Testing the Limits of Investment Crisis - Belarus Economy Digest
On 25 August 2016 the National Statistic Committee of Belarus (Belstat) publicised new macroeconomic data for July, which showed that the economy is suffering from a lack of investment flows.
Meanwhile, according to the National Bank of Belarus the continuing decline of companies' profits threatens the financial stability of the country.
Finally, the CEO of "Great Stone" Hu Zheng tries to convince authorities of the profitability of the "Great Stone" industrial park, teaching Belarusians about high-level commercial science.
Economic Recession: Investment Drought
In January-July 2016 investment in fixed capital in Belarus has dropped by a fifth since the same period last year. Belarus has not witnessed such a decline in investment activity since the 1990s, a period of investment disaster in the economy.
2016 has brought a third straight year of investment drought, bringing the total amount of years of drought up to four over the last five years. Moreover, the process of investment "deforestation" is speeding up: from -5.9 per cent in 2014 up to 20.6 per cent right now (see Figure 1).
The main explanation lies in the economic structure of the Belarusian economy – the greatest "stake" still belongs to the state. It thus continues to play the leading role in the investment scenario. As a result, the decline in investment expenditures of public industries has pulled down the whole investment activity in the country.
The second reason concerns foreign investors: they spend money mainly on sectors with high domestic demand – finance, communications, retail trade, restaurants, and so on. With the reduction of the "life-giving" source of superprofits the additional commercial investments have also greatly diminished.
Finally, in order to help the National Bank reduce inflation, the government has committed itself to cut funding of state programmes by approximately BYN28tn this year and by BYN20tn the next one.
Therefore, given the significant dependence of investment programmes of state enterprises on state funding, the government’s hopes for an investment recovery in the following years seem dubious.
The Financial System: Destabilising Loss-Makers
According to Belarus's statistical agency Belstat, the profits of enterprises have decreased by a fifth in the first half of the year, while the number of loss-making companies has increased by a quarter compared to the same period last year. On 1 July 2016 the number of loss-makers reached 1,738 (or 22.8 per cent in total) and outperformed the corresponding figures of the previous year by 24.8 per cent.
On 28 July 2016 representatives of the National Bank said that the situation with loss-makers is even more complicated, as over the last several years, in order to expand production, a large share of enterprises took out more loans without an adequate assessment of their ability to pay them back.
Correspondingly, in the first half of the year the amount of troubled assets in Belarusian banks doubled, thus increasing the risk of financial instability in the country.
Moreover, according to the National Bank, due to the devaluation of the national currency the debt burden (formed mostly by foreign currency liabilities) of the enterprises has increased significantly over the past two years.
As a result, the positive effect of the devaluation on price competitiveness of Belarusian exporters has been cancelled out. In January-July 2016 exports fell by more than a fifth in comparison with the same period last year.
Trade Policy: Low-ball from the Great Wall
On 5 June 2012 President Aliaksandr Lukashenka signed a decree on the creation of the Belarusian-Chinese industrial park "Great Stone," aimed at attracting over 100 companies from China and Europe. However, to this day only eight residents have agreed to participate, and only two of them have started the building process.
On 19 August 2016 the CEO of "Great Stone" Hu Zheng tried to dispel any uncertainty about the future of the project by claiming that the conditions for entering the project are too restrictive (the size of the company and its business area: electronics, pharmaceutics, R&D, engineering, biotechnology, fine chemistry, new materials, warehouse logistics), which restrains investors.
Hu Zheng has suggested that the criteria for residents must initially be relaxed and their areas of activity expanded. He gave several examples, including firms engaged in processing of raw materials on a tolling basis (for example, processing of stone or metal).
However, such "extraordinarily helpful" advice may turn the innovative project into a simple excuse to transfer the above mentioned enterprises with low added value (which are also potentially harmful to the environment) from China to Belarus.
Due to prohibitive tax benefits (10 years of "all inclusive" tax vacation plus a subsequent 10 years of half-priced tax bills) for the investors, acting on such advice could undermine the competitiveness of Belarusian enterprises, contribute to additional job losses of Belarusians and lead to even more severe budget problems.
In Belarus this is an unpopular position: the first Deputy General Director of the "Company for the development of the industrial park" Kirill Koroteyev has admitted that the primary aim of "Great Stone" is to attract only high-tech companies.
Thus, the government is still searching for additional sources of economic growth, preferring to bet on foreigners and forgetting about the entrepreneurial abilities of their own citizens. Meanwhile, investments continue to evaporate and additional fiscal risks threaten the financial stability of the country.
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)