Belarus Business Forecast Report

Impact Of The Breakdown With Russia While we have revised up our forecast for Belarusian growth in 2009 following better than expected H1 real GDP data, we caution that the post Soviet economy is expected to remain in the doldrums through the medium term. Indeed, the Q409 Belarus Business Forecast Report highlights our relatively guarded outlook on Belarus's ability to avoid a prolonged period of low growth going forward, with our latest projections seeing the economy expand by an average 4.0% through 2013, considerably lower than the 11.1% rate of real GDP growth recorded between 2004 and 2008.

To be sure, the country's underlying risk profile remains relatively weak, in large part a factor of Minsk's perpetually tense relations with Moscow. This, we caution, will continue to prove anathema to foreign investors, and could delay the economy's eventual recovery should it further impair investment inflows through the medium term.

On June 30, US lawyer and pro-reform campaigner Emanuel Zeltser was released from prison following the receipt of an official pardon from President Alexander Lukashenko. Lukashenko's decision to pardon Zeltser was an important first step towards the improvement of relations with the United States. Despite an apparent desire on the part of both Belarus and the West to improve cooperation, we caution that major obstacles to better ties remain, and that these will likely prevent a fundamental positive shift in the tenor of relations through the long term.

We caution that the year-on-year (y-o-y) spike in the current account deficit seen in Q109 will ensure that the macroeconomic risks generated by Belarus's balance of payments position remain elevated through the medium term. We believe that the country's long-term economic prospects will benefit from undertaking the necessary correction towards a more sustainable external equilibrium. Yet the delay to this process seen in Q109 is symptomatic of imports receiving greater continuing support than exports, which will only worsen Belarus's H209 and 2010 economic outlook. Moreover, we caution that should this delay to the correction continue, it will pose a serious upside risk to our end-2009 and end-2010 current account deficit forecasts.

Belarusian consumer price inflation fell to 12.9% y-o-y in July from 13.4% the previous month. This represented the lowest rate of inflation seen since February 2008, although it is worth noting that the scale of Belarus's disinflation has thus far been modest by regional standards, with July's figure representing only a 3.3 percentage point deceleration from the 16.2% y-o-y CPI growth seen in July 2008. Going forward in H209 and into 2010, we expect Belarusian disinflation to run further.

Indeed, we have revised down our end-2009 and end-2010 CPI growth forecasts to 10.0% and 9.0% y-o-y respectively, to reflect underlying disinflationary dynamics. We also caution that risks are weighted to the downside.