ACRA affirms LT B+ to Belarus, assigning the status “Rating under revision: negative”

ACRA has affirmed the following ratings to the Republic of Belarus (hereinafter, Belarus, or the country) under the international scale:

  • Long-term foreign currency credit rating at В+ and local currency credit rating at В+;
  • Short-term foreign currency rating at B and local currency credit rating at B.

The “Rating under revision: negative” status assumes that the rating may be downgraded within the next 90 days, although this is not mandatory.

The “Rating under revision: negative” status has been assigned to the sovereign credit ratings of Belarus due to growing pressure on the national currency caused by the unfavorable external situation and uncertainty with regard to refinancing foreign currency debt by the government and export-oriented companies. These factors also create risks for the volume of international reserves. The primary source of uncertainty is the country’s upcoming presidential elections (on August 9), which may potentially lead to a prolonged period of political instability. The country’s relationship with Russia, its main trading partner, can be seen as an additional risk. At the same time, the high share of non-market borrowings in public debt and the country’s ability to access international markets, as demonstrated by the recent successful USD 1.25 bln Eurobond placement, are mitigating factors.

Credit rating rationale

Belarus’s B+ long-term sovereign credit ratings are supported by relatively high economic welfare, moderate public debt, anticipated further stabilization of inflation (despite a temporary spike in 2020), positive changes in the structure of the economy due to private sector development, as well as high quality human capital. The rating is constrained by the country’s weak external position (which has deteriorated in 2020 due to the unfavorable external environment), expected worsening of budget indicators this year, the economy’s high sensitivity to external shocks, high dollarization, and low potential for growth.

A number of structural factors have a positive impact on the sovereign credit ratings. Firstly, the relatively high level of economic welfare: Belarus ranks third among the CIS countries in terms of per capita GDP by purchasing power parity (PPP) (19,900 international dollars in 2019). In general, the country’s population enjoys equally distributed economic welfare as Belarus’s Gini coefficient, as calculated by the World Bank, is one of the lowest among all countries for which the World Bank calculates this index. The economic welfare that the country has achieved, as well as its relative uniformity, indicates the sufficient tax potential of the Belarusian economy. Secondly, ACRA notes positive structural changes in the country’s economy, in particular, the rapid development of industries such as IT, tourism, etc. In 2019, almost half of the country’s real GDP growth came from the information and communication sector, which includes IT (0.5 p.p. out of 1.2% y-o-y). The success of these sectors is mainly facilitated by special measures of support taken by the government. These structural factors increase the resilience of the Belarusian economy to external shocks and may lead to the growth of its potential in the future.

Another factor supporting the rating was stabilized inflation (4.7% y-o-y in in December 2019), which was due to the government and the National Bank of the Republic of Belarus (NBRB) implementing a balanced macroeconomic, fiscal, and monetary policy aimed at ensuring macroeconomic, price, and financial stability. The stability of the national currency’s exchange rate (as one of the results of this policy) amid low inflation in Russia constrained price growth in Belarus. Despite the weakening of the Belarusian ruble, significant growth of prices in the first half of the year did not take place due to weak external demand, the NBRB’s interventions, and the introduction of pricing regulations for certain groups of goods. Inflation was 5.2% y-o-y in June 2020, and ACRA expects this indicator to slightly exceed the NBRB’s 5% y-o-y ceiling by the end of the year.

ACRA expects economic growth to deteriorate in Belarus in 2020. In 2019, the country’s GDP expanded by 1.2% y-o-y and was close to its potential growth, which ACRA determines as 1.5–2% y-o-y. This year, however, growth should decline to minus 4–6%. This is largely related to external shocks — the lack of agreement with Russia on oil supplies from January 1 until the end of March had a negative effect on the utilization of industrial capacity and petroleum product exports, while falling external demand limited price growth for a number of key export products. However, ACRA does not expect a significant worsening of internal demand this year given that the Belarusian authorities did not enact any tough quarantine measures.

ACRA expects moderate growth of Belarus’s general government debt: from 41.9% of GDP in 2019 to 47–50% in 2020, including guarantees. The reason for this is weak growth of nominal GDP, the expected budget deficit, and planned increases in the volume of loan guarantees issued to companies that have been hit hardest by the pandemic. The decline in budget income in 2020 is the result of reduced GDP, an expected decline in tax revenues (including due to tax relief and tax deferral measures), and the end of income from oil customs duties from Russia, which is only partially covered by interbudgetary transfers stipulated by the new agreements between Belarus and Russia. Taking these factors into account, and also the scheduled relatively small increase in expenditures to support the economy, ACRA assesses the country’s 2020 general government budget deficit at 3–5% of GDP. This deficit can be financed by new borrowings or the foreign currency balances of previous budgets, which are part of international reserves. ACRA notes that Belarus can still access international markets: its placement of USD 1.25 bln worth of new Eurobonds in late June was sufficiently popular among investors, however, the risk premium required by market participants grew by around one-and-a-half times (by 70%) compared to a similar placement in 2018.

The country’s general government debt consists mainly of intergovernmental loans and loans from international organizations, which explains the relatively low interest payments on it. At the beginning of 2020, more than 90% of public debt was denominated in foreign currency, making it vulnerable to fluctuations in the national currency exchange rate.

The risks of contingent liabilities materializing related to companies and banks have increased because external demand has fallen and many large corporate borrowers are dependent on it to a large degree. ACRA assesses the state of the country’s banking sector as generally stable, however some financial stability indicators have worsened since the start of the year. For example, the regulatory capital adequacy of the banking sector fell from 17.8% in January to 16.8% at the start of July, while the share of non-performing assets in assets exposed to credit risk grew from 4.6% to 5.1% in the aforementioned period. The NBRB has applied a number of contracyclical measures related to lowering some of the prudential requirements and softened its approaches to the calculation of certain standards in order to support lending in conditions of heightened influence of external negative factors.

The relatively weak assessment of Belarus’s external position is related to the high share of external debt and anticipated moderate growth of the current account deficit. The assessment was also influenced by the decline in international reserves in the first quarter amid the repayment of internal and external foreign currency obligations of the government and the NBRB, and the regulator’s interventions to support the national currency. From January until the start of June, total foreign currency debt payments made by the government and the NBRB amounted to USD 1.7 bln, while in the same period, international reserves, including the foreign currency balances of budgets, fell by USD 1.5 bln (to USD 7.9 bln). As of April 1, 2020, Belarus’s external debt (taking into account intercompany lending) was 62.5% of GDP and mainly made up of public debt and the debt of stated-owned companies and banks. At the start of January 2020, reserves covered 52% of forthcoming foreign debt payments, yet this indicator had fallen to 43% by the start of April. Nevertheless, reserves had grown to USD 8.8 bln by the start of July following the placement of dollar-denominated Eurobonds, and the coverage of foreign debt improved as a result. In ACRA’s opinion, however, international reserves will decline by the end of the year and may approach the minimum boundary of USD 7.3 bln set by the NBRB due to continued pressure on emerging market currencies and also in connection with the government’s need to repay its external debts. The oil dispute with Russia in the first quarter and weak external demand will negatively affect Belarus’s trade turnover. The country’s current account was also be adversely impacted by the fall in secondary income generated by oil customs duties from Russia. However, these negative factors should be partially offset by growth in demand for Belarus’s highly developed IT services and falls in imports. The current account balance was 1.8% was in 2019; ACRA expects it to grow to 2.5–3.5% in 2020.

The country’s World Governance Indicators, as calculated by the World Bank, generally correspond with the CIS countries and countries with similar indicative credit ratings. The country’s Control of Corruption indicator has improved over the past ten years and currently is one of the highest among the CIS countries. The Regulatory Quality indicator has also increased, which also highlights the positive effects of public policy aimed at stimulating and developing the private sector. However, ACRA cannot rule out that political tensions associated with the upcoming presidential elections and a change in the government may lead to a delay in structural reforms and problems in securing financing from official creditors needed to support the economy.

The sovereign credit ratings are support by the high quality of the country’s human capital, which is based on high life expectancy and education levels. The UN-calculated index of education quality puts Belarus significantly higher than comparable countries. According to the UN, public spending on education amounted to 4.8% of GDP in 2017, exceeding the world average of 4.1%.

Sovereign model application results

Belarus has been assigned a BB Indicative credit rating in accordance with the core part of ACRA’s sovereign model. One of the modifiers in the modifiers part of the model allows the Indicative credit rating to be increased. This includes the following, which is determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

  • Efficacy of structural, economic and monetary policies.

Negative modifiers are the following:

  • Potential economic growth;
  • Contingent liabilities and the risk of them materializing;
  • Fiscal policy framework and fiscal flexibility;
  • Market access and sources of funding;
  • Balance of payment vulnerabilities;
  • External debt sustainability;
  • Political instability and recent political decisions.

ACRA has lowered the country’s Indicative credit rating by two notches based on the abovementioned modifiers. ACRA has assigned a Final credit rating of B+. There are no extraordinary factors that could adjust the Final credit rating. As such, the Final credit rating remains at B+.

Potential rating upgrade factors

  • Improved public debt structure including reduced currency risks;
  • Strengthened external position via accumulated foreign currency reserves;
  • Reduced risk of contingent liabilities via effective structural reforms in the public sector;
  • Accelerated economic growth while maintaining macroeconomic stability.

Potential rating downgrade factors

  • Increased public debt while maintaining a high share of foreign currency debt;
  • Significant increase in short-term public debt;
  • Continued unfavorable external environment or a further deterioration thereof which is capable of putting pressure on the national currency;
  • Prolonged period of political instability.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The sovereign credit ratings have been assigned to the Republic of Belarus under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The sovereign credit ratings of the Republic of Belarus were published by ACRA for the first time on February 20, 2020. The sovereign credit ratings and their outlook are expected to be revised within 90 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The sovereign credit ratings are based on information from publicly available sources, information provided by the Republic of Belarus, as well as ACRA’s own databases. The sovereign credit ratings are unsolicited. The Government of the Republic of Belarus participated in the credit rating assignment.

ACRA provided no additional services to the Government of the Republic of Belarus. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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