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Rating Action:

Moody's affirms Belarus' B3 rating, maintains stable outlook

28 Feb 2020

London, 28 February 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Belarus' B3 long-term issuer (domestic and foreign currency) and senior unsecured (foreign currency) ratings. The rating outlook remains stable.

The factors supporting the affirmation are:

(1) Belarus' relatively high wealth which supports the economy's resilience to shocks, although significant state involvement weighs on growth potential;

(2) While policy effectiveness has improved, Belarus' overall institutional and governance strength remains weak;

(3) Belarus' moderate government debt burden supports fiscal strength, although debt remains significantly exposed to exchange rate shocks; and

(4) Despite a strengthening in reserve levels, external vulnerability risks continue to weigh on Belarus' credit profile.

The stable outlook reflects Moody's expectation that the strengthening in Belarus' credit profile since 2015, including a structurally improved external position with a higher reserve buffer and a more narrow current account deficit, will help to support the B3 rating as the economy adjusts to the higher cost of oil imports as a result of Russia's (Baa3 stable) recent tax maneuver.

Concurrently, Belarus' long-term foreign currency bond and deposit ceilings remain unchanged at B3 and Caa1 respectively, while the short-term foreign currency bond and deposit ceilings remain Not Prime (NP). The country ceilings for local currency bonds and deposits are also unchanged at B2.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE B3 RATING

FIRST FACTOR: RELATIVELY HIGH WEALTH SUPPORTS ECONOMIC RESILIENCE ALTHOUGH STATE INVOLVEMENT WEIGHS ON POTENTIAL

Belarus' relatively high wealth, with GDP per-capita (in purchasing power parity terms) well above the B3-rated median, and moderate diversification support the country's shock absorption capacity. Belarus' export potential benefits from the country's high levels of human capital which supports a relatively diverse export product mix and a significant ICT sector which has emerged as an important contributor to GDP growth.

That said, Belarus' government-led industrial structure weighs on the economy's dynamism while high government involvement in the economy through state-owned enterprises (SOEs) hinders productivity growth. Recent measures by the government to reduce distortions in the economy, such as reducing financial support to SOEs, will have limited effects if not accompanied by broader efforts to improve the efficiency and governance of the SOE sector. According to official statistics, around 13% of the SOE sector is loss-making.

At the same time, Belarus' economy remains highly reliant on Russia, its largest trading partner and the source of almost all fossil fuel imports. A gradual increase in oil import prices, as changes to Russia's tax system removes an important subsidy for Belarus, will pose a challenge to the country's chemical sector and its wider economic model.

Moody's expects the economic adjustment resulting from the gradual increase in oil import prices will weigh on Belarus' growth prospects through weaker commodity exports, lower investment given elevated uncertainty and weaker government revenues which limit the scope for a fiscal stimulus. After falling to around 1.2% in 2019, from 3.1% in 2018, Moody's expects growth will remain subdued in the next two years. Furthermore, Belarus' growth potential remains constrained by its adverse demographics given a projected continued decline in its working age population.

SECOND FACTOR: IMPROVED POLICY EFFECTIVENESS BUT INSTITUTIONAL STRENGTH REMAINS WEAK

Belarus has seen a marked improvement in the effectiveness of some macroeconomic and fiscal policies, albeit from low levels.

Efforts to strengthen monetary policy, including the ongoing transition to an inflation targeting framework and strengthening central bank independence, has supported a moderation in domestic inflation. Furthermore, financial stability has been supported in recent years by the central bank's ability to deem banks as systemically important and impose higher capital requirements.

The authorities have also embarked on a significant fiscal consolidation programme following the crisis in 2015, and again in 2018 amid rising uncertainty around oil price subsidies from Russia, which has helped maintain government debt at moderate levels, while fiscal support to SOEs, including directed lending, has declined.

That said, assessments for voice and accountability in Belarus remain very weak compared to B-rated peers, with limited opportunity for independent bodies or civil society to influence policy making and act as a check on the exercise of government power. For example, the Organisation for Security and Co-operation in Europe determined that Belarus' recent parliamentary elections did not meet international democratic standards.

At the same time, the country scores well below B-rated peers on international surveys for the rule of law given the limited effectiveness of judicial and legal processes in Belarus, which hinders efforts to create transparent laws and weakens property rights. For example, a weakening in minority investor protections contributed to the decline in Belarus' ranking on the World Bank Doing Business 2020 survey to 49th position from 37th a year earlier.

THIRD FACTOR: MODERATE DEBT BURDEN ALTHOUGH SIGNIFICANTLY EXPOSED TO CURRENCY SHOCKS

Belarus benefits from a moderate government debt burden given the tighter fiscal stance adopted in recent years. Positive primary balances, together with strong nominal GDP growth, have contributed to a fall in government debt which remains below the median of B3-rated peers. At the same time, stronger debt affordability relative to peers is supported by a large share of funding from concessional and bilateral lenders at reduced costs, and, hence, doesn't reflect market access at low rates.

While Moody's expects government debt to remain moderate as the budget moves into deficit this year, Belarus' fiscal position will continue to face significant exchange rate risks given that about 90% of government debt is in foreign currency (according to IMF estimates), a share which is high even for the CIS region.

Furthermore, the continued high level of state ownership raises the risk of contingent liabilities crystallising on the government's balance sheet in the event of a significant slowdown in growth or losses at SOEs. In addition, official statistics mask large off-balance sheet expenses and do not take into account that a number of social programmes are funded through the banking system.

FOURTH FACTOR: DESPITE A STRENGTHENING IN RESERVES, EXTERNAL VULNERABILITY RISKS WEIGH ON CREDIT PROFILE

Belarus' resilience to external shocks has strengthened through an increase in its foreign exchange reserves to historical highs, supported by a more stable macroeconomic environment and narrowing of the current account deficit. Foreign exchange reserves (excluding gold) stood at around $5.6 billion at the end of January 2020, which compares with around $4.1 billion a year earlier. Reserves are more than three times larger than in mid-2015.

That said, reserve levels still remain very low relative to external payment needs and will face some pressure from a modest weakening in the current account. For example, reserves cover less than two months of goods and services imports and account for around 40% of external debt due within one year (although this includes a sizeable share of trade credit whose refinancing has generally been stable, even in times of crisis). As a result, Belarus' external vulnerability indicator, which compares short-term and currently maturing external debt plus long-term non-resident deposits to reserves, is expected to reach around 299% in 2020 which, despite having fallen markedly from around 853% in 2016, remains among the highest in our sovereign rated universe.

At the same time, while government borrowing needs are relatively low and most debt is in the form of bilateral and multilateral loans, the government remains very reliant on external financing from a limited number of sources, including from Russia which can be subject to disruption. That said, Belarus has sought to diversify its funding sources, including with a $500 million loan from the China Development Bank (A1 stable) agreed in December 2019 and has also regained access to the Eurobond market in recent years which has helped extend its maturity structure.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the strengthening in Belarus' credit profile since the last balance of payments crisis in 2015 will help to support the B3 rating as the economy adjusts to the higher cost of oil imports from Russia. The timing around any potential compensation from Russia remains highly uncertain, and Moody's doesn't expect any agreement to be reached in 2020.

Notably, a structurally improved external position including a more narrow current account deficit and a higher reserve buffer, as well as a consolidated fiscal position which has kept government debt at moderate levels, will help to support Belarus' credit profile as the economy moves to modest twin deficits given the headwinds from subdued growth, higher oil import costs and lower government revenues.

The stable outlook also reflects Moody's view that refinancing risks will remain manageable.

The authorities have drawn up the 2020 budget on the assumption of no compensation from Russia which, together with fiscal savings from previous budget surpluses and plans for new external market borrowings (including a Eurobond), will support government refinancing in the face of a weakening budget balance.

The government will likely face increased challenges around funding next year as, in the absence of any agreement on compensation from Russia, government revenues weaken further, requiring a combination of further fiscal consolidation and new external borrowings. Furthermore, while the next Eurobond maturity is not until 2023, the start of repayments on the nuclear power plant loan from Russia, which remain subject to negotiation, will add to financing needs. That said, in Moody's view, the Belarussian authorities have always demonstrated a strong willingness to pay despite repeated balance of payments crises, and higher reserve levels will act as an additional buffer.

At the same time, Moody's expects progress on reforms, including those which would help raise potential growth, to remain slow. While there is the prospect for stronger reform engagement following this year's presidential elections, Moody's expects any reform steps, particularly towards the large SOE sector which accounts for a material share of employment, will remain incremental.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S), and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Belarus, the materiality of ESG to the credit profile is as follows.

Environmental considerations are somewhat material to Belarus' credit profile given the moderately important role played by the agriculture sector, accounting for around 6% of value added and 10% of employment, which exposes Belarus' economy to weather-related events and trends.

Social factors are material to Belarus' credit profile given its demographic challenges, particularly its declining and ageing population which will restrict potential growth. According to the United Nations, the population has been declining over the past decades and this trend is not expected to reverse. Furthermore, the important role played by the SOE sector in providing a degree of social security for a large share of the population -- SOEs account for around 40% of employment -- will likely serve to delay any wide-ranging SOE reforms. As a result, the SOE sector is likely to continue to pose fiscal risks and weigh on potential growth.

Governance considerations are very material to Belarus' credit profile, reflected in the country's relatively weak rankings in the Worldwide Governance Indicators, particularly around the rule of law which negatively impacts on the business environment.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop from a marked strengthening in Belarus' ability to withstand external shocks, including a reduction in foreign-currency debt servicing requirements or a material increase in its foreign exchange reserve buffer. Also positive would be a faster or larger than expected reduction in Belarus' government debt including state guarantees. This could result from faster progress on structural reforms which serve to reduce the inefficiencies in the large SOE sector, helping to support potential growth and lower the contingent liability risks for the government's balance sheet. A reduction in government liquidity risks, including through a material widening in external financing sources, would also be positive.

Downward rating pressure could arise from a marked worsening in Belarus' external vulnerability, resulting from a material deterioration in foreign exchange reserves or a widening of external financing requirements. Also negative would be a material weakening in the government's fiscal position, including from a crystallization of contingent liabilities from the large SOE sector, including the need to provide material fiscal support to the country's important chemical sector, or a sharp currency depreciation which feeds quickly into the government debt ratio. A material deterioration in Belarus' ability or willingness to repay its external obligations would also give rise to downward rating pressure.

GDP per capita (PPP basis, US$): 19,941 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.1% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.6% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 2.4% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.1% (2018 Actual) (also known as External Balance)

External debt/GDP: 65.5% (2018 Actual)

Economic resiliency: b1

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

On 26 February 2020, a rating committee was called to discuss the rating of the Government of Belarus. The main points raised during the discussion were: 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 not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. 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 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.

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

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

Yves Lemay
MD - Sovereign Risk
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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