(The following statement was released by the rating agency)
May 30 -
Summary analysis -- Belarus (Republic of) ------------------------- 30-May-2012
CREDIT RATING: B-/Stable/C Country: Belarus
Primary SIC: Sovereign
Credit Rating History:
Local currency Foreign currency
26-Sep-2011 B-/C B-/C
27-May-2011 B/B B/B
15-Mar-2011 B+/B B/B
21-Aug-2007 BB/B B+/B
The ratings on Belarus are constrained by political risks, rising government indebtedness, reliance on external funding, and the government's reluctance to introduce much needed structural reforms to improve the country's competitiveness. The ratings are supported by the country's relatively high, albeit declining, GDP per capita for the rating level, its substantial industrial capital stock, and its highly educated workforce. These factors provide the potential for a quick improvement in productivity should the government pursue structural reforms to enhance efficiency in state-owned enterprises and support private sector growth.
Belarus suffered from a severe balance of payments crisis in 2011, triggered by a loosening of monetary and fiscal policy prior to the presidential election in 2010. This contributed to a substantial widening in the current account deficit and exchange rate pressures. Consequently, the Belarusian ruble depreciated by 178% in 2011, and consumer price inflation surged with the year-on-year rate reaching 109% at end-2011. At the same time, the country's usable reserves were depleted, reaching a low of $3.7 billion in March 2011 that already included a substantial amount of foreign currency borrowed from the domestic banking system.
The government's policy response to the crisis came with some delay, and only gathered pace in the third quarter of 2011. After entering a $3 billion (about 7% of GDP) three-year loan agreement with the EurAsEC Anti-Crisis Fund (ACF) in June 2011, underpinned by a stabilization program, the government started to tighten its fiscal and monetary policies. Mostly driven by cuts in current and capital spending, the fiscal outturn for 2011 was a surplus of 3.0% of GDP compared to a target deficit of 1.5% of GDP under the ACF program. Further, the National Bank of Belarus (NBRB) abandoned the practice of providing loans to the government, and the exchange rate was liberalized and unified in October. Interest rates were increased, with the refinancing rate reaching 45% by end-2011. The national bank also abolished the practice of borrowing from commercial banks.
On the external front, Belarus has benefitted from new funding and capital inflows that have helped alleviate exchange rate pressures and replenish useable reserves. In addition to $1.24 billion secured under the ACF program, Belarus received a loan of about 2% of GDP from Russia's Sberbank. Belarus sold its remaining 50% share of Beltransgaz to Russia's Gazprom for for about 6% of GDP, and agreed to sell other assets worth 12% of GDP during 2012-2013. Russia and Belarus also signed a new agreement for oil and gas import prices, which puts the gas price this year at a 44% discount from 2011. We expect this will translate into 3% of GDP in savings for Belarus over the next two years.
It appears that the economy is showing early signs of stabilization. The banking sector has seen an inflow of local currency deposits, indicating that the population is regaining confidence in the currency. Inflation, while still high, has been declining since December, and the monthly rate slowed down to 1.5% in March 2012. The goods trade balance posted a surplus of $715 million in first-quarter 2012. Moreover, and given the recent capital inflows, the government has built sufficient external resources to meet its financial obligations due this year and the exchange rate has slightly appreciated from its trough versus the U.S. dollar in October 2011.
Notwithstanding these positive developments, we believe the stabilization process remains at risk of policy slippages or even reversals. Signs of slippage include recent moves by the national bank to reduce interest rates, government plans to raise wages and pensions to restore real incomes to pre-crisis levels, and the presidential administration's decision to raise the economic growth target for 2012 to 5%. All this implies a possible recourse to domestic-demand-boosting policies. We also remain concerned that Belarus' deep-rooted structural economic problems remain unaddressed. With the increased dependence on and deepening economic integration with Russia, reform momentum is likely to wane further, in our view.
The stable outlook reflects our view that the improvement in external liquidity and successful stabilization efforts have significantly reduced the likelihood of us lowering the ratings over the short term. However, we could lower the ratings if renewed expansionary policies were to lead to a return of exchange rate and inflationary pressures. We could also lower the ratings if external liquidity or the availability of external funding were to significantly deteriorate again.
Government policy leading to a sustained improvement in competitiveness, a diversification of funding sources, and increased availability of foreign exchange could eventually support an upgrade. We could also consider raising the ratings if we saw an improvement in external balances indicated by lower external financing needs, lower external debt, and improved current account balances.