Progressing Recession Deteriorates Quality of Debts – Belarus Economy Digest
On 27 October, the Belarusian statistical office released revised GDP data. The government actually bets on a quick revival of the economy and bails-out some firms and industries through expanding its own debt.
However, this in turn creates a potential problem of public debt sustainability, as the perspectives for creating the effective economic activity of firms under a bail-out look doubtful. Another troubling trend is that the growth rate of outstanding loans has been significantly higher than the expansion of firms’ economic activity.
No Recession End in Sight
The Belarusian statistical office reported that in January-September GDP contracted by 3.7%. From the perspective of recession, this figure provides ambiguous signals. On the one hand, the deepness of the recession was less than in January-July. On the other one hand, GDP performance in September deteriorated in comparison to August.
Some swings in output dynamics occurred due to late harvesting this year. If this fact is taken into account, the perception that the bottom of the recession is further ahead becomes more reasonable.
The Belarusian authorities prefer to accuse external shocks for the poor GDP performance Read more
New statistics show further that Belarus is experiencing a significant shock in its level of potential GDP. The latter emphasises the partial disorganisation of the important aspects of the national economy, which might increase the length of the recession, which will result in lower living standards.
The Belarusian authorities prefer to accuse external shocks for the poor GDP performance. For instance, the first deputy Minister of the Economy characterised the current trends as 'adaptation to a new normality’. Although external shocks have indeed become a trigger for the recession, currently mainly domestic adjustments speed up and increase the contagion of recession.
However, problems associated with poor GDP performance and lower living standards have both lost their top positions in the economic agenda for now. This is due to the Belarusian authorities announcing the new denomination in 1 July 2016. Although the technical step of removing 4 zeros from prices will not have any effect on economic dynamics, it has attracted much public attention.
Two Patterns of Adjustment to Recession
Belstat reports that the ‘average’ financial stance of firms improved in comparison to previous years. For instance, the average level of sales profitability in January-August 2015 improved modestly in comparison to previous year, although it remains close to the historical minimum. The improvement in profitability became possible mainly due to cost adjustments, as most firms currently face much tighter budget constraints.
However, each firm’s performance is not uniform. The share of loss-makers increased threefold in 2015. The absolute amount of loss generated by these firms during the first 8 months of 2015 approached to roughly 5.5% of GDP.
Government Buys the Debt of Wood-Working Firms
Within the real economy a divide among firms has arisen. Some firms appear to be successful in adjusting to the new environment, due to lower costs and growing productivity. Yet other suffer and for them operating in a recession environment results in progressive loss-making and debt accumulation (see Table 1).
From this perspective, wood-working manufacturing has become a good example. In 2007-2014, the government initiated a so-called modernization of the industry, allocated to the industry more than $1 billion through a mechanism of direct lending. During a meeting between government officials and Alexander Lukashenka in late October devoted to wood-working, the officials recognised that majority of wood-working firms will not become profitable in the near future.
Moreover, a huge amount of debt has been accumulated by these firms (during the modernization campaign) and so it becomes further each firms poor prospects. This in turn becomes a huge challenge for the banking system of the country.
In the case of wood-working, Lukashenka decided that the government should purchase this debt from commercial banks. This scheme looks pretty similar to the one employed in June for supporting state machinery firms. The government in turn is forced clean each banks’ balance sheets from the issue of potentially bad loans by means of increasing government debt.
The Quality of Debt As A New Systemic Threat
Over roughly a decade, the growth rate of outstanding loans has been significantly higher than the expansion of firms’ economic activity. Hence, the fraction of each firms own capital has decreased constantly. Between 2004 and 2014 it fell by 22.1 percentage points down to 57.3%.
Given the sharp growth in real interest rates during the last couple of years, each firms’ costs for debt servicing has increased significantly. Hence, during the recession many firms faced the choice of:
- substituting, at least partially, borrowed funds using their own money;
- limiting the volume of production;
- instigating loss-making activities, expecting that either the interest rate will go down, or the demand will revive in the short-term.
A significant number of firms (especially state-owned ones) had to select the third option, as ceasing/contracting production would have meant a quick default on already accumulated debts.
These threats have also emerged in banking balance sheets. The share on non-performing loans started growing, although modestly (see Figure 1). But one may argue that the problem is gaining momentum. For instance, the growth rate of assets classified as ‘in between standard and non-performing ones’ (i.e. the part of these loans will become non-performing soon) is growing rapidly.
The deteriorating financial performance of firms has already affected banks’ financial results. Due to the deteriorating quality of assets, nearly all the banks display lower profitability in 2015 in comparison to previous year. More than this, some banks have displayed losses in the last quarter of 2015. From this perspective, a long drawn out recession might hit the banks further (individually, or, in the worst case, systemically), thus continuing the feeling of depression in the economy.
Dzmitry Kruk, 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)
Belarusian Writers and the Soviet Past
Last week two demonstrations in Minsk commemorated the victims of Stalinism. On 29 October, “The Chain of Remembrance” drew attention to the execution of more than 100 Belarusian cultural leaders on this same date in 1937.
On 1 November, the Conservative Christian Party of Belarus held a street rally in central Minsk to commemorate the dead, Dziady, authorised by the Minsk city and regional governments.
The events focus on aspects of the Soviet past that the Belarusian leadership has largely ignored or concealed. Not only have Stalin’s crimes been glossed over, but so have recent tragedies in Belarus such as the consequences of the 1986 accident at the Chernobyl nuclear plant. Writers who have tried to draw attention to these events have faced profound difficulties.
This article cites the examples of three prominent Belarusian writers, one writing before the presidency of Aliaksandr Lukashenka and two during his tenure in office. They illustrate that the leaders of Belarus have failed manifestly to address the crimes of Stalin and other consequences of Soviet rule.
These three Belarusian writers demonstrate the dilemmas of probing into such controversial topics in current-day Belarus whereas its southern neighbour Ukraine is attempting to eradicate all traces of its Communist past. All became alienated from the modern state.
Vasyl Bykau: “The Dead Feel No Pain”
Vasily Bykau (1924-2003) was Belarus’ best known writer, largely as a result of his accounts of the war years, which he experienced in the ranks of the Red Army in the Second and Third Ukrainian Fronts as the Red Army advanced through Eastern Europe.
Though recognised for his talents, his starkly realistic accounts contrasted with most Soviet writing on the ‘Great Patriotic War’. He provided an antidote to the ritualistic pantheon of great victories and heroism, particularly his book “The Dead Feel No Pain” (1965). Bykau achieved fame in the USSR through Russian translations of his works, which he wrote in Belarusian.
Bykau and Lukashenka proved incompatible compatriots and in December 2002, the former Secretary of the Hrodna section of the Belarusian Union of Writers emigrated to the Czech Republic with the support of the Czech Chancellor and playwright Vaclav Havel, thereafter visiting his homeland only a few times. Shortly before his death he returned to Belarus where he died of stomach cancer in a Minsk hospital. Over 50,000 attended his funeral, which was notable for the absence of government officials, including the president.
Ales Adamovich: the Partisan Writer
Adamovich, born in 1927, was too young to be called up to the Red Army but served in a partisan unit during the war. From the 1950s to the early 1990s he wrote several books about the war that brought him fame, most notably Khatynskaya Povest’ (The Khatyn Story, 1972), about the massacre of residents of the village some 30 miles from Minsk, which now holds the well known heritage site.
Like Bykau his genius lay in capturing the true nature of the war, portrayed with searing honesty in his screenplay written with Elem Klimov Idi i Smotri (Come and See, 1985), which was released on the eve of Glasnost, allowing for wide dissemination of the movie about a teenaged boy during the German occupation of Belarus.
Like Bykau, Adamovich, who held a doctorate in philology, emigrated from Belarus—this time to Moscow. In the declining years of the USSR, Adamovich supported the formation of the Belarusian Popular Front and tried to draw popular and official attention to the problems engendered by the 1986 Chernobyl accident.
Adamovich wrote in both Russian and Belarusian, and had a wide influence over Belarusian writers of the following generations, not least Sviatlana Aliakseevich, who emulates his model of conveying realities through literary fiction, often based on actual events or popular memories. Adamovich died on January 26, 1996, ironically the same day that Stanislav Shushkevich was ousted from power in Belarus as a result of charges brought by a parliamentary committee on corruption chaired by Lukashenka.
Sviatlana Aliakseevich: the “Cultural and Mental Backwardness of Our People”
Aliakseevich, born in May 1948 in Ivano-Frankivsk to Belarusian father and Ukrainian mother, was raised in Belarus and has written on the Second World War, the Soviet war in Afghanistan and Chernobyl. On the former, she wrote about the experiences of women and children, and like her mentors, she added provided realistic accounts.
Most of the works of Aliakseevich were published outside Belarus and she lamented Belarusian society under Lukashenka. In an interview Yulia Shymko and I held with her in April 1998, she stated: “Certainly it would be preferable to have Vaclav Havel as president, someone who permits society to progress without provoking its worst features. But, on the other hand, Lukashenka simply reflects the cultural and mental backwardness of our people.”
In 2000 she moved abroad, living in France, Sweden, and Germany, but returned in 2011. On 8 October 2015 when she was awarded the Nobel Prize for Literature, the Belarusian president could hardly ignore her and offered grudging praise, but shortly afterward the two resumed hostilities: the president accused her (October 25) of throwing “a bucket of dirt” on Belarus. She retorted that her critiques targeted “the regime, not its people.”
These three writers represent the conscience of Belarus. They laboured under complex conditions that were not eased by the collapse of the Soviet state. The state tried to uphold many ideals of the USSR, not least its interpretation and memory of the war.
Lukashenka personally concealed the inquiry into the mass shootings at Kurapaty, just as he did the effects of Chernobyl by declaring that the catastrophe had been overcome—symbolised by the construction of Belarus’ first nuclear power station on the border with Lithuania.
Even these featured writers rarely highlighted the destruction of virtually the entire Belarusian cultural elite in 1937-38, which has sparked the recent demonstrations. Yet it is thanks to their writings that an alternative perspective of the Soviet past remains.
David Marples is Distinguished University Professor, University of Alberta and author of 'Our Glorious Past: Lukashenka's Belarus and the Great Patriotic War (ibidem-Verlag, 2014).