Belarusian Economy: New Threats to Macroeconomic Stability
In the first half of 2013, a deteriorating external environment became the core reason for a downturn in GDP growth. Despite the government implemented expansionary policy to spur growth in the GDP, the domestic demand could not fully compensate shrinking external demand.
Furthermore, stimulation of domestic demand against a downward trend in the foreign sector renewed external imbalances. The latter may ruin a fragile equilibrium in the financial markets and challenge macroeconomic stability.
Belstat reported further downturn of the GDP growth rate: in January to May it amounted to 1.1% year-on-year against 2.5% year-on-year in from January to April. According to our estimations, it means that in May output contracted roughly by 3.7% on annual basis, and by 1.7% on monthly (seasonally adjusted) basis. Hence, the cyclical pattern of GDP seems to have changed during the last month: between late 2012 and March 2013 the economy showed signs of recovery, while since April it is likely to have fallen and entered a new slowdown phase.
From the demand side, household consumption still contributes to growth mostly. For instance, retail turnover (which is a good proxy for household consumption) grew in May by 19.6% year-on-year, having exceeded the growth rates in the first quarter and April.
A key reason for this confident growth is the intention of authorities to provide the growth of real wages. Some private companies that face a lack of skilled labour (due to labour outflow to Russia and other countries, amongst other reasons) contribute to the upward dynamics of wages as well. Such firms have to provide competitive wages despite losing the competitiveness of their products. Through this in April, real wages grew somehow (both on an annual and monthly seasonally adjusted basis) despite weakening growth and a deteriorating external environment.
Another major component of domestic demand – capital investments – displays volatile dynamics. After substantial growth in the beginning of the year, it has become much more modest in recent months. In May, it grew only by 4.6% year-on-year. This instability stems from the lack of financial resources for investments, while the government seeks potential options to spur the growth of investments.
So the domestic demand is growing, but nominal restraints after the currency crisis of 2011 has narrowed the effectiveness of its stimulation. Furthermore, its expansionary policy is tending to become more and more dangerous against a backdrop of deteriorating external environment. Given the reduction of external demand due to weakening growth in Russia and non-favourable environment at EU markets, such policy will lead to a further deterioration of net exports: first, through an additional demand for imports; second, through higher real unit labour cost, i.e. less competitiveness. Hence, in April merchandise the trade deficit increased almost tripled in comparison to March and reached $293.9m.
The cyclical slowdown of GDP has nothing to do with the effect of a high statistical base of the previous year (which takes place due to extra export revenues from ‘thinners and solvents business’ in the first half of 2012). From the production side, all the industries of the economy contributed to the downturn of GDP growth.
For instance, trade – which contributed to GDP growth between January and April mostly – has shown decrease of the growth rate. Another growing industry – agriculture – faced growth downturn as well. All other industries, including manufacturing, demonstrated downward trends well, which however, is more concerning, as in their case the slowdown deepened rather the growth went down.
The branches of manufacturing displayed either downward dynamics, or just a slightly narrowed slowdown in their output. Production of machines and equipment and production of non-metal mineral products were two lucky exceptions from the common trend, as they succeeded to strengthen the growth rate of their output, although rather modestly. Finally, the gross value added (the output in basic prices) fell by 0.1% year-on-year.
Hence, net taxes on products were the item that made growth rate of GDP positive. The latter effect takes place at the background of deteriorating net exports, as more imports increases the tax base for VAT.
Non-financial firms reduced their output in May monotonously, trying to react to an already deteriorated external demand, although with some delays. Although the signs of this deterioration appeared a couple of months ago, a majority of Belarusian firms did not adjust their output to this trend. In some industries, the firms treated this shrinkage of external markets as a short-term one. In some cases, the government restrained adjustment in firms’ output because of its growth targets.
These output growth targets became the core reason for the problem of excessive inventories of finished products and the worsening profitability of non-financial firms. For instance, as of 1 May 2013 in manufacturing, the stock of inventories of finished products reached 82.4% for its monthly average output (an acceptable level for the manufacturing as a whole is roughly 45-50% of monthly average output).
Alongside this, the indicators of firms’ profitability during January to April were extremely low: they were much lower than in the previous year and close to the level of 2009, i.e. the peak of the global crisis. Adjustment of output in May allowed for a stabilising financial stance of the firms somehow, although it is still far from the level needed for their sustainable development.
In May, the National Bank of Belarus kept on softening monetary policy trying to mitigate the downturn of GDP growth. It reduced the refinancing rate by 2 percentage points down to 25% (later on in June it made further reduction down to 23.5%). Financial markets adopted this impulse rather rapidly and the interest rates on the main instruments in national currency went down. In some segments of the market, say, those of short-term deposits in national currency, interest rates went down much more substantially in comparison to the refinancing rate: from 30.9 down 23.9% per annum.
The banks reduced the rates so radically due to the high supply of such deposits, while the demand for loans at this level of interest does not match the supply. In previous months, when the National Bank carried out a stricter policy, the banks preferred to keep a definite amount of excessive liquidity. Given the softening monetary policy and expectations of further reductions in the refinancing rate, the banks seem to be increasing their propensity to borrow. In this case, they are reluctant to maintain excessive liquidity and prefer to reduce their rates on deposits.
The equilibrium at the financial market still seems to be fragile against rather fresh memory of high inflation and depreciation. Through this, a new wave of deposit dollarization – which might take place in case of further rapid reduction of interest rates – might be a threat to monetary equilibrium. In May, there was a first warning – the growth rate of households’ savings deposits (on annual basis) went down, which might signal that the current level of rates is getting close to its threshold.
This article is a part of a new joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC) – a Minsk-based economic think tank.
Belarus Independence Day: Reviving the Soviet Myths
Today Belarus celebrates its Independence Day. Yesterday, the Square of the National flag opened next to the new building of Residency of President with great pomp.
Veterans of the WWII, famous Belarusian sportsmen, officials and youth swore allegiance to the national colours in the presence of 6,000 students and schoolchildren.
Despite financial difficulties the government spends huge amount of budget money to celebrate this holiday, which has particular significance for Alexandr Lukashenka.
Unlike most other official Belarusian holidays with roots in the Soviet Union, 3 July Independence Day is an invention of the current political regime. But efforts of officials, most Belarusians demonstrate indifference to the official holiday and leave the city instead of celebrating.
The date of 3 July refers to the myth of Great Patriotic War which became the main historical myth of the country during the rule of Alexander Lukashenka. Authorities introduced the 3 July as Independence Day in 1997, when it substituted previous official Independence Day – 27 July, which referred to the Declaration of Sovereignty of Belarus proclaimed in 1990.
The Day Which Irritates Inhabitants of Minsk
The Independence Day in current Belarus is the biggest large-scale event which is supposed to demonstrate stability and strengths of Alexander Lukashenka's political regime. Every year the state budget spends huge money for celebrations. According to an independent economist Leanid Zaika the military parade alone costs at least USD 300,000.
The main action takes place in Minsk and very much resembles the celebrating of official holidays in the Soviet Union. The parade of military vehicles, aviation and products of leading enterprises (agricultural machines, heavy trucks, fridges) follows the procession of sportsmen. After the parade Lukashenka usually gives a speech on the subject of progress of Belarusian state and current geopolitical situation of the country.
Preparation for the parade starts several weeks before the performance. Manoeuvres of tanks and armoured vehicles in the city centre causes havoc in public transportation. Ordinary Minsk residents cannot even cross the street for half an hour or longer to get home. It is no wonder that such inconvenience irritates most of the population of the city.
Unlike the residents of Belarusian capital, Minsk authorities refrain from publicly discussing their attitude to the parade. But every year after the celebrations finish, municipality has to invest substantial funds to repair city roads broken by heavy tanks and other military machines.
Genealogy of 3 July
It is difficult to imagine more artificial holiday in Belarus than the official Independence Day celebrated on 3 July.
In the early years of his rule Lukashenka gained a huge popularity promising to return the Soviet Union by creating the alliance with Russia. To gain popular support he used the nostalgia for the USSR of the majority of the population of Belarus which became the most rich and successful republic in the Soviet Union.
To legitimise the political regime which aspired to revive the USSR, Lukashenka returned Soviet holidays to the official calendar. From 1995 – 1996 Belarus revived the celebration of the Day of October Revolution of 1917 – 7 November and the Defender of the Fatherland Day – 23 February. During that period authorities also increased their attention to the Victory Day – 9 of May. Established in 1991, the Independence Day of 27 July did not correspond to this semantic range. It referred to the day when Belarus declared its sovereignty from the Soviet Union in 1990.
For that reason Belarusian political elites decided to move the Independence Day. The question of moving it to 3 July was put on the 1996 referendum together with several others questions. According to the official referendum results, 89.4% of voters approved the change of the date of national holiday. OSCE, Council of Europe and European Union did not recognise the results of referendum saying that the procedure failed to meet democratic standards.
Prior to 1996, on 3 July Minsk was celebrating the anniversary of its liberation from the Nazi invaders and “Day of the City” – annual holiday in most of big cities of USSR with bear-garden, concerts and fireworks. Minsk city authorities moved the Day of the City to September only in 2002.
As a result, between 1997 and 2001 on 3 July Minsk inhabitants celebrated three official holidays on the same day. At that period celebrations did not differ much from the feast on Day of the City. The “ideologisation” of the holiday starting in early 2000s when the Belarusian regime started to develop its own ideology.
Evil Fate of 3 July
3 July refers to the mythology of Great Patriotic War which became the main historical myth in Belarus. Unlike the second holiday which glorifies the heroism of Belarusian nation in Second World War, the Victory Day, 3 July is the invention of current Belarusian political elites. On several occasions the celebrations went wrong.
In 2008 during night concert in the centre of the city a bomb exploded. Forty persons were injured. Alexander Lukashenka was several hundred metres from the place of attack. The explosion became the pretext for the taking of fingerprints of almost entire male population of Belarus. But KGB and the police failed to find those responsible for the crime. But following arrests for the bombing of Minsk metro in 2011 suspect Dmitry Kanavalau was found guilty of attack on 3 July and executed shortly after.
Second time the celebrations spoiled Minsk inhabitants. During the summer 2011 “silent protests” against Lukashenka regime took place. In most of the cities of Belarus demonstrators were protesting against the authoritarian regime with clapping on the main squares of the cities. For that reason after the annual speech of the President on the parade the police prohibited audience to applause. During the protests on 3 July in Minsk the police arrested 210 persons.
After the celebrations in 2012 at night of 4 July an airplane, chartered by the Swedish citizens, illegally entered the airspace of Belarus and parachuted hundreds of teddy bears with notes carrying pro-democracy messages. That resulted in international scandal and closing of Swedish embassy in Minsk.
It looks like in recent years in spite of early preparation and huge money spent for the celebration bad luck haunts the official Independence Day. Many Belarusians prefer not to participate in political show of current elites.
They use the official day off to enjoy sunny summer day out of the city. Unlike the Soviet Union Lukashenka regime has very limited resources to force regular citizens to take part in official holiday and thereby to approve the political system.
The holiday exists for the prestige and legitimisation of the current political regime. For that reason most likely the annual performance on 3 July will stop shortly after the current political regime will become history itself.