OUTLOOK 2019 Belarus

OUTLOOK 2019 Belarus
By bne IntelliNews December 21, 2018


In the placid pool of Belarusian domestic politics the only thing making any waves is the apparent effort by Russia to wean the republic off its de facto energy subsidy teat.

Russia’s so-called tax manoeuvre will mean the Belarusian government will lose some half a billion dollars in income starting in January 2019 when the new tax rules come into effect, and has led Belarus’ President Alexander Lukashenko to make some strong statements, including accusing Moscow of attempting to annex his country.

These sorts of remarks are par for the course for Lukashenko who remains tightly bound to Moscow’s orbit. Nevertheless the growth of the economy and the emergence of a middle class are slowly transforming the republic. And the changing relations with Moscow mean that Lukashenko has become more open to the rest of Europe, which remains a major export market. The most obvious sign of this thaw is Minsk’s decision to introduce almost visa free entry to the republic (if you arrive at Minsk international airport) in defiance of Moscow, as there is supposed to be borderless travel between Russia and Belarus under the terms of the Eurasia Economic Union (EEU). Russia responded by reintroducing passport controls on the border.

Currently Belarus buys the agreed volume of crude oil from Russia effectively without having to pay excise duties (although the exact setup is more complicated). However, in 2019, Moscow decided to cut the rate of duties on crude oil and simultaneously increase mineral extraction tax (MET).

Therefore, the price for Belarus would increase. Officials’ estimate that it would loose the equivalent of $300mn of fiscal revenues in 2019, and the effect would increase further as the Russian tax maneuver proceeded: the ultimate goal is to zero out export duty on crude oil.

Minsk has been complaining bitterly and the uncertainty regarding the outcome of negotiations was the key reason for the relatively late submission of the budget’s draft, as usually next year’s fiscal plan would have been agreed earlier. It also implies that numbers could change as Presidents Putin and Lukashenko have scheduled a meeting in the last week of December to discuss the matter.

Belarus’s draft budget assumes no compensation from Russia among the revenue items. On the other hand, there is a planned BYN616mn ($290mn equivalent) increase of the government’s cash balances next year, so analysts believe that if sides agree on compensation it would be channeled to President’s Fund.

On the macro side, the budget was drafted on the assumption of a 2.1% GDP growth, a 5.3% average CPI and a USDBYN exchange rates of 2.216. The oil price assumption was $60/bbl.

As usual, the budget is planned with a visible surplus (BYN1.7bn this year), which would be used mostly for debt servicing purposes. Meanwhile, it is also common that actual surplus numbers exceed the plan. Specifically, in 2017, the budget law assumed the surplus at BYN1.5bn vs. the actual BYN 2.8bn. The surplus for the first nine months of this year is running at BYN 3.4bn vs. BYN 0.7bn plan.


GDP growth in Belarus is the strongest in the CIS, but was fading towards the end of 2018: the economy expanded by 3.2% y/y in the first ten months of 2018 and is expected to end the year with 3.5% growth.  

The International Monetary Fund (IMF) improved its forecast on Belarus' economic development in the World Economic Outlook: Belarus' economy will expand by 4% in 2018 and by 3.1% in 2019. Earlier, the fund projected Belarus' GDP growth at 2.8% in 2018.

According to the IMF, inflation in Belarus will be 5.5% in 2018 and 2019.

The National Bank of Belarus (NBB) estimates that the 2018 annual inflation in the country will stay below projections and end the year at about 6%. In September, the annual increase in consumer prices totalled 5.6% and the regulator expects 5.5% for 2019.

According to the first assessment, the country's GDP in money terms totalled BNY111bn ($52.2bn), or 103.2% in comparable prices against January-November 2017.

The real disposable money income of Belarusians rose by 8.1% y/y in January-October 2018, the National Statistics Committee of Belarus reported on December 18. Falling inflation has boosted real incomes and given the average person more spending power.

With more money in their pockets, a Belarusian middle class is emerging, which is in turn driving strong growth in retail: from a contraction in most of 2015 and 2016 the sector turned around in the middle of 2017 and has been growing strongly since. This expansion fuelled a bid by the republic’s biggest supermarket chain Eurotorg (aka Euroopt) to attempt an IPO in London in the autumn of 2018 – the republic’s first corporate IPO – which ultimately failed due to poor market conditions.

Belarus will run a BNY1.7bn ($800mn) budget surplus according to the 2019 budget bill, the chairperson of the Standing Commission on Budget and Finance at the House of Representatives Lyudmila Dobrynina told BelTA on 18 December. Budget revenues will make up BNY23.7bn ($11.2bn), expenditures Br22bn ($10.3bn).

“The 2019 budget has its peculiarities. First of all, it will have a bigger social focus,” she noted. Public sector salaries will increase and the budget provides for heavier social spending.

The government’s consistent efforts to raise salaries – Lukashenko set a target of BYN1,000 ($470.6) per month on average which has been achieved — will be continued throughout 2019. Spending on social society is a big focus of the new budget and public sector wages are expected to make up 80% of all salaried income in 2019.

However, the key element of the budget calculations is how much money the republic will earn from oil duties. Belarus currently earns what are in effect a subsidy from Russia, which charges low duties on exports of oil to Belarus. These are due to come to an end from 2019 as part of the so-called tax manoeuvre.

“The Belarusian economy will not collapse because of the tax manoeuvre in Russia's oil industry,” Lukashenko said in December,  “even in a worst-case scenario.”

“If we do not come to an agreement with Russia [on compensation], this tax manoeuvre will affect us gradually from 2019 to 2024. In 2019, if anything, we may lose about $400mn-500mn. This is actually a fair amount of money, but there will be no catastrophe for the country.”

The IMF is less sure and called on Minsk to get a “Plan B” ready just in case.

The draft budget does not include any revenues in the form of compensations from Russia. In other words, the budget takes into account estimated losses to the budget at over BNY600mn ($282mn) in 2019.


Belarus has been very prudent in its borrowings and took advantage of a window in February 2018 to issue a $600mn 12-year Eurobond with 6.2% coupon following January's drop in the nation's foreign exchange reserves by 11.5% month-on-month, to $6.477bn. This followed on from a $1.4bn Eurobond issued the year before and together with borrowing from Russia the republic has already covered all its debt obligations through to the middle of 2019.

The government policy in 2018 has been to use current account surpluses to pay down debt, and the debt to GDP ratio is a moderate 55% as of December 2018. However, the republic plans to refinance about 75% of its outstanding debt in 2019 and intends to issue $2bn via Eurobond placements in 2019-2020, according to Lukashenko. Belarus also seeks to raise funds on the Chinese bond market. Minsk has said it might raise up to $300mn-$400mn from the Chinese market in 2019.

Finance Minister Maksim Yermolovich told journalists in November 2018 that Minsk should repay around $5.4bn of the state debt in 2019-2020. "Some of the $5.4bn will be refinanced. In the to-be-refinanced part $2bn will be raised as untied credit resources, which we are going to get abroad by floating the relevant bonds for a broad spectrum of investors," he said.


In business it is Chinese investment that has been the main motor, with heavy investments into the new Great Stone logistics park, a new Geely automotive plant to produce cheap cars and the organised retail space.

China is due to pour close to $1bn into Great Stone park, a logistics and industrial park that is supposed to be a bridgehead into the European market. According to bne IntelliNews data, around $300mn has been channelled into the development of the park's first phase since its inception in 2012, when Lukashenko officially established the project by a special decree. The number of resident companies of the ambitious Belarus-China Great Stone industrial park is expected to rise to 55 to 60 by late 2019 vs the 34 residents that were there at the end of 2018.

The first mass-produced Belarusian cars rolled off the assembly line at the new Chinese-based BelGee car plant in November. The Belarusian-Chinese joint venture SZAO BelGee was established in 2011 to assemble Geely brand cars in Belarus based on the import of complete kits manufactured in China. In July the company said it may start producing electric cars in 2019.

And with the strong growth in retail, Eurotorg may come back for a second attempt at an IPO, or at least a debt raising offer, in 2019. The development of organised retail is a well worn track in Eastern Europe, and Belarus is at an early stage of development, but the market has a decade of strong growth to look forward to and appears to be stepping off square one now.