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
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same series, category/class of debt, security or pursuant
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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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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
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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.
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a.With Rated Entity or Related Third Party Participation:
NO
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and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
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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
Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
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