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
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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
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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
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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.
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rating and, if applicable, the related rating outlook or rating
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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
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London E14 5FA
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
