Fears of Economic Turmoil, Banking Sector Problems - Belarus Economy Digest
According to the press release published by International Monetary Fund on 19 May the possible losses for the Belarusian economy in 2015 will amount 2.3 per cent of the GDP and $2bn of its foreign exchange reserves.
The consequences of the economic crisis in Belarus have multiplied and more problems are on their way.
The intensification of economic relations with China suggests that a simple solution could be improving the status of manufacturing and increasing the economy's competitiveness.
However, several questions remain: how to use any loans effectively, taking into account the criteria that any deals with China stipulate that most of the spending finds its way back to China, and how not to expose the most savoury sectors of the Belarusian economy to the ferocity of the Chinese dragon.
Beyond this, the banking sector shows warning signs. One troubling indicator is the National Bank's recent move to recall the licences of several commercial banks.
Belarusian Economy: the Great Slowdown
Belarus's economic figures for May have, to put it mildly, been disappointing. According to data published on 19 May, the economy is dealing with a number of serious issues. Nearly all of the primary economic indicators are in a downward spiral. For one, GDP has dipped by 2.6 per cent (see figure 1). Foreign direct investment fell by 37.6 per cent over the course of a year. Manufacturing is not providing the same kinds of profits that it once did with industrial output decreasing by 7.5 per cent.
The economy is also suffering from rising levels of indebtedness, which has recently climbed by 40.9 per cent. Retail sales have also slowed down: growth is sitting at 1.3 per cent, a sad figure when compared to the same period from a year ago, when it was considerably stronger at 12.8 per cent. This sends a disappointing signal for the emergence of consumption as a driver of growth.
A stronger Belarusian ruble and weak Russian demand have squeezed exports by 28.6 per cent over the course of a year. The number of people that are officially registered as unemployed skyrocketed 73.1 per cent as of the end of March 2015 when compared to the same period of 2014. Foreign exchange reserves have dropped by $238.1m.
Belarus now faces significant risks with a potential long-term slowdown in economic growth. Contrary to expectations, this sluggishness has emerged not necessarily as a result of the crisis unfolding in Russia, but rather due to the economy's virtually exhausted overall competitiveness.
Only through improvements in productivity and greater savings and investment are capable of breathing some fresh air into the economy. But according to the available economic indicators, the economy has yet to find a way to emerge from under the waves: productivity has decreased by 1.1 per cent and investment in fixed capital has dropped 5.9 per cent as of the end of April 2015 over the past year.
Rather than waiting for the situation to improve on its own, the government should remove all barriers currently holding Belarus back. The agricultural and IT-sector, for example, have much to offer.
Diversifying Belarus: In China We Trust
The nearly complete economic dependence on Russia and its interrelated industries has basically condemned Belarus to enduring its most recent economic decline. Though Russia is also suffering from losses (its GDP dropped 2.2 per cent in the first quarter of 2015), it still possesses so-called 'knowledge industries' (a vibrant service economy) that have restored its strength. Belarus has practically no trumps in its hand to play and, therefore, the new government has prioritised diversification, first and foremost with China..
Nevertheless, the past ten years of cooperation with powerhouse Chinese economy has provided almost negligible results for Belarus. Exports have seen only a slight increase, but while imports have grown considerably. As a result the trade balance from 2005 to the present has amounted to a $-1.7bn decline. Furthermore, the structure of trade has also transformed in an adverse manner. In 2005 Belarus has purchased approximately 40 per cent of consumer goods, but today its share has increased almost 60 per cent in total imports from China (see figure 2).
In May Belarus took several steps to speed up its trade and investment relationships with China. On 11 May 2015, during the Belarusian-Chinese Inter-regional Business Forum, the Minister of Economy of Belarus Uladzimir Zinouski announced that Beijing would provide more than $7bn ($3bn in the form of preferential loans, and another $4bn as a commercial loan) to Belarusian banks to finance business projects, including infrastructure development, and in support of small and medium-size businesses.
According to Zinouski China will additionally provide a special grant of 800m yuan in the form of technical assistance for various social projects. After negotiations on 10 May with Chinese officials, both parties approved 20 agreements and memorandums that will allegedly double mutual trade, promote the exchange of technologies and increase the share of scientific and technical innovations.
Nevertheless, the prospects of the successful implementation of these agreements seem unclear, especially when one takes into account the past experiences Belarus when dealing with countries like Iran and Venezuela.
Governmental representatives have tried to define how to follow China’s lead with regards to its astounding economic growth, as well as deploying its advanced manufacturing, especially in electronics. However, to replicate China’s path towards prosperity, Belarus requires three of China’s prominent advantages: low-cost manufacturing, the comprehensive automation of industry, and an excellent (and improving) infrastructure.
Banking Sector: More Serious Issues Arising
In April the National Bank extended the period of time to increase the profitability of operational activities, first of all with the short-term difference between loans granted and deposits attracted, of Trastbank, BTA Bank, and Bank BBMB.
Additionally, the national regulator has prolonged its decision to restrict TK-Bank’s operations with deposits (cash assets provided to the bank in order to gain interest profit) of individuals and legal entities, on issuing of warranties and plastic cards, and on trusts' management of assets.
In May the National Bank also ended the licences of the Nord European Bank, InterPayBank, BIT-Bank, Evrobank, and N.E.B Bank due to their failure to comply with the imposed requirements on normative capital value ($25m) and the uncertainty of prospects for their build-up.
Similar events occurred in 2011, when currency devaluation hit the Belarusian economy, and as a result eleven banks experienced the similar problems, with three banks nearly being nearly liquidated altogether. But, today’s problems differ from 2011, as banks’ difficulties are associated, first of all, with the improper regulation of the currency market; in 2015 problems have arose from exporters and their inability to repay their debts.
On the whole, the economy is continuing to decline endangering the stability of the banking sector, declining competitiveness and the pressure being applied to the National Bank to soften its monetary policy to strengthen the industrial sector and exports.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)