New York, November 04, 2011 -- Moody's Investors Service has today confirmed at B3 the foreign-
and local-currency government bond ratings of Belarus. The
country's B3 foreign-currency bond ceiling and the Caa1 foreign-currency
bank deposit ceiling were also confirmed. The outlook on the ratings
is negative. In addition, Moody's has confirmed the
local-currency bond ceiling at Ba3 and downgraded the local-currency
bank deposit ceiling to B1 from Ba3.
Today's actions conclude a review for possible downgrade initiated
in July 2011. The confirmation of the government bond ratings was
prompted by:
1) The potential narrowing of the country's account deficit due
to currency depreciation
2) The possibility of Belarus obtaining near-term financing for
the deficit
3) Incremental efforts (such as exchange rate liberalisation) to rebalance
the macro-economic framework
The negative outlook on the rating reflects the following concerns:
(i) a likely significant slowdown in economic growth in 2012 will worsen
profitability and asset quality in the banking system, increasing
the government's contingent liabilities; (ii) the relatively
low levels of foreign currency reserves leave Belarus's balance
of payments vulnerable to event risk; and (iii) political risks.
RATING RATIONALE
The 65-70% depreciation of the Belarusian ruble against
the US dollar in 2011 could help narrow the country's current account
deficit to US$3.5 billion - US$4 billion in
2012 from an estimated US$6 billion in 2011. This would
considerably reduce the country's external financing requirements
in 2012. In the near term, Moody's expects these financing
requirements to be met by disbursements from the Eurasian Economic Community
(EurAsEc), continued energy subsidies from Russia and privatization
revenues.
However, until authorities substantially raise international reserve
levels, secure medium-term external financing and rebalance
the economy away from credit driven growth, Belarus will remain
susceptible to domestic and external shocks. Moody's believes
that an International Monetary Fund (IMF) agreement would alleviate external
financing risk while supporting the establishment of a more balanced macro-economic
policy framework. However, at this time, the prospects
of an IMF agreement are uncertain.
Exchange rate depreciation has raised the ruble value of foreign-currency
debt, bringing the external debt to gross domestic product (GDP)
ratio to 70% in 2011, from 25% in 2008. With
the change in exchange rate regime from fixed to managed float in October,
the ruble may depreciate further over the next year. This will
substantially raise the external debt repayment burden, heightening
repayment risk. On the other hand, the market-based
determination of the exchange rate will signal the true cost of additional
foreign borrowing to Belarusian borrowers, which the fixed-exchange
rate did not. Therefore, liberalizing the exchange rate removes
one of the regulatory distortions that underpinned Belarus's dependence
on external credit for growth.
While loose credit drove GDP growth of 7.9% over the first
three quarters of 2011, Moody's anticipates that growth will
slow in 2012 on the back of ruble devaluation, external liquidity
constraints, producer price inflation, creditor restrictions
on fiscal stimulus and a less benign global growth environment.
Indeed, the main driver of today's one-notch downgrade
of Belarus's local-currency bank deposit ceiling is Moody's
assessment that lower growth prospects will pose a risk to bank profitability
and asset quality. In an adverse situation, the government
may be able to support banks through capital infusions of local currency.
However, foreign-currency reserve levels are too low to meet
banks' foreign-currency deposit and external debt obligations.
As the Caa1 foreign-currency bank deposit ceiling suggests,
the risk of a freeze on foreign-currency bank deposits remains
high.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on the ratings indicates three main concerns held
by Moody's. First, at its current rate of 35%,
the central bank's benchmark refinancing rate is negative in real
terms. If inflation, which stood at 79.6% in
September, and credit growth remain high, the current account
deficit will not correct to the extent required to alleviate balance of
payments pressures.
Second, the large scale of the country's short-term
debt ($14.3 billion) relative to reserves leaves external
finances vulnerable to refinancing risk. It should be noted that
most of this short-term external debt consists of trade credits
and bank liabilities and has generally been rolled over in the past.
Third, the ability of Belarusian authorities to maintain political
stability will be tested in 2012, as household incomes decline in
real terms because of the impact of devaluation and inflation.
Meanwhile, EurAsian Economic Community (EurAsEc) loan-related
restrictions on the country's budget deficit may not allow for the
compensation of this decline via increased subsidies.
WHAT COULD CHANGE THE RATING UP/DOWN
A downgrade could be triggered by (i) Belarus's failure to maintain
reserve levels, secure medium-term external financing or
take additional steps to rebalance the economy; (ii) an acute growth
downturn, which precipitates a prolonged and severe banking crisis;
or (iii) a worsening political situation that jeopardises growth and repayment
capacity.
A reconsideration of the negative outlook on the government bond ratings
would depend upon (i) Belarus securing sufficient external financing to
raise reserve levels and meet repayment obligations over the medium term;
(ii) the Belarusian economy avoiding a major and prolonged deterioration
in growth; (iii) a shift in policy focus that removes existing distortions
while raising international competitiveness; and (iv) a stable domestic
and foreign policy outlook, including relations with external creditors.
PREVIOUS RATING ACTION & METHODOLOGY USED
The previous rating action on Belarus was implemented on 21 July 2011
when Moody's downgraded the government's bond rating to B3
from B2, the foreign currency bond and bank deposit ceilings to
B3 and Caa1(from B1 and B3 respectively), and the local currency
bond and bank deposit ceilings were downgraded to Ba3 from Ba1.
In addition, the ratings were placed under review for downgrade.
The principal methodology used in determining the rating of Belarus was
"Moody's Sovereign Bond Methodology", which was published
in September 2008 and can be found on www.moodys.com.
REGULATORY DISCLOSURES
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this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
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this announcement provides relevant regulatory disclosures in relation
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Atsi Sheth
Vice President - Senior Analyst
Sovereign Rating Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Rating Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's confirms Belarus government bond ratings at B3, outlook negative
