Belarusian Economy Sinks to Uncertainty - Belarus Economy Digest
Belarus displayed modest but stable growth during past couple of months.
However, future prospects for growth remain uncertain, given the deteriorating economic situation in Russia along with the desire of the authorities to carry out several growth stimulating policies.
Moreover, there are questions with respect to both the exchange rate and interest rate policy that the authorities cannot decide how to deal with the issues.
Output: Sluggish growth stayed put, but its further path is uncertain
During last four months Belarusian economy performs modest and extremely stable growth rate on annual basis – 1.5%. In terms of business cycle, it means that Belarusian economy is still reviving, although the power of this revival is fading away (see Figure 1).
Two factors lay behind these developments. On the one hand, a recent revival of capital investment, a huge expansion in potash fertilisers exports and bitumen mixtures, and less demand on intermediary non-energy imports are all pushing the economy to grow. From the production side, these trends have resulted in confident and strengthening growth in both mining and quarrying, as well as chemical production. This all goes to show that growth actually stems from a very limited number of industries.
On the other hand, weakening consumption growth and a deteriorating external environment have become serious obstacles for growth. At present real wages are stagnating. This new trend has become more or less established as the government gives up on artificially stimulating wages (given the serious challenges with price competitiveness that Belarusian producers face).
The influence of Russian economic problems
Moreover, labour migration dropped as well, largely due to declining wages in Russia -- which is the main destination for labour migration -- in US dollar terms. Frozen wages began to drive household consumption down. For instance in October, retail turnover recorded growth of just 1.7% in annual terms, while it grew by 13.1% and 9.0% in the first and second quarters of 2014 correspondingly. By the end of the year household consumption growth is will continue to decline and is unlikely to be a source of growth in the near future.
Furthermore, the quickly deteriorating economic situation in Russia is turning into a major issue for the Belarusian economy. According to the available data, there are signs that in October Belarusian producers began to have some problems with sending their goods for export to Russian markets.
These problems are twofold. First, contracting demand in Russia hit Belarusian producers as well as other competitors on Russia's markets. Second, a sharp decrease in price competitiveness for Belarusian producers on Russian markets also unfolded in October.
Russian ruble depreciated enormously against the US dollar in October, while Belarusian ruble kept on modest rate of depreciation vs. dollar. Hence, in real terms Belarusian ruble appreciated to Russian ruble in October by 6.6%, and by 17.6% since the beginning of the year. These figures display the scale of price competitiveness reduction for Belarusian producers (see Figure 2), which restricts their exports.
A more expensive Belarusian ruble (vs. the Russian ruble) also triggered a boost in the demand for imports from Belarus's eastern neighbour. The prices in Russia in dollar terms turned out to become much cheaper for Belarusians in comparison to the domestic market, especially for durable and capital goods.
The combination of growth of promotion and the growth of restrictive factors has created a large amount of uncertainty. This uncertainty alone presents a challenge for the economy. In such an environment many economic agents shift their behaviour to be conservative in tone – they postpone planned investments and purchases of durable goods and/or refrain from new plans until more clarity and certainty about the economic situation is apparent.
In this respect, the government should raise confidence levels by offering reliable response to the crisis. However, the new external environment seems to have completely preoccupied the Belarusian authorities, as they still have not elaborated a clear response. During the last couple of weeks different officials have stated radically different positions in respect to the exchange rate, interest rate, fiscal and wage policy. This forms a threat not only to production dynamics, but also to financial markets.
Monetary Environment: Threats to financial stability are accruing
The National bank of Belarus is trying to keep the USD/BYR exchange rate roughly stable to suppress inflation and lower devaluation expectations. At the same time, it needs to provide at least a stable level of price competitiveness for exporters, especially on the Russian market.
A modest depreciation and stable price competitiveness may co-exist when Belarusian and Russian rates of depreciation against the US dollar are closer to each other (or even if the Belarusian one is more significant). In this case, a stable USD/BYR exchange rate is going to be in line with domestic expectations, while a generally stable (or depreciating) RUB/BYR exchange rate is going to provide accessible level of price competitiveness on the Russian market for Belarusian companies.
Given the sharp depreciation of Russian ruble over last two months, the National Bank had to sacrifice one of its priorities. It preferred to provide a stable USD/BYR rate in order to prevent a new wave of deposit outflows and/or deposit dollarization. A sharp appreciation in the real exchange rate vs. Russian ruble has become another element that (see Figure 2).
However, the current policy mix might not offer up a sufficient solution. External imbalances are likely to progress, which reduces the credibility of the National Bank’s exchange rate policy. Further deposit dollarization is the standard response by Belarusian households in these circumstances.
According to preliminary data, the process of changing the currency of deposits was restored in October and rapidly expanded in November. Hence, the policy of modest depreciation against the US dollar is failing in respect to both priorities: the fragility of domestic financial market is growing, while external price competitiveness has been dampened.
A good solution for the National Bank assumes that the Russian ruble will stabilise shortly against the US dollar, or even appreciate somehow, compensating for its all too rapid depreciation. In this case, the National Bank can ‘catch up’ with the Russian ruble in several months time by holding a modest depreciation rate against the US dollar.
However, the Russian ruble is continuing to depreciate due to dropping oil prices. To make matters worse, oil prices may not have reached rock bottom yet. At the same time, reducing the credibility of Belarus's monetary policy requires new incentives for mitigating deposit dollarization. This would mean that they would have to raise interest rates. But the latter will restrict output growth despite the desire of the authorities to stimulate it.
As such, a huge degree of uncertainty in respect to future path of the economy and the government’s policy was a major characteristic of the Belarusian economy in November.
This article is a part of a joint project between Belarus Digest and the Belarusian Economic Research and Outreach Centre (BEROC)