C/A deficit may exceed 5% of GDP.

Chart 7 - Foreign trade balance (USD bn)
NBB, Belstat, RBI/Raiffeisen Research

Outlook with high factors of uncertainty

The recovery of the Belarusian economy is unlikely in 2021, primarily due to the high uncertainty associated with the ambiguity of the sanctions' practical application. Sanctions pressure may lead to a significant deterioration of the situation in the industrial sector. The industrial output growth will slow down significantly in H2 2021, as on the one hand the low base effect is fading, on the other hand, the effects of the negative sanctions on the petrochemical industry will appear. At the same time, the domestic demand and investments in capital without the state's emission mechanism will continue to maintain a negative trend. Thus, the cumulative impact of the above-discussed factors may create conditions for a slowdown in economic growth.