Belarus Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	57
ISBN Number	1759-8257
Product Code	BMI03957

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Summary

In BMI's Q309 Business Forecast Report, we assess the impact of the deepening global recession on Belarus, paying particular attention to the country's stark external financing requirements and weakening relations with Russia. We forecast the economy to contract by 4.3% in real terms this year and to grow by only 1.8% next year, on the back of a severe deterioration of gross fixed capital formation, household consumption, and export demand. Moreover, the need for fiscal austerity mandated by the IMF and Russia will prevent government consumption from taking up the shortfall in aggregate demand. On the political front, we caution that this bleak economic situation will start to impact social stability, as rising unemployment and declining living standards exacerbate public dissatisfaction with government policy. That said, we caution that fundamental political change is unlikely, and we expect President Alexander Lukashenko's regime to retain power into the long term.

Relations between Belarus and Russia have recently deteriorated, following Moscow's decision to freeze further financial assistance payments to Minsk until the latter demonstrates that it is making significant progress on reforming the economy. President Lukashenko has exchanged strong words with Russian President Dmitri Medvedev and Prime Minister Vladimir Putin, and alleged that Moscow had made further aid contingent on Belarusian recognition of the Georgian separatist regions of South Ossetia and Abkhazia. We believe that this diplomatic spat will negatively impact Belarus's economic and political risk profile, insofar as it will delay the transfer of further Russian credit and potentially jeopardise broader ties. However, we still expect the two sides to eventually repair their relationship, given the strategic benefits that each derives from close alignment with the other.

Belarus's balance of payments position will be a key source of risk through the medium term, following the sharp widening of the current account deficit in 2008. With financial account coverage of the shortfall set to come under severe strain in 2009 and 2010 as foreign direct investment (FDI) inflows and bank lending evaporate, a swift and painful contraction of imports will be required.

Indeed, the country's need for IMF and Russian aid - and requests for yet more loans - is indicative of the dire financing situation. On the inflationary front, we believe that CPI growth will remain elevated through 2009 and into 2010. To be sure, domestic and external demand destruction will increasingly weigh on price growth, but we caution that ruble weakness and increasing energy import costs will serve to maintain upside pressure.

Belarus's business environment will remain one of the worst in Central and Eastern Europe (CEE) through the medium term, thanks to the country's impenetrable tax system, weak rule of law, stillsevere corruption, and the recent deterioration of credit markets. However, we are encouraged that President Lukashenko has committed to significant improvements, including reductions in bureaucratic red tape, a drive against corruption, and the firm establishment of six FDI-friendly Special Economic Zones.

Content

Executive Summary
Impact of The Breakdown with Russia
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Recession to Increase Political Tensions
- Public Dissatisfaction over The State of The Economy Is Likely to Mount in Belarus in 2009 and 2010, as The Economy Sinks into Recession.
- Foreign Policy
- Tough Diplomacy to Remain The Norm
- There Is A Risk That Belarus Will Struggle to Access Further Russian Credit in The Short Term, Due to A Recent Diplomatic Spat between The Two 'Union State' Partners.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- 4.3% Gdp Contraction by End-2009
- in Light of Weak Industrial Production and Freight Transport Data, and Recent Downgrades to Our Russia and Eurozone Growth Forecasts, We Have Slightly Revised down Our Belarusian Real Gdp Growth Forecast to -4.3% for 2009.
- Balance of Payments
- Current Account Shortfall to Narrow Sharply
- Belarus's Current Account Shortfall Is Set to Narrow Markedly in 2009, as The Scarcity of Foreign Investment Forces A Correction of The Trade Imbalance.
- Monetary Policy
- Inflation to Remain Elevated
- Downside Pressures on Belarusian Inflation Will Increase through H209 and 2010 as The Economy Sinks into Recession, in Turn Reducing Demand-Side Pressure on Consumer Prices.
- Regional Outlook (Banking Sector)
- Banking Sector: Risk of Real Sector Deterioration
- The Immediate Crisis Risks Facing The Central and Eastern European (Cee) Banking Sector in Q408 Have Subsided Markedly through H109, with The Stabilisation of Global Credit Markets Mitigating The Risks of Capital Flight in The Short Term.
- Regional Outlook (Economic Activity)
- after The Crisis: Slow Recovery, Lower Trend Growth
- with First Quarter Real Gdp Growth Figures in Key Emerging Europe Economies Confirming That The Region Has Entered into Its Deepest Recession since The Post-Soviet Transition, We Reaffirm Our below-Consensus 2009 Regional Growth Forecast of -5.6%.
Chapter 3: 10-Year Forecast
- The Belarusian Economy to 2018
- Economic Liberalisation to Raise Growth Potential
- While The Medium-Term Outlook for The Belarusian Economy Is Weak, We Are Hopeful That The Economy Will Grow More Robustly over The Long Run, on The Back of Rising Fdi Inflows and Increasing Exports.
Chapter 4: Special Report
- The Outlook for Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Global Assumptions
- Global Assumptions
List of Tables
- Table: Belarus Politics
- Table: Economic Activity
- Table: Balance of Payments
- Table: Monetary Policy
- Table: Emerging Europe Growth Forecasts
- Table: Belarus - Long-Term Macroeconomic Forecasts
- Table: Loan-to-Deposit Ratios, Selected States
- Table: Loan Growth (% Chg Y-O-Y), Selected States
- Table: Commercial Banking Business Environment Ratings, Selected States
- Table: Bmi Business & Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Labour Force Qual Ity
- Table: Europe, Fdi Annual Inflows
- Table: Top Export Destinations
- Table: Global Assumptions
- Table: Global & Regional Real Gdp Growth
- Table: Commodities