Economic developments in Belarus Daniel Krutzinna Investment Company Uniter.

Economic developments in Belarus

Daniel KrutzinnaInvestment Company Uniter

Current situation

Main prerequisites of the crisis

Main causes of the crisis

Policy options

Government approach to tackle the crisis

Belarus financing needs

Projections

Current situationMarch 22: the National Bank stopped selling foreign currency to commercial banks.

May 24: the National Bank devaluated Belarusian ruble by 56%, but the foreign exchange market didn’t recovered.

October 20, the National bank introduced free floating regime for Belarusian ruble, total depreciation from the beginning of the year accounted for 189,3%

Following limited access to foreign currency the foreign trade balance started to improve

Uncertainty on foreign exchange market led to inflation acceleration up to 74% for Jan 11 – Sep 11 (comparing to CPI 2010 = 9,9%)

Positive trade balance for July 2011 = 173,8

mn USD

Structural imbalances of Belarusian economy + boosting internal demand through soft macroeconomic policy caused a chronic CA deficit during last 5 years

Fixed exchange rate was maintained by exhausting the international reserves. Before 2009 currency depreciation and before 2011 crisis international reserves dropped by third.

To maintain international reserves on appropriate level government was forced to seek external financing. Thus, the gross external debt increased from 17 % of GDP in 2005 to 52% of GDP in 2010

Main prerequisites of the crisis

Oct 1: 4,7 bn USD or 5,5 weeks of

imports

Main causes of the crisis:1. Internal factors

• Structural imbalances: state sector accounts for 70% of economy

• Soft macroeconomic policy: stimulating of demand by low interest rates

• Large quasi-fiscal investment financing through state programs• Pertaining high employment by subsidies to state enterprises• Raising wages of state sector employees before 2010

presidential elections• Existence of fixed exchange rates

2. External factors. • Reduction of energy/hydrocarbons subsidies from Russia. • Entry into the Customs Union with Russia and Kazakhstan.

Policy options:4th June, 2011 EurAsEc Anti Crisis Fund (ACF) approved a $3 billion loan to Belarus to

support the balance of payments and to augment foreign exchange reserves. The loan is accompanied by a stabilization program.

Since September, 2011 Belarusian Government has started to take clear steps for economic stabilization under the EurAsEc stabilization package.

13th September, 2011 IMF issued its Country Report with analysis of current situation. The report offers more tight stabilization package.

17th October, 2011 The IMF appreciated the Government’s efforts in recovery from the crisis, but required deeper reforms and a “clear commitment—including at the highest level to stability and reform and to reflect this commitment in their actions”.

The Head of the National Bank Ms. Ermakova said, that the IMF loan is unlikely to be provided.

So the baseline scenario seems to be EurAsEc ACF stabilization package

20th October, 2011

Government approach to tackle the crisisMonetary policy• Positive real interest rates• Restrain credit growth

+80%

EurAsEc requirements

Current policy indicators

Implications for economy

The Head of the National Bank Nadezhda Ermakova supposes that there is no need to raise the refinancing rate to the level exceeding inflation (80%) motivating this view by her considerations regarding the vanishing role of the refinancing rate in crisis situation and economic security concerns.The governmental policy now is focused on combating inflation. But in frame of price liberalization (introduced this year under Directive of the President No 4) the only instrument to tackle inflation is tight monetary policy. So there is certain risk that the Government will fail to curb inflation in short term perspective (the inflation target for 2012 is 19%).

Government approach to tackle the crisisBudget policy

EurAsEc requirements

• Budget deficit decrease from 3% of GDP to 1,5% of GDP:• Freeze of budget sector wages• Reduction of subsidies for transportation and household utilities• Increase in export duties for potash fertilizers, tax rates for the

extraction of mineral resources, and excise tax rates for alcohol and tobacco.

Current policy indicators

• Real incomes are declining however at the lower pace than inflation

• In Sep-11 the Government introduced a one-time additional payment to all pensioners

• Decrease in real incomes of state sector employees are partly compensated (lower than inflation rate)

• The Jan-Aug budget generated a surplus of 0,9% of GDP. The government prepared the adjusted budget plan for 2011 which envisages budget deficit of 1,5% of GDP. The additional inflation-generated revenues, revenues from oil export duties and higher potash export duties will be channeled to some increase in budget sector wages and social payouts.

• The adjusted budget plan also provides for reduction of subsidies for transportation and household utilities up to agreed levels.

• Although export duties for potash fertilizers and tax rates for the extraction of mineral resources were raised this year, the excise taxes are planned to raise gradually next year.

Government approach to tackle the crisisLending under government programs (LGP) • Gradual decrease of lending under government programs (LGP):

• 4% of GDP in 2011;• 3% of GDP in 2012;• 1% of GDP in 2013.

• Sources of LGP financing – only MinFin deposits, no National Bank subsidized lending.

• Establishment of special Development Bank to manage LGP• Voluntary participation of commercial banks in LGP on market

conditions

EurAsEc requirements

Current policy indicators

• For Jan-Apr 2011 the LGP volume accounted for 2,2% of GDP• 21st June, 2011 – President issued an Edict “On establishment of Development Bank” for

managing LGPs. • New mechanism of interest rate compensation: funds are channeled not to banks, but to

the borrowers.• On 2 September, 2011The National Bank sent a circular to all banks engaged in LGP with

instruction to limit the volume of debt of the borrowers under Government Programs by the 1st September 2011 level. This means that new loans in frame of LGP will be provided within the amounts of repayment of the previous debts.

Government approach to tackle the crisisExchange rate policy

EurAsEc requirements

• Exchange rate unification • All trade conducted at a market-clearing rate

Current policy indicators

• 20th October, 2011 – after a month-lasting period of existence of 2 segments of foreign exchange market (one segment operated on market conditions, another segment was maintained to allow foreign exchange at lower-the-market rate for purchase of imported energy sources and medicines) the National bank introduced free floating regime for Belarusian ruble. Total depreciation since the beginning of the year accounted for 189,3%.

• To maintain stable market exchange rate in short and middle term the Government and the National Bank has only 2 instruments:

• Market interventions of the National Bank, which require considerable level of international reserves

• Tight monetary policy, which will limit money supply and aggregate demand

Now the level of international reserves is still below the safety level and the monetary policy is still not tight enough so there are certain exchange rate risks

Government approach to tackle the crisisStructural reforms • Large scale privatization during 2011-2013 (7,5 bn USD).EurAsEc

requirements

Current policy indicators

• According to the Privatization plan for 2011-2013 the state planned to sell 178 state enterprises in 2011, another 64 are planned to be sold in 2012, 2013 (most of the enterprises are small and medium, loss-making or non-effective state companies with liquidity problems). As for 19th October 2011, 29 enterprises were sold (primarily to local competitors) and the proceeds from the privatization accounted for 110 bn BYR (about 12,8 mn USD). The failure of privatization program is caused mainly by lack of appropriate approach to market the assets, poor quality of the assets, and rigidity of local management to change the status quo. There are talks in government structures that 2011-2013 privatization plan could be extended up to 600 enterprises.

• The progress in privatization of large interesting enterprises is the following:1. The sale deal of another 50% of Beltransgaz to Gazprom for 2,5bn USD

is planned to be finalized by the end of the year.2. There are 2 Russian bidders to acquire MAZ (one of the largest CIS

trucks and buses producer): GAZ and KAMAZ3. The President announced the Belaruskali price: 30 bn USD which is

about 2 times higher than market price. No real plans to sell.4. Belarus plans to sell its 50% stake in mobile phone operator MTS for 1

bn USD on 1st December, 2011

Items 20102011 2012 2013 2014 2014 2014

IMF projectionsFinancing needs -13,1 -15,3 -13,4 -14,1 -14,9 -17,0 -17,0Current account balance -8,5 -8,4 -6,5 -6,9 -7,1 -7,7 -8,2Amortization of debt securities 0,0 0,0 -0,2 0,0 0,0 -1,0 0,0Amortization of medium- and long-term debt -1,0 -1,5 -1,8 -2,4 -3,0 -3,5 -4,0Amortization of short-term debt -3,6 -5,3 -4,9 -4,8 -4,8 -4,8 -4,8Financing sources 12,6 7,7 8,3 8,7 10,0 11,4 11,2FDI (net) 1,3 1,8 2,0 2,4 2,6 2,8 3,2Portfolio investment inflows 1,2 0,8 0,2 0,0 0,0 1,0 0,0Trade credits (net) 1,1 0,3 0,4 0,4 0,4 0,4 0,4Medium- and long-term debt financing 2,8 2,5 3,9 4,7 5,2 4,4 4,8Short-term financing 5,3 4,9 4,8 4,8 4,8 4,8 4,8Other -0,5 -2,3 -0,5 0,8 1,5 0,1 0,0Targeted increase in reserves 0,8 -1,5 -3,0 -3,5 -3,0 -2,0 -2,0Exceptional financing 0,5 1,2 0,5 -0,8 -1,4 -0,1 0,0of which ACF () 0,0 1,2 0,9 0,9 0,0 0,0 0,0of which IMF (net) 0,7 0,0 -0,4 -1,7 -1,4 -0,1 0,0Residual financing gap 0,0 6,3 4,7 6,2 6,3 5,6 5,8 Our adjustments for 2011: Financing needs -12,9 Current account balance -6,0 Financing sources 3,5 Sberbank loan secured by Naftan shares 1,0 Sale of 50% stock of Beltransgaz 2,5 Residual financing gap 0,4

The IMF projections provide for existence of considerable financial gap even in 2011. However, the IMF plan does not consider certain issues:•Additional source of financing (FDI), •Better CA balance situation, •Extra loans

Limited access to external financingS&P: Local/foreign currency rating: B- Issuer credit long-term rating: B- Issuer credit short-term rating: CMoody’s: Country Ceiling for For. Curr. Bonds – LT: B3 Country Ceiling for For. Curr. Bank Deposits – LT: Caa

Belarus financing needs

Projections 2010 2011E 2012F 2013F 2014F

Real sectorGDP growth, yoy 7,60% 4,80% 0,50% 6,50% 7,30%Real domestic demand growth, yoy 11,20% 2,10% -2,80% 5,60% 7,40%Real population income growth, yoy 14,90% 1,20% 0,20% 6,00% 7,00%Investments growth 16,60% 2,40% -8,50% 8,00% 11,50%CPI dec-of-dec 9,90% 118,60% 19,20% 12,10% 9,00%

External sectorForeign trade bakance, mn USD -7 426 -3 667 1 843 2 270 2 256Foreign trade bakance, % of GDP -13,60% -7,50% 3,50% 4,00% 3,70%Current account balance, mn USD -8 493 -8 689 -3 674 -3 518 -3 629Current account balance, % of GDP -14,6% -17,70% -6,90% -6,10% -5,90%Financing account balance, mn USD, i.a. 7 273 8 869 6 774 3 448 3 983FDI i.a. 3 744 3 804 3 874 4128

Privatization proceeds 2 500 2 500 2 500 2 500International reserves, mn USD 5 031 6 010 9113 9 259 9 856International reserves growth rate, mn USD -622 978,9 3 103,20 146 598International reserves, months of imports 1,6 01.май 2,6 2,4 2,4External debt, mn USD 10 666 13 235 13 144 11 305 9 304External debt, % of GDP 19,50% 26,40% 24,70% 19,80% 15,20%

Monetary sectorBanks' claim on the economy, bn BYR 92 875 173 646 213 847 255 244 301 501Banks' claim on the economy growth, % 39,90% 87,00% 23,20% 18,80% 18,10%Banks' claim on the economy in BYR, bn BYR 72 346 99 563 108 551 118 336 128 336Banks' claim on the economy in BYR growth, % 56,60% 37,60% 9,00% 8,60% 8,50%Funds for state programme finansing, bn BYR 12 000 -

Basing on the conservative scenario

the Government prepared forecasts

for the main economic indicators

Indicator Safety level 2010 2011 2012 2013 2014External debt, % of GDP 55 52 70 75 77 78

State external debt, % of GDP 25 19 26 25 20 15

International reserves, monthes of imports 3 1,6 1,5 2,6 2,4 2,4

Foreign trade balance, % of GDP -5 -13,7 -7,5 3,5 4 3,7

Inflation 12 9,9 120 19 12 8

Economic security indicators

Thank you

Daniel KrutzinnaInvestment Company Uniter