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Belarus Country Risk Report Q2 2016

Belarus Country Risk Report Q2 2016

Core Views The removal of EU sanctions on Belarus in February 2016 points to a shift in Brussels’ stance towards Minsk from isolationist to integrating it with the West. Nevertheless, there are many impediments to a potential Belarusian pivot to the West, not least high economic dependence on Russia, meaning Belarus will remain firmly entrenched in Russia’s orbit for the foreseeable future. Belarus will continue to register modest fiscal surpluses in the coming years due to the prudent fiscal policy course outlined by its IMF loan arrangement. However, budget surpluses mask the precarious condition of public finances, with rising contingent liabilities stemming from overleveraged and unprofitable state-owned enterprises posing a significant risk to the sovereign balance sheet. Consumer price growth in Belarus will slow in 2016 due to limited inflationary pressures from FX pass-through, subdued domestic demand and ultra-tight monetary policy stance by the authorities. We forecast inflation to average 10.5% in 2016, down from 14.1% in 2015. Belarus has undergone sizeable external adjustment in recent quarters, mainly due to a reduction in imports, which narrowed its massive trade deficit. Nevertheless, we forecast the country’s current account deficit to remain wide at -4.7% of GDP in 2016, and -4.5% in 2017, due to its sizeable primary income deficit, underpinned by loan repayments to Russia. Major Forecast Changes We have revised down our forecast for GDP growth in Belarus, as Russia – Belarus’ main trading partner – will remain in contractionary territory in 2016, weighing on the outlook for Belarusian exports. Consumer price inflation has been slow to build over the course of 2015, prompting us to revise down our forecast for inflation to average 10.5% y-o-y in 2016 from 14.1% previously.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth Contracting On Weak External Demand
We have revised down our forecast for GDP growth in Belarus, as Russia – Belarus' main trading partner – will remain in contractionary
territory in 2016, weighing on the outlook for Belarusian exports.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE : FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Fiscal Surpluses Masking Rising Risks To Public Finances
Belarus will continue to register modest fiscal surpluses in the coming years due to the prudent fiscal policy course outlined by its
IMF loan arrangement. However, budget surpluses mask the precarious condition of public finances, with rising contingent liabilities
stemming from overleveraged and unprofitable state-owned enterprises posing a significant risk to the sovereign balance sheet.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Monetary Policy
Inflation To Subside Mainly On Weak Domestic Demand
Consumer price growth in Belarus will slow in 2016 due to limited inflationary pressures from FX pass-through, subdued domestic
demand and ultra-tight monetary policy stance by the authorities. We forecast inflation to average 10.5% in 2016, down from 14.1% in
Monetary Policy Framework
External Trade And Investment Outlook
External Adjustment On Import Contraction To Prove Transitory
Belarus has undergone sizeable external adjustment in recent quarters, mainly due to a reduction in imports, which narrowed its
massive trade deficit. Nevertheless, we forecast the country's current account deficit to remain wide at -5.8 % of GDP in 2016, and–6.1
% in 2017, due to its sizeable primary income deficit, underpinned by loan repayments to Russia.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE : TOP FIVE IMPORTS IN 2015
TABLE: TOP FIVE EXPORTS IN 2015
Chapter 2: 10-Year Forecast
The Belarusian Economy To 2025
Long-Term Growth Prospects Subdued
We remain downbeat on Belarus' long-term growth potential on the back of the large footprint of the state on the economy, which
will stifle productivity and deter private fixed investment. We do, however, expect the country to pursue a modest degree of political
liberalisation, although we caution that meaningful democratisation is unlikely and that Moscow will remain Minsk's principal benefactor.
TABLE : LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Despite EU's Overtures, Belarus Remains Firmly In Russia's Orbit
The removal of EU sanctions on Belarus in February 2016 points to a shift in Brussels' stance towards Minsk from isolationist to
integrating it with the West. Nevertheless, there are many impediments to a potential Belarusian pivot to the West, not least high
economic dependence on Russia, meaning Belarus will remain firmly entrenched in Russia's orbit for the foreseeable future.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Lukashenko And Russia To Determine State Evolution
Belarus' long-term future depends almost entirely on two factors: the longevity of President Alexander Lukashenko, and the country's
relationship with Russia. Lukashenko is likely to remain in power for at least the next few years, due to opposition weakness, but he will
eventually prove vulnerable to removal. Regardless of who succeeds Lukashenko, Belarus' history and geography suggest that Russia
will play the dominant role in its future development .
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE
TABLE : EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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