June 30, 2017
Following almost two years of recession Belarus GDP growth reached a positive figure of 0.3% YoY in the first quarter of 2017. Improving external trade, the merchandise balance in particular, contributed the most. Aside from the commodities balance, other components of the trade statistics do not indicate a sustained improvement, and with weak growth in Russia, expected at just around 1.5% over the next several years (see our macroeconomic forecast for Russia), the situation in external trade won’t change significantly.
With limited external demand and high external debt, domestic demand remains low as well. Retail turnover declined by 1.4% in 2017Q1, driven by low household consumption. Investment declined at by 6.5% YoY, albeit at a slower pace than a year ago, as lending activity is weak. The main reason is the high risk awareness of commercial banks, who face the highest NPL ratio in history, combined with a low deposit base.
Despite Q1 growth being higher than expected, the market consensus continues to be that of low growth in 2017. Meanwhile our Macro Forecast argues that economic growth will likely accelerate further towards the year-end. Growth will be supported by exports in part due to the resolution of the longstanding oil and gas dispute between Belarus and Russia in April 2017. Russia has agreed to increase oil supplies to Belarus back to pre-2016 levels. As a result, the amount of cheap crude oil processed in Belarus refineries and then exported to the West at market prices will increase.
Economic growth will remain subdued in the medium term due to an absence of reforms and a muted outlook for Russia, the key trading partner. State-owned companies, which lack productivity growth, dominate the economy, and deep economic reforms to attract foreign capital and know-how are not foreseen. High external debt repayment needs, a weak banking sector and low external demand hinder growth as well.
Developments in Russia, as well as political decisions about lending, are critical for growth and external stability. The recent agreement between the two governments signals a period of more favorable conditions, but a deterioration of the relationship could bring back negative growth rates, stronger depreciation pressures and higher interest rates. An IMF program could aid in securing external debt financing and open the gates to loans from other international financial institutions to avoid a further deterioration of debt figures.
The economist responsible for this story: Gyorgy Molnár
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