London, March 10, 2022 -- Moody's Investors Service (Moody's) has today downgraded the Government of Belarus's long-term issuer and senior unsecured debt ratings to Ca from B3 and has maintained a negative outlook.
The downgrade reflects the weakening of Belarus's credit profile amid Russia's (Ca negative) ongoing military invasion in Ukraine (Caa2 review for downgrade). Belarus is directly exposed to a significant further tightening of sanctions targeting key economic sectors and the financial system that will hamper the country´s already narrow external buffers and jeopardize its capacity to service its debt. The country's external position will be further exposed as will its macroeconomic and financial stability.
In Moody's view, a default by Belarus has become increasingly likely given concerns around the government's willingness to repay its debt obligations and expectations that any potential financial support coming from Russia will unlikely be used for that purpose. Moody's view is that the likely recovery for investors will be in line with the historical average, commensurate with a Ca rating. At the Ca rating level, the recovery expectations are at 35 to 65%. Moody's considers willingness to service debt a Governance consideration under its ESG framework.
The decision to downgrade Belarus's ratings by four notches and maintain a negative outlook follows the recent sanctions imposed by Western countries on Belarus in retaliation for the country's support for Russia's military invasion, coupled with the severe deterioration of the credit profile of Russia, historically a key source of financial support for Belarus.
Moody's has concurrently lowered Belarus's local- and foreign-currency country ceilings to Caa3 and Ca from B2 and B3 respectively. The one-notch gap between the local-currency ceiling and the sovereign rating reflects Belarus's elevated vulnerability to a balance of payments crisis, the large footprint of the government in the economy and financial system as well as weakening institutions amid high geopolitical 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 an incentive to impose transfer and convertibility restrictions.
RATIONALE FOR THE DOWNGRADE
The multi-notch downgrade reflects the negative credit implications for Belarus's emanating from a significantly tightened sanctions environment imposed by Western countries in response to the country´s support for Russia's military invasion. The sanctions will exacerbate the country's already high external vulnerability and threaten its macroeconomic and financial stability.
The European Union (EU, Aaa stable) recently introduced new sanctions targeting selected individuals and key export sectors, including tobacco products, mineral fuels, potash, iron and steel products among others, and imposed restrictions on dual-use goods. The trade sanctions were followed by measures targeting the financial sector (including a ban on some banks' access to the financial messaging system SWIFT), and measures prohibiting transactions with the central bank and the provision of euro-denominated banknotes to Belarus. These measures build on the sanctions that were already introduced by the United States (US, Aaa stable) and that target Belarus's defense sector and two state-owned financial institutions. The restrictions will effectively block the targeted institutions from participating in the global financial system and make it exceptionally difficult for them to engage in international transactions.
Belarus is already subject to a range of restrictions selectively targeting key exports, such as refined oil and potash fertilizer. Sanctions already in place also effectively prevent Belarus to access to financial markets in the EU, the United Kingdom (UK, Aa3 stable) and the US for new sovereign debt issuances or loans.
While growth was resilient in 2021, with real GDP estimated to have exceeded 2%, Moody's believes that downside risks to the economy have increased significantly. The combination of existing and new sanctions will lead Belarus to face a severe recession in 2022. The EU accounts for 25% of Belarus exports of goods and services as of end-2021. Furthermore, the likelihood of a sustained disruption to Russia's economy and financial sector poses an additional downside risk to Belarus's macroeconomic stability given the significant trade and financial dependence between the two countries. Trade disruptions with Ukraine due to Russia's military invasion will also weigh on Belarus's growth.
Although Belarus achieved an estimated small fiscal surplus in 2021, the Russian invasion of Ukraine will weigh negatively on its public finances. Moody's projects that the general government fiscal balance will likely turn into a deficit of 4% this year with substantial downside risks. Pressures coming from the government's large state-owned enterprise (SOE) sector will pose additional fiscal risks. Moody's expects Belarus's government debt to reach 60% of GDP in 2022 from around 46% in 2021. The reserves held by the Ministry of Finance at the Central Bank, which amounted to $3.9 billion (5.7% of the estimated 2021 GDP) as of end-January 2022, provide only a temporary buffer that we expect will be exhausted rapidly.
The recently approved sanctions and prospects of further coordinated and severe sanctions will also exacerbate the precarious external position, characterized by significant upcoming external debt repayments. These pressures will weigh on the country's already weak level of foreign exchange reserves. Over the recent months, reserves have stabilized at close to $4.0 billion as of January 2022 according to Moody's definition, a relatively low level compared to the upcoming debt repayments. Belarus's import cover is low at just 1.1 months which leaves the country extremely vulnerable to further adverse shocks amid the ongoing invasion. Our calculation excludes last year's IMF special drawing rights (SDR) allocation of $0.9 billion that Moody's believes Belarus will be unable to convert into US dollars.
Upcoming sovereign principal debt repayments remain significant and mostly denominated in foreign currency (amounting to around $2.4 billion in 2022 and $3.3 billion in 2023 according to the Ministry of Finance), including an $800 million Eurobond repayment in February 2023, amid increasingly constrained financing sources given the tightening sanction environment and deteriorating macroeconomic prospects. 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 projected at around 614.2% on average over 2022-23.
The ongoing invasion of Ukraine has severely affected confidence and continues to exert pressure on the Belarusian ruble raising the risk of significant bank deposit withdrawals that will jeopardize financial stability. Further currency depreciation will add to an already elevated inflation level (headline inflation stood at 10.4% in January 2022). Also, government debt is almost entirely denominated in foreign currency, and therefore vulnerable to exchange-rate depreciation.
Belarus's institutional controls and checks over the executive power have weakened markedly. This raises concerns about Belarus's willingness to service its debt despite its strong repayment track record in recent years.
Belarus's support to Russia's military invasion and the more stringent sanctions environment have increased Belarus's economic integration with Russia and the country´s dependence on the Russian financial support. However, the capacity of Russia to provide support to Belarus has severely diminished and any potential financial support channeled to Belarus from Russia is unlikely to be used to service its external debt obligations.
RATIONALE FOR THE NEGATIVE OUTLOOK
While there is considerable uncertainty regarding the impact of the current sanctions, the negative outlook reflects the severe risks to macro-economic stability posed by the tightening sanction environment that we expect will remain for at least as long as Russia´s invasion of Ukraine persists.
Moody's expects the sustained economic and financial disruption will compound concerns around the government's willingness to service its debt despite Belarus's track record of foreign debt repayment during prior crises. As a result, the unpredictability of government actions could result in larger losses for investors than is consistent with a Ca rating.
The credit profile could come under further pressure in a scenario where severe sanctions weigh on Belarus's foreign currency generation capacity or the financial sector's stability more than currently envisaged, further impairing Belarus's ability to service its debt.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Belarus's ESG Credit Impact Score is highly negative (CIS-5), reflecting moderately negative exposures to environmental risks, highly negative exposure to social risks and a very 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's 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's 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 high (S-4 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's declining and ageing population will continue to represent a major headwind for the economy. Furthermore, Belarus faces increasing 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 very highly negative governance profile score (G-5 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 over the past months, particularly around the time of elections, and is resulting in the imposition of sanctions in Belarus. These weaknesses also contribute to Belarus's relatively low resilience to environmental and social risks, despite relatively favourable income levels and moderate government debt.
GDP per capita (PPP basis, US$): 20,170 (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: -2.9% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.4% (2020 Actual) (also known as External Balance)
External debt/GDP: [68.5%]
Economic resiliency: caa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 07 March 2022, a rating committee was called to discuss the rating of the Belarus, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, have materially decreased. The issuer has become increasingly susceptible to event risks. Other views raised included: The issuer's economic fundamentals, including its economic strength, have materially decreased. 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
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
Given the negative outlook, an upgrade of Belarus's ratings is currently unlikely. The outlook could be changed to stable if Moody's concluded that that recovery for investors was likely to remain in line with the historical average for a Ca rating.
Even in a scenario where the invasion stops, peace is restored and Belarus continues to service its sovereign debt, the external and liquidity positions of Belarus are likely to remain very susceptible to shocks and hence will likely remain consistent with the current rating.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
Belarus's ratings could be downgraded further if, in the event of a default, losses for investors were likely to be greater than assumed in the Ca rating. This could result from an even more destabilizing impact from sanctions than Moody's currently assumes, possibly accompanied by the confirmation of Belarus unwillingness to repay its obligations.
The publication of this rating action deviates from the previously scheduled release dates in the UK sovereign calendar published on www.moodys.com. This action was prompted by the sanctions imposed on the Government of Belarus in recent days by Western countries and severe deterioration of Russia's credit profile which has a track record of supporting Belarus in times of financial stress.
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.
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