ACRA affirms LT B+ to Belarus, outlook 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 outlook on the long-term foreign currency credit rating is Negative and local currency credit rating is Negative.

The Negative outlook assumes the possibility of a negative rating action within the 12 to 18–month horizon.

The removal of the status “Rating under revision: negative” and the assignment of the Negative outlook reflect ACRA’s view that negative trends in the country’s fiscal and external positions and economic growth dynamics will continue to develop at a slower pace than previously expected. Continued political instability remains an additional risk factor for the economy. However, there are several mitigating factors. Firstly, the considerable recovery in Russia in Q3 2020, the country’s main trading partner. In addition, the country reached a USD 1.5 bln loan agreement with Russia and has received part of it (USD 0.5 bln) from The Eurasian Fund for Stabilization and Development in October of this year. The high share of non-market borrowings in the public debt, as well as the country’s continued access to foreign markets, primarily Russian, also play a role.

Credit rating rationale

Belarus’s B+ long-term sovereign credit ratings are supported by relatively high GDP per capita , moderate (yet prone to increase) public debt, positive changes in the structure of the economy due to private sector development, as well as high quality human capital. The rating is limited by a weak external position, including a high level of external public debt (although notably lower that countries with comparable Indicative ratings), a high share of dollarization  in the banking system, and a low potential for economic growth.

A number of structural factors have a positive impact on the sovereign credit ratings. Firstly, the relatively high level of GDP per capita: 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 relatively equally distributed economic wealth as Belarus’s Gini coefficient, as calculated by the World Bank, is one of the lowest among all countries for which this index is calculated. However, in recent years, there has been an increase in the gap between average and median wages, which indicates a less even distribution of wealth. The economic wealth 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).

Another factor supporting the rating was stabilized inflation (4.7% y-o-y 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. ACRA expects that inflation in Belarus will be about 6% in 2020, and in 2021, it will fall to 5.5% in the absence of a significant depreciation of the national currency. In September 2020, this factor led to an increase in inflation to 6.1%, which exceeded the 5% level set by the NBRB. However, factors like the introduction of price regulation for certain product groups and reduced demand due to quarantine restrictions contributed to a decrease in price growth in the economy.

ACRA forecasts that GDP will fall by 3−5% in 2020, compared to growth of 1.2% in 2019. External shocks in beginning of the year (the lack of agreements with Russia for oil deliveries in Q1 2020 that negatively impacted capacity utilization and the export of petroleum products, as well as the decline in external demand that limited the growth of prices for some key export goods) were partially offset by curbed deterioration in domestic demand, given the country’s lack of strict quarantine measures. A more moderate drop in GDP in Q2 2020 compared to Russia and Kazakhstan (3.3% vs. 8.0% and 6.0%, respectively) and monthly GDP dynamics indicate that this decline has stabilized. However, the risks of a second wave of the pandemic and its economic consequences should not be ignored.

ACRA expects moderate growth in Belarus’s general government debt: from 41.9% of GDP in 2019 to 50–53% in 2020, including guarantees. The reason for this is the 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. Because the vast majority of the national debt is denominated in foreign currency, the exchange rate of the national currency at the end of the year has a significant impact on this indicator.

The decline in budget revenues in 2020 is due to several factors, including the weak growth in nominal GDP and an expected decrease in tax revenues (including due to tax breaks). An addition factor is the halt in revenue from the transfer of export duties from the transit of Russian oil through Belarus to the country’s budget instead of Russia’s budget. This is only partially covered by inter-budget transfers from Russia’s budget to the country’s budget stipulated under new agreements between the two countries. ACRA expects the country’s budget deficit to be 4−5.5% of GDP at the end of 2020, given the abovementioned factors and the planned, relatively small, increase in spending to support the economy.

The official estimate of the national budget deficit (45% of the budget of the public sector according to IMF terminology) in the base case scenario is BYN 2.1 bln. In the conservative scenario, this figure is BYN 5.0 bln (about 4% of GDP). To finance the deficit, the government has used its cash balances with  the NBRB in the national currency, which decreased from 2.7% of GDP at the beginning of 2020 to 1.2% of GDP in June 2020. The cash balance carried forward in foreign currency can also serve as a source of budget deficit coverage this year. In addition, the government expressed interest in placing RUB 10.0 bln in government bonds by the end of this year (BYN 0.3 bln, about 0.2% of GDP). ACRA notes that the price conditions for borrowing in Russian rubles have stabilized, and the yields on outstanding issues have approached the yields on their placement. 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.

The risks of contingent liabilities materializing related to large, export-oriented companies and banks have increased because of reduced external demand and the depreciation of the national currency. In the first 8M of 2020, companies’ debt increased by 18%. Net profit for the same period fell by more than 3x, and the share of funds allocated for debt servicing in 2020 reached 33.3% of revenue. 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%. 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 negative external factors. In addition, JSC Asset Management Agency, whose main activity is the reform and improvement of the agricultural sector, was recapitalized by the national budget in the amount of  BYN 1.2 bln (1.0% of GDP). The outflow of household deposits from the banking system is also a concern. In March and August of this year, they withdrew BYN 1.6 tln and USD 0.7 bln from deposits. This outflow was partially offset by an increase in corporate deposits in foreign currency, which increased by USD 0.6 bln this year.

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 H1 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 to August of this year, total foreign currency debt payments made by the government and the NBRB amounted to USD 2.8 bln, while in the same period, international reserves, including the foreign currency balances of budgets, fell by USD 1.9 bln to USD 7.5 bln. The placement of USD 1.25 bln in government Eurobonds increased reserves by the corresponding amount.

As of July 1, 2020, Belarus’s external debt (taking into account intercompany lending) was 65.7% of GDP and mainly made up of public debt and the debt of stated-owned companies and banks. Due to the placement of Eurobonds, the reserve coverage on external debt payments due during the year improved from 52% to 54% in the H1 2020. Therefore, there are still relatively high refinancing risks for companies in terms of external debt. However, it is ACRA’s view that due to continued pressure on the exchange rates of emerging markets, as well as the need to repay the government’s external obligations, international reserves may fall below the minimum value of USD 7.3 bln set by the NBRB by the end of the year (in September, they had already fallen to USD 7.31 bln).

By the end of 2020, ACRA expects the current account deficit to fall to 2.5−3.5% of GDP, compared to 1.8% in 2019. Negative factors will outweigh the positive ones. Increased outflows from the primary account and the negative impact on the secondary income account from oil customs duties from Russia have resulted in a weaker current account balance (a deficit of USD 1.1 bln compared to USD 0.8 bln a year earlier). However, due to a decrease in imports, mainly because of a drop in oil supplies from Russia, the trade balance of goods and services improved to USD 0.7 bln in H1 2020 (compared to USD 0.3 bln in H1 2019).

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 (BB+). 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 increased political tensions associated with the presidential elections 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 supported 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

The Indicative credit rating of Belarus in the core part of the rating model is BB+.  However, the Rating Committee decided to use an Indicative rating of BB to determine the Final credit rating. According to ACRA’s methodology, a conservative adjustment was applied, as the Indicative credit estimate slightly crossed the lower limit of BB+. 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;
  • Stable recovery of 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 182 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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