Dagong Maintains the Sovereign Credit Ratings of Belarus at BB, B+ with a Negative Outlook
Dagong Global Credit Rating Co., Ltd.
Aug 15, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Republic of Belarus (“Belarus”) at BB and B+, each with a negative outlook. Political environment at home is stable, its economy is expected to climb out of recession and the government finance remains in surplus. Nevertheless, long-standing deficit in current account, dramatically insufficient international reserves and prominent external vulnerability all pose a downward risk to government solvency.
The primary reasons for maintaining Belarusian sovereign credit ratings are listed below:
1. The country’s domestic political situation remains stable, although structural reform does not achieve substantial progress. President Lukashenko’s powerful control ensures the political stability of Belarus. Lessons from the Ukrainian crisis and domestic economic recession did Belarus a favor in solidifying the public’s stability petition. Nonetheless, Belarusian authorities still lack the momentum required for substantial reforms and attempts eventually fade into a mere formality, which results in the country’s consecutively rigid economic model. Support from the financial system to the real economy is limited by a relatively high refinancing rate in spite of Belarus’ largely easing monetary policy. The deterioration of enterprises in operation against the backdrop of economic recession puts the asset quality of the banking sector under further pressure. At the same time, the rapid growth of the foreign currency loan which wields a lack of hedging increases the risk of currency mismatch. The overall financial system’s robustness is declining.
2. The country’s short-term economy is hopefully extricated from contraction, although Belarus’ long-term economic growth is sluggish and lagged by structural problems. Beset with troubles both internally and externally, the Belarusian economy contracted by 2.6% in 2016. In the short term, a recovery of the oil supply agreement and gas price discount with Russia will guarantee energy imports and exportation of petroleum products. Meanwhile, the contraction of consumption and investment will only moderately be alleviated. Therefore, the country‘s growth rate is estimated to return to 0.5% in 2017 and 1.5% in 2018. In the medium to long term, the Belarusian Ruble’s periodic devaluation and persistently high inflation will continue to accumulate. The industrial structure featuring chemical industry leads to an overdependence on energy imports from Russia and a structural imbalance in trade, which will undermine long-term growth potential of the Belarusian economy.
3. The country’s short-term fiscal surplus is expanding, although the stability of repayment sources continues to need to be strengthened. An increase in tax income due to the economy’s return to a growth track will attain a broader fiscal surplus. The implementation of measures such as cutting enterprises subsidies will contribute to fiscal expenditure control, although plans amongst uplifting public servants’ salary and widening interest expenses will squeeze the country’s fiscal policy space. The general government fiscal surplus is estimated to expand to 1.5% of GDP in 2017 and 1.9% in 2018. Variety and multi-channel external assistants will provide the necessary liquidity buffer, although repayment sources rely highly on currency issuance, which requires some improvement to its stability.
4. The solvency of the Belarusian government is fundamentally stable, although the downward pressure is relatively significant. Thanks to mitigation of the Belarusian ruble’s devaluation pressure owing to decreasing inflation, as well as an improved economy and finances, the debt burden rate of the Belarusian general government is expected to fall to 52.0% in 2017 and 2018. However, the government is still facing a heightening contingent liability risk. The external debt burden rate has increased sharply to 78.5% due to a sustaining current deficit and the Belarusian ruble’s devaluation. Aided by liquidity assistance, the coverage of total external debt and short-term external debt by international reserves has elevated respectively to 13.1% and 46.4%, still indicating a significant external liquidity risk and threatening the foreign currency solvency of the government.
In the short term, as influenced by reluctant domestic reforms, the Belarusian economy has recovered gradually although remaining relatively weak. External uncertainties persist owing to the sluggish Russian economy. Together with insufficient international reserves, the devaluation pressure upon the Belarusian ruble and high inflation risk, government solvency is persistently under pressure. Considering all the aforementioned factors, Dagong has decided to assign a negative outlook to the local and foreign currency sovereign credit ratings of Belarus for the next one to two years.