Belarus to Face Default

The Lukashenka government will not cope with public debts.

The International Monetary Fund predicts that in case of instability in foreign markets Belarus will not cope with payment of debts in 2019-2020, economist of the Belarusian Economic Research and Education Center Dzmitry Kruk says. What does a default mean and how much is it possible and what should we be ready for? Belsat dealt with these issues.

This year the external debt of our country has hit all-time high - more than $15 billion or about 40% of GDP. The Eurasian fund for Stabilization and Development explains that the external debt has started to grown exponentially after 2006, when the existing economic model reached its sustainable limit.

"Opportunities for extensive growth (due to the increase in the number of products) were exhausted before 2006. The administrative mobilization of resources while simultaneous increase of the debt burden was the only option for further growth," Alisher Mirzoyev, director of stabilization loan projects, says.

By the way, the government's formal external debt which is published by the National Bank and the media is only a part of the state debt. In fact, it also includes domestic foreign exchange-denominated debt, loans to state-owned enterprises with the share of state property of more than a half.

"In total, this debt approached 60% of GDP, Aliaksandr Chubryk, director of Institute of Privatization and Management research center, says. - When we say that the Japan's debt is of 200%, then, first, it is partly an internal one. Second, it is of long-term, third, it is extremely cheap, we can only dream about. It turns out that there 200% are, perhaps, better than our 60.

What is money spent for?

Until 2015 it was spent on:

1) Crawling peg. The National Bank of Belarus constantly filled the economy with printed money.

2) State modernization projects which mostly proved to be unpredictable and failing.

Among other things, Belarusian woodworking enterprises or, for example, cement production received a billion dollars each (mainly Chinese credits) to modernize. They can produce many times more products than before, but the cost of production is uncompetitive. As a result, they stand idle or work at a loss and continue to waste foreign currency the government again has to borrow.

" The problem is that debts of enterprises are more expensive than that of the public ones," Aliaksandr Chubryk adds.

Now payments on interest rates alone are more than 2% of GDP. This is every 8th budget ruble which is spent not on repayment of old debts but on retention already issued ones. If this year we had paid at least interest on our loans, the Belarusian economy would have nearly dropped by this 1.5% announced now as growth.

In 2007 when the existing economic model reached its bottom of sustainable growth, the authorities of Belarus kept creating the illusion of its development through foreign loans.

Now when the public debt has reached almost 60% of GDP, the domestic economy does not cope with the burden of interest on loans, and the external debt is increasing every year just to feed itself. Such a snowball ends with the default sooner or later.

What does the default mean?

The default is when the country is unable to pay on its debts in time. Once a country declares default, it begins to save on payments of foreign loans, but at least temporarily loses the opportunity to make new ones.

"We can take, for instance, Argentina. Argentina declares the default, its banks cannot involve financing and cannot fulfill their duties on those deposits in currency they have," Dzmitry Kruk cites an example.

A sudden devaluation and price increase, as the National Bank will be forced to print rubles to buy out currency in short supply inside the country to pay for critical imports as fuel, food, medicines will become an inevitable consequence of the default. Many enterprises will temporarily be unable to purchase equipment abroad, it leads to close-down of many plants and the spike in unemployment.

"This is likely to lead to a reduction in GDP, a decline in wages, a decrease in social payments," Dzmitry Kruk believes.

The authorities realized the immediate danger of default in 2015 when budget revenues fell due to the decline in the economy, while expenses for service of foreign currency debt sharply increased due to the devaluation of the ruble. Since that moment, the authorities have decided to make the external debt relief their policy.

In 2016 the external debt declined for the first time in many years. However, only by 0.5%. The authorities had to cut all other budget expenditures by as much as seven percent to make repayments on interests and the external debt itself. It became one of reasons for the drop in the economy, wages and employment last year.

"The reduction of budget expenditures by 7% for six years is really much," Aliaksandr Chubryk says.

This year the authorities seem to have given up on the idea of debt repayment since the cut of budget expenditures, by and large, is no possible. According to statistics, the true task is to slow down the debt growth.

"This debt aims to preserve us in a state of stagnation," Leanid Fridkin from Economic Newspaper says.

Specialists emphasize that now the cost of external debt for Belarus is about half less of the market rate - less than 4% per annum, on average, through concessional loans from Russia, the Eurasian Fund for Stabilization and Development, and China.

"Eurobonds are quite expensive for us. But we get preferential loans from Russia and the EFSD, so the average effective rate for us is not that high," Fridkin says.

If Russia continues to support Minsk with such loans, then default can be avoided for many more years without any reforms. But, experts note that benefits from the Kremlin are not for free. Every year the Kremlin demands new concessions in the matter of economic and political sovereignty.

"Starting from the military base which Belarus does not want to host on its territory and it has temporary terminated the issue, but it can arise later. Second, potassium is a tasty morsel," political scientist Andrei Yeliseyeu says.

According to economist Dzmitry Kruk, the next round of trade to prolong Russian benefits is expected in 2019-2020, when Belarus expects new peak payments for the public debt which are subject to refinancing. Then the existing authorities will have two options: either to transfer to market lending conditions that are twice as expensive - the real threat of default could then come already in 2021-2022. Or to agree to demands of the Kremlin loosing critical elements of military, political or economic sovereignty.

"Within the framework of the same Eurasian Economic Union which now represents the economic integration association. But it can acquire features of a political one," Andrei Yeliseyeu adds.

However, in theory, the country could pay the debt itself without sacrificing independence. It requires steps the existing authorities of Belarus will not dare taking, experts believe.

"These are very comprehensive institutional changes in the economy, changes in the incentive system, changes in the system of economic relations in the national economy," Dzmitry Kruk says.

It is worth noting that the history knows an example when the unreformed socialist economy was approaching the default, but then it paid all foreign debts at the expense of extraordinary measures of the budgetary economy. It is Romania during times of the dictator Nicolae Ceaușescu. But these measures led to such a drop in the standard of living of ordinary citizens that, as a result, he was overthrown and shot dead with his wife.

Therefore, experts believe that Lukashenka will pursue a policy of a softer budgetary economy, which does not allow reducing debts, but slows down the approximation to default.

In the next year or two no default is expected. Thanks to concessional loans from the east, the price of Belarus' public debt has significantly decreased over the past two years and is now about a half of the market one. Therefore, now our country is able to pay half of the interest on external debt itself. The second part of interest payments have to be covered anyway due to new loans, that is, the public debt is still growing, but much more slowly than before. The point of no return may be reached in 2-3 years, if Minsk keeps talks on prolongation of loan conditions with Moscow. If the Belarusian authorities do not agree to ceding critical elements of the country's independence, then not an immediate default but at least painful economic shocks await us.