Continued low growth
Deep macroeconomic imbalances stemming from economic overheating under ultra-loose monetary and fiscal policy in 2010 pushed the economy into a severe currency and external liquidity crisis in 2011 from which it has yet to recover.
Real GDP growth has been above the average of Emerg¬ing Europe for many years until 2011, but fell to just +1.5% in 2012 on the back of a sharp -13.8% drop in fixed investment as the impact of the deep financial crisis of 2011 took full effect. Growth decelerated further to +0.9% in 2013 and picked up only slightly to +1.2% y/y in H1 2014. Full demand-side details are not availa¬ble, but it is reported that fixed investment contin¬ued to decline markedly by -6.7% y/y in H1, while a +10.9% y/y increase in retail turnover suggests that private consumption gained robustly. On the supply side, industrial output shrank by -1% y/y in H1, while agricultural output contracted by -4.3% y/y.
EH expects economic activity in Belarus to remain weak in the next 18 months or so as the economic crises in neighbouring Russia and Ukraine, its main trading partners, will weigh on the Belarusian economy. Full-year GDP growth is forecast at +1% in 2014 and +1.5% in 2015.
Inflation and exchange rate risks remain on the cards
The official BYR/USD exchange rate was devalued in several steps by a total 178% in 2011 and was unified with the market exchange rate into one floating rate in October 2011. Inflation was driven up by the devalua¬tion and reached 108.7% y/y at end-2011. In 2012 the exchange rate stabilised, depreciating by just 2.6%. Inflation moder¬ated but was still relatively high at 21.8% at end-2012.
Driven by ongoing large macroeconomic imbalances as well as monetary easing (intended to support growth), currency depreciation has accelerated again since mid-2013, reaching 11% y/y at end-2013 and 16% y/y in mid-2014. Inflation has remained relatively high and picked up again from 16.5% at end-2013 to 19.8% y/y in July 2014. Nonetheless, the central bank has continued its path of monetary easing in 2014, lowering its key policy interest rate in four steps from 23.5% at end-2013 to 20% in August 2014. EH fore¬casts inflation to persist in double-digits and exchange rate risk to remain very high until at least end-2015.
The fiscal balance has been in moderate deficit or surplus over the last few years and the public debt level is adequate at currently 37% of GDP, but this mainly reflects the govern-ment's lack of access to external funding. EH projects annual fiscal deficits of around 3% of GDP in 2014-2015. Since Belarusian creditworthi¬ness is weak, the government has in recent years mainly borrowed from Russia and also increased its domestic debt issuance, including sales of foreign exchange-denominated bonds.
Huge current account deficit
The current account deficit narrowed from a record high 15% of GDP in 2010 to 2.7% in 2012, but widened again to an unsustainable 9.8% in 2013. A similar ratio is forecast in 2014 and a slight moderation to about 8% in 2015.
Already high external debt set to rise further
The currency devaluation in 2011 pushed up external debt to a critical level of 57% of GDP, up from an average 23% in 2000-08. After narrowing to 51% of GDP in 2013, EH forecasts the external debt to GDP ratio to rise again to about 57% by end-2015 as a result of external financing of the current account deficits.
Very high external liquidity and T&C risk
Foreign exchange reserves are low, standing at USD4.6 billion in July 2014, sufficient to cover just 1.2 months of imports or, in other terms, only 19% of all external debt payments falling due in the next 12 months. External liquidity and T&C risk will remain very high in the medium term, especially as IMF funding is unlikely in the next year or two.