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Rating Action:

Moody's changes outlook on Belarus to negative; affirms ratings

01 Oct 2021

London, 01 October 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Belarus to negative from stable and has affirmed Belarus's foreign and domestic currency long-term issuer and foreign currency senior unsecured ratings at B3.

The key drivers for the change in the outlook to negative are:

1. Heightened debt refinancing risks given tightening economic and financial sanctions that constrain financing options; and

2. Belarus's limited reserves reduce capacity to withstand further shocks amid heightened political instability.

The affirmation of the B3 ratings reflects that, in Moody's baseline view, refinancing over the next 12-18 months will be supported by Belarus's accumulated savings as well as continued financial support from Russia (Baa3 stable). The affirmation also reflects that Belarus benefits from relatively high per-capita wealth despite the inefficiencies of its public sector-dominated economy. Furthermore, the affirmation also takes into account Belarus's moderate government debt levels although fiscal strength remains exposed to a high reliance on foreign-currency debt and high levels of state ownership.

Belarus's local- and foreign-currency country ceilings remain unchanged at B2 and B3, respectively. The one-notch gap between the local-currency ceiling and the sovereign rating reflects Belarus's very weak external balances, the large footprint of the government in the economy and financial system, low predictability of institutions and elevated political risk. The one-notch gap between the foreign-currency ceiling and the local-currency ceiling reflects Belarus's largely closed capital account and moderate external debt which provide some incentive to impose transfer and convertibility restrictions.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE

FIRST DRIVER: HEIGHTENED DEBT REFINANCING RISKS GIVEN TIGHTENING SANCTIONS

The first driver of the decision to change the outlook on Belarus to negative is the tightening sanctions environment which increases risks to debt refinancing, in particular given Belarus' constrained access to external financing sources. Furthermore, Moody's expects Belarus's dependence on Russia for economic and financial support will further increase due to the more stringent sanctions environment.

Belarus has faced tightening economic and financial sanctions since the disputed presidential elections in August 2020, with more stringent measures imposed by western countries following the forced rerouting of a plane to arrest an opposition journalist in May 2021. A range of co-ordinated, albeit not entirely consistent, restrictions on key exports, such as refined oil and potash fertilizer, and access to western financial markets has been imposed in recent months by important economic partners such as the European Union (EU, Aaa stable), the United States (US, Aaa stable) and the United Kingdom (UK, Aa3 stable).

While the precise impact of the sanctions will ultimately depend on the extent to which Belarus is able to mitigate the effects through increased support from other markets, such as Russia, Moody's considers the balance of risks to Belarus's economic and fiscal performance, and therefore to refinancing prospects, to be clearly to the downside. Furthermore, Belarus's ongoing tensions with the west have increased the likelihood of additional restrictions being imposed (the EU has indicated that it has started preparing a 5th package of sanctions), with little prospect of existing measures being lifted.

Moody's expects that Belarus will need to finance its sizeable fiscal deficits while facing constrained access to new sources of financing. The worsening economic environment will weigh on tax receipts, and in particular revenue from foreign economic activity which accounted for around 8% of general government revenue in 2020. Furthermore, the potential need to provide financial support to Belarus's large state-owned enterprise (SOE) sector, particularly those SOEs impacted by the more stringent sanctions, may also weigh on the budget in the coming years. Moody's forecasts a fiscal deficit of 2.6% of GDP in 2022, after a similar budget outturn in 2021, and the deficit could turn out significantly larger if the downside risks arising from the tightening sanctions environment were to materialize.

At the same time, Belarus's access to western financial markets has effectively closed following the imposition of financial sanctions by the EU and UK which restrict Belarus from accessing their capital markets for new sovereign debt and loans. Belarus also faces an $800 million Eurobond repayment in February 2023 which will add to its financing requirements in the coming years. The negative outlook reflects the risk that Belarus may face a much larger borrowing requirement amid constrained financing sources given the uncertain impact of the tightening sanctions environment on the economy and budget.

The more stringent economic and financial restrictions imposed by the west will also increase Belarus's dependence on Russia, de facto Belarus' main source of financing. Economic ties between both countries will likely further strengthen as Belarus looks to divert its exports away from western markets. Moody's expects Belarus's integration with Russia to deepen to secure economic and financial support. As a result, Belarus's credit profile will remain highly dependent on its relationship with Russia, which has been volatile in the past.

SECOND DRIVER: LIMITED RESERVES REDUCES CAPACITY TO WITHSTAND FURTHER SHOCKS

The second driver of the decision to assign a negative outlook is Belarus' limited foreign exchange reserves which elevates external vulnerability risks and reduces the sovereign's capacity to withstand further shocks amid the heightened political instability.

Belarus's foreign exchange reserves fell markedly over 2020 as the central bank sold reserves to help stabilise the weakening exchange rate amid the uncertainty arising from the pandemic and the heightened political instability following the disputed presidential election. Foreign exchange reserves -- Moody's definition for the purposes of assessing a sovereign's susceptibility to external pressures is limited to foreign currency holdings -- fell to $3.0 billion at the end of 2020, almost half the level of the $5.6 billion reserves at the end of 2019, and covered just above one month of imports of goods and services. Foreign exchange reserves have been recently supplemented by the SDR allocation of around $900 million provided by the International Monetary Fund in August 2021, as part of its general allocation to help members cope with the impact of the pandemic.

While foreign exchange reserves have broadly stabilised in recent months, and rose to $4.0 billion at the end of August 2021, Belarus's current account deficits and sizeable public sector debt repayments over the coming years will continue to weigh on the country's reserve levels. Belarus's external vulnerability indicator (EVI), which compares foreign-exchange reserves with short-term and currently maturing external debt plus long-term nonresident deposits, is forecast to rise to around 518% on average over 2021-2022, the third highest EVI ratio in Moody's sovereign rating universe, from 341% in 2020.

As a result, Belarus's credit profile remains susceptible to the risk of a marked further weakening in the Belarusian ruble or a significant rise in bank deposit outflows, particularly in the event that new sanctions were to materially impact on confidence. While the Belarusian ruble has been relatively stable in recent months, a sustained currency depreciation would add to already significant inflationary pressures -- headline inflation reached 9.8% in August 2021 from 5.5% on average over 2020 -- and likely require the central bank to further draw upon its low foreign exchange reserves to support the exchange rate. A further material deterioration in foreign exchange reserves would lead to a marked worsening in Belarus's already elevated external vulnerability and give rise to negative credit pressures.

RATIONALE FOR AFFIRMING THE B3 RATINGS

The affirmation of the B3 ratings reflects that, in Moody's baseline view, refinancing over the next 12-18 months will be supported by Belarus's accumulated savings as well as continued financial support from Russia.

Moody's expects Russia (and to a lesser extent China (A1 stable)) to remain the main source of contingency financing for Belarus, as evidenced by the $1.5 billion loan agreed between Russia and Belarus in 2020 and the recent commitment by Russia to provide around $600 million by the end of 2022, with the potential for further financing support as part of negotiations around increased integration between the two countries. In addition, Belarus's liquidity needs will be supported by savings accumulated by the Ministry of Finance which are held at the central bank, amounting to $4.6 billion (7.4% of forecast 2021 GDP) at the end of July 2021, while Moody's expects the IMF SDR allocation would be available to support refinancing if needed.

Disbursement's from Russia's loan together with accumulated savings and refinancing on the domestic market will help finance Belarus's borrowing needs in 2021, with debt amortisations largely due to Russia and the Eurasian Fund for Stabilisation and Development as well as China in line with their sizeable holdings in the overall stock of government debt. Debt repayments will rise in 2023 as a result of the Eurobond maturity and the expected start of repayments to Russia for the nuclear power plant loan.

Moreover, the Belarusian authorities have always demonstrated a strong willingness to pay despite repeated balance-of-payments crises. In particular, the authorities have shown a strong ability to manage the budget in a prudent fashion given the periodic nature of external financing and that reserve buffers have always been very limited. As such, Moody's expects Belarus will likely constrain budget spending in the face of limited financing options, helping to mitigate some of the impact on government financing.

Furthermore, the affirmation of the B3 ratings reflects that Belarus's credit profile benefits from relatively high per-capita wealth and human capital despite the inefficiencies of its state-dominated economy and adverse demographics. While weaknesses in the rule of law and the restrictive election environment weigh on Moody's overall assessment of Belarus's institutions, there has been a strengthening, albeit from low levels, in the effectiveness of some macroeconomic and fiscal policies in the years leading up to the pandemic. Finally, the affirmation reflects the government's moderate debt burden relative to B3-rated peers following a marked reduction in government debt prior to the crisis, although fiscal strength faces risks from exchange rate shocks given a high reliance on foreign-currency debt while high levels of state ownership pose sizeable contingent liability risks.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Belarus' ESG Credit Impact Score is highly negative (CIS-4), reflecting moderately negative exposures to environmental and social risks and a highly negative governance profile, with weaknesses in institutions also explaining the sovereign's low resilience to environmental and social risks despite relatively favourable income levels and moderate government debt.

Belarus is moderately exposed to environmental risks, in particular from carbon transition risks given the importance of the country's large oil refinery sector, as well as from risks posed by water scarcity and physical climate risks. Belarus' exposure to physical climate risks is exacerbated by the moderately important role played by the agriculture sector, accounting for around 7% of GDP and 11% of employment, which exposes Belarus' economy to weather-related events and trends. Its overall E issuer profile score is therefore moderately negative (E-3 issuer profile score).

Exposure to social risks is moderate (S-3 issuer profile score) and primarily reflects unfavourable demographics, despite the country's high levels of human capital which is reflected in relatively low poverty and inequality and strong educational attainment. In particular, Belarus' declining and ageing population will continue to represent a major headwind for the economy. Furthermore, Belarus faces social risks emanating from labour and income as, despite relatively high wealth levels, the economic model relies on access to the Russian market and social security provided by the large, inefficient state-owned enterprise sector.

Belarus has a highly negative governance profile score (G-4 issuer profile score), reflecting weaknesses in the rule of law and for voice and accountability. Belarus scores below rated peers on international surveys of the effectiveness of judicial and legal processes. Furthermore, there is limited opportunity for independent bodies or civil society to influence policymaking and act as a check on the exercise of government power, while the restrictive election environment and the lack of any significant competition weighs on democratic freedom in the country. These risks have crystallised in wide-spread protests, particularly around the time of elections, and led to the imposition of sanctions in Belarus. These weaknesses also contribute to Belarus' relatively low resilience to environmental and social risks, despite relatively favourable income levels and moderate government debt.

GDP per capita (PPP basis, US$): 20,187 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -0.9% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.3% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -3.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.4% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: b1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 28 September 2021, a rating committee was called to discuss the rating of the Belarus, Government of. The main points raised during the discussion were: The issuer has become increasingly susceptible to event risks. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Belarus's ratings would likely be downgraded if the government's refinancing prospects were to worsen materially such that its credit profile would be consistent with a rating in the Caa category. For example, a larger than expected economic and fiscal impact from the more stringent sanctions environment, including the possibility of further material restrictions being imposed, which significantly increased the sovereign's gross borrowing requirements, would be negative. Refinancing prospects would also materially worsen if there were to be a marked depletion in the government's fiscal savings or indications of reduced financing support from Russia. The ratings would also likely be downgraded if there were to be a substantial further decline in the liquid component of Belarus's foreign exchange reserves which further increased the sovereign's vulnerability to external shocks.

The negative outlook suggests an upgrade is unlikely in the near term. The outlook could be changed to stable if the economic and fiscal impact of the more stringent sanctions environment would be relatively moderate and Russia continued to demonstrate a commitment to provide funding to Belarus when needed, such that refinancing pressures remain contained and consistent with a B3 rating. Furthermore, a stabilisation or increase in foreign exchange reserves, helping to mitigate the risk of a further rise in external vulnerability risks, would also be consistent with a stable outlook. While unlikely, a reduction in tensions with western countries which reduces the probability of new sanctions being imposed or Belarus regaining access to external capital markets would also support a stabilisation in the outlook.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: NO

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Evan Wohlmann
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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