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Economic developments in Belarus Daniel Krutzinna Investment Company Uniter.

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Presentation on theme: "Economic developments in Belarus Daniel Krutzinna Investment Company Uniter."— Presentation transcript:

1 Economic developments in Belarus Daniel Krutzinna Investment Company Uniter

2 Current situation Main prerequisites of the crisis Main causes of the crisis Policy options Government approach to tackle the crisis Belarus financing needs Projections

3 Current situation March 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 didnt 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

4 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

5 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.

6 Policy options: 4 th 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. 13 th September, 2011 IMF issued its Country Report with analysis of current situation. The report offers more tight stabilization package. 17 th October, 2011 The IMF appreciated the Governments efforts in recovery from the crisis, but required deeper reforms and a clear commitmentincluding 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 20 th October, 2011

7 Government approach to tackle the crisis Monetary 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%).

8 Government approach to tackle the crisis Budget 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.

9 Government approach to tackle the crisis Lending 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 21 st 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 1 st September 2011 level. This means that new loans in frame of LGP will be provided within the amounts of repayment of the previous debts.

10 Government approach to tackle the crisis Exchange rate policy EurAsEc requirements Exchange rate unification All trade conducted at a market-clearing rate Current policy indicators 20 th 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

11 Government approach to tackle the crisis Structural 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 19 th 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 KAMAZ 3.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 1 st December, 2011

12 Items2010 2011201220132014 IMF projections Financing needs-13,1-15,3-13,4-14,1-14,9-17,0 Current account balance-8,5-8,4-6,5-6,9-7,1-7,7-8,2 Amortization of debt securities0,0 -0,20,0 -1,00,0 Amortization of medium- and long- term debt-1,0-1,5-1,8-2,4-3,0-3,5-4,0 Amortization of short-term debt-3,6-5,3-4,9-4,8 Financing sources12,67,78,38,710,011,411,2 FDI (net)1,31,82,02,42,62,83,2 Portfolio investment inflows1,20,80,20,0 1,00,0 Trade credits (net)1,10,30,4 Medium- and long-term debt financing2,82,53,94,75,24,44,8 Short-term financing5,34,94,8 Other-0,5-2,3-0,50,81,50,10,0 Targeted increase in reserves0,8-1,5-3,0-3,5-3,0-2,0 Exceptional financing0,51,20,5-0,8-1,4-0,10,0 of which ACF ()0,01,20,9 0,0 of which IMF (net)0,70,0-0,4-1,7-1,4-0,10,0 Residual financing gap0,06,34,76,26,35,65,8 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 financing S&P: Local/foreign currency rating: B- Issuer credit long-term rating: B- Issuer credit short-term rating: C Moodys: Country Ceiling for For. Curr. Bonds – LT: B3 Country Ceiling for For. Curr. Bank Deposits – LT: Caa Belarus financing needs

13 Projections 20102011E2012F2013F2014F Real sector GDP growth, yoy7,60%4,80%0,50%6,50%7,30% Real domestic demand growth, yoy11,20%2,10%-2,80%5,60%7,40% Real population income growth, yoy14,90%1,20%0,20%6,00%7,00% Investments growth16,60%2,40%-8,50%8,00%11,50% CPI dec-of-dec9,90%118,60%19,20%12,10%9,00% External sector Foreign trade bakance, mn USD-7 426-3 6671 8432 2702 256 Foreign trade bakance, % of GDP-13,60%-7,50%3,50%4,00%3,70% Current account balance, mn USD-8 493-8 689-3 674-3 518-3 629 Current account balance, % of GDP-14,6%-17,70%-6,90%-6,10%-5,90% Financing account balance, mn USD, i.a.7 2738 8696 7743 4483 983 FDI i.a. 3 7443 8043 8744128 Privatization proceeds 2 500 International reserves, mn USD5 0316 01091139 2599 856 International reserves growth rate, mn USD-622978,93 103,20146598 International reserves, months of imports1,601.май2,62,4 External debt, mn USD10 66613 23513 14411 3059 304 External debt, % of GDP19,50%26,40%24,70%19,80%15,20% Monetary sector Banks' claim on the economy, bn BYR92 875173 646213 847255 244301 501 Banks' claim on the economy growth, %39,90%87,00%23,20%18,80%18,10% Banks' claim on the economy in BYR, bn BYR72 34699 563108 551118 336128 336 Banks' 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 IndicatorSafety level20102011 201220132014 External debt, % of GDP555270757778 State external debt, % of GDP251926252015 International reserves, monthes of imports31,61,52,62,4 Foreign trade balance, % of GDP-5-13,7-7,53,543,7 Inflation129,912019128 Economic security indicators

14 Thank you Daniel Krutzinna Investment Company Uniter

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