Belarus: What are the main drivers of ST political risk?
Credendo’s short-term political risk assessment largely reflects a country’s liquidity situation and takes into account any risky short-term political situations. The short-term political risk of Belarus is currently in category 5 on a scale from 1 to 7 (the highest risk). This classification reflects an improvement of some indicators but also the widening of the current account deficit and the risk arising from Russia’s tax manoeuvre.
Positive evolution of short-term external debt and gross foreign exchange reserves
Over the past few years, the financial and macroeconomic policies have improved significantly. Short-term external debt has decreased in relative and absolute terms and accounts for less than 30% of current account receipts. The gross foreign exchange reserves have increased over the last years (cf. graph 1) and reached 2 months of import cover in May 2019 – its highest relative level since 2013. Thanks to these positive developments, the gap between the shorter-term external resources and short-term external obligations of Belarus has narrowed. This positive picture is somehow tarnished by the rising current account deficit.
Risk arising from the current account balances
Indeed, in 2019 the current account deficit is expected to widen to 4% of GPD (from 2.3% in 2018) on the back of a less favourable external environment and imports related to the construction of a nuclear power plant. In particular, trade tensions with Russia – Belarus’ main export market – have affected exports of food products to Russia. Looking ahead, food exports to Russia are unlikely to remain subdued. After all, Russia is becoming more self-sufficient thanks to its successful import-substitution strategy which was aimed at developing its agriculture and food production.
On top of that, the net oil trade surplus - arising from the fact that Belarus was used to buying cheap crude oil imports from Russia, refining it in Belarus and then selling it to Europe at market price - is under pressure. Indeed, last year Russia decided to introduce a mineral extraction tax which would apply to domestic production and exports. This new tax is going to replace the export duty on oil and oil products over a five-year period and thus reduce the energy subsidies provided to Belarus over a period of five years. Such move implies a rise in input prices for the Belarussian oil refineries. For 2019, the impact on the current account balance is estimated at around 1% of GDP.
In addition, the tax manoeuvre implies a loss of export duties on oil products for the Belarussian authorities (this affects public revenues and thus fiscal balance). Without compensation – which is under negotiation – and once the transition will be completed (in 2023) the direct impact of the tax manoeuvre on fiscal and current account balances is estimated at about 1.3% and 3.9% of GDP respectively.
Taking into account the improvement and risks, Belarus’ short-term political risk is expected to remain stable in the forthcoming months.
Analyst: Pascaline della Faille – P.dellaFaille@credendo.com