Oil pessimism and manufacturing optimism – digest of the Belarusian economy
On 26 November Belarusian Deputy Prime Minister Vladimir Semashko announced that the recession in the Belarusian manufacturing sector has ended.
However, Belarusian banks strongly disagree with this statement. They yearn for more financially stable corporate borrowers, especially in the industrial sector.
Meantime, oil refining – currently the mainstay of Belarusian manufacturing – is under threat as Russia reduces the volume of oil it supplies to Belarus for processing. This is likely to impede Belarus’s recovery from the economic recession even further.
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Industrial production: an optimistic view
On 26 November, Vladimir Semashko announced that all indicators point to the fact that the manufacturing crisis has stopped – the growth rate reported by the Ministry of Industry has already reached 3 per cent; it is predicted to rise to more than 11 per cent next year.
However, such an extraordinarily positive appraisal of economic performance in the industrial sector seems slightly premature. There are several reasons to think so. First of all, in 2015 the manufacturing sector received financial assistance from the state (in the form of of foreign currency bonds) totaling more than $500m. This sum has yet to be repaid.
Secondly, due to a lack of free financial resources, the repayment of these debts will fall on the shoulders of ordinary Belarusians. The average wage in Belarus remains at historically low levels – despite several months of growth it has fallen once again and now constitutes only $379.
Finally, even though growth dynamics have reversed when it comes to several industrial product items, the overall picture in manufacturing remains disappointing (see Figure 1). In October industrial production increased by 3.6 per cent compared with September – this was slightly better than expected but hardly surprising.
The banking system: endangered risk takers
Meanwhile, the demand for loans from Belarusian enterprises remains low due to the high cost of borrowing (18 per cent on average). If the credit market were in a different condition, banks could channel unused funds into the economy in order to break the recession.
Theoretically, banks could increase their loan portfolio – they do have the money. However, the situation five years ago, when banks’ credit portfolios grew by dozens of percentage points a year, seems unlikely to repeat itself in the coming years.
Belarusian Development Bank analysis shows that the economic downturn and deteriorating financial conditions of enterprises has led to changes in the internal instructions of the Belarusian banks prohibiting to increase loan portfolio if they do not first improve their quality. Belarusian banks do not trust corporate borrowers to repay their debts in the future, as most potential borrowers are classified as ‘low-quality’.
For example, in January-September 2016 the number of problem loans in the banking sector increased from 6.8 per cent of the total at the beginning of the year to 14.3 per cent on 1 October. This rise in banks’ problem loans coincides with the deteriorating financial conditions of enterprises.
The current economic downturn has several repercussions. First, it increases the risk for those banks who wish to raise their loan portfolio. Second, it discourages others from further risk taking. As a result, according to the National Bank, the volume of corporate loans in national and foreign currency decreased by 3.9 per cent and by 5.2 per cent in January-September respectively.
Oil negotiations: waiting for refunds
Belarusian authorities are trying to find new ways to increase the financial base of budget profits. On 25 November 2016, Igor Demin, an official representative of the Russian company Transneft, confirmed that two Belarusian oil transport companies had stated their intention to increase the cost of transit for Russian oil from 1 January 2017 by 20.5 per cent.
In October, Belarusian authorities had already threatened Moscow with a sharp increase (50 per cent) of the oil transportation tariff. Transneft representative Igor Demin responded that such changes would require a corresponding agreement with Transneft and the Russian government.
At the moment, a 2010 intergovernmental agreement regulates the calculation of the growth rate for transit tariffs. It takes into account the preliminary predetermined volume of oil transit, which remains unknown until February 2017. According to these arrangements, Belarus has the right to increase the transit tariff unilaterally only to adjust for average annual inflation.
However, the main reason behind the growth of the transit tariff remains the volume of oil reaching Belarusian oil refineries. From 2016 until 2024, Russia agreed to supply 24m tonnes of oil annually. But starting in the second half of the year, Moscow reduced the oil stream first to 3.5m tonnes (approximately 40 per cent) per quarter, and starting in October to only 3m tonnes (see Figure 2).
The main reason behind these harsh measures is the Belarusian gas debt, which has already reached $281m. In turn, authorities in Minsk are demanding that gas prices be reduced and set according to their own calculations ($73 instead of $132). Belarus has promised to close this gap by 20 October in exchange for the resumption of oil supplies, but the invoice nevertheless remains unpaid.
The decrease in the oil supply and the corresponding decline in petroleum product production have led to an additional 0.3 per cent GDP drop. Officials in Minsk urgently need a new bargaining chip for their oil manoeuvres to succeed. They are now relying on alternative oil streams from Azerbaijan.
Thus, the authorities have decided to raise the stakes in the energy dispute once again. Although such a controversial move may possibly help resolve the issue of discounted gas, it will surely not help attract new foreign investors, especially into the manufacturing sector, suffering as it is from a lack of cheap capital.
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)