Main results of 2012: The economy survived 2012, having drawn resources from a post-crisis growth

Economic Situation

The year of 2012 was significantly different from other periods in the history of Belarus. The main differences in 2012 included a positive balance of foreign merchandise trade throughout the year, the growth of Gold and Forex Reserve against substantial payments on external and internal liabilities, unusually low rates of GDP, a rapid household income growth compared to the level prior to depreciation of the currency.

1. The balance of foreign trade was positive most of the year 2012

In 2012, in contrast to all previous years, the balance of foreign trade may be positive at year-end. Over the 10 months of 2011, the balance was minus USD 3 641.6 million and in 2012, over the same period, it was + USD 913.5 million.

The reason for the improved situation in foreign merchandise trade is provision of power resources at preferential prices by Russia.

In 2012, Belarus received natural gas at the price of USD 168 per 1000 m3, which is USD 88 per 1000 m3 below the average price for the period of 10 months in 2011. Therefore, savings in payments for the natural gas for 10 months of 2012 amounted to USD 1.5 billion.

The new terms of oil deliveries resulted in the estimated savings of approximately USD 700 million. If in 2011, Russian companies supplied oil to Belarus at a premium of USD 46 per ton, in 2012 – at a discount of USD 3.6 per ton. In addition, the cost of processing at Belarusian refineries increased from USD 35 to USD 41 per ton for Russian oil suppliers.

The Russian party allowed Belarus to make about USD 1.4 billion at the project of supply of solvents and lubricants produced from Russian oil products. The raw materials for production of solvents were purchased at the price of USD 539/ton, and finished solvents were sold for USD 855/ton. The sales volume of solvents was 3.2 million tons. The production was carried out with minimal additional costs, allowing Belarus to earn about USD 950 million – USD 1.000 million. The lubricants brought Belarus about USD 400 million – USD 450 million. In 2011, Belarus earned at these projects half as much.

The biodiesel delivery project added other USD 750-800 million to the positive trade balance.

Moreover, Belarus has reduced import of cars by USD 550 million.

Thus, the balance of foreign trade was improved mainly due to the increase of preferences on the part of Russia. Belarus has taken advantage of Russia’s integration intention to the full extent, has received significant economic benefits, but, at the same time its dependence on decisions made in Russia has increased, too.

2. The growth of Gold and Forex Reserve despite considerable payments on external and domestic liabilities

At the beginning of 2012, the volume of Gold and Forex Reserve was USD 7 915.9 million. In 2012 Belarus had to pay USD 1 521.8 million only for the external national debt. The state of foreign trade at the end of 2011 did not assume any external debt refinancing due to the positive trade balance.

As of December 1, 2012 the amount of Gold and Forex Reserve was USD 207.6 million. Belarus experienced no problems in servicing the external debt; all payments under commitments were made in time.

The following factors were the reasons for the growth of Gold and Forex Reserve despite significant external debt payments.

1. Refinancing of debt by means of new borrowings. The external debt at the beginning of 2012 and at the end of the first three quarters of 2012 decreased by USD 1057.2 million, but the reduction was due to the closure of a swap with China, which led to the reduction in the external debt of more than USD 900 million. The state administration bodies increased the debt rather than reduced it. Therefore, it is fair to say that the old debts were settled by means of new borrowings.

2. The foreign trade has improved the results. Unlike previous years, the foreign trade balance was positive throughout 2012 and this is reflected in the near-zero balance of external payments including duties on oil products. It was not necessary to spend Gold and Forex Reserve to maintain the foreign trade.

3. Credibility of the public banking system of Belarus on the part of the population. At the end of 11 months deposits in foreign currency in the banking system increased by 45% or by USD 1.9 billion. People bought foreign currency, and brought it to banks, returning the money to the banking system. Banks did not buy foreign currency at the exchange to issue foreign currency loans, but used funds from the public, thereby helping to maintain the amount of Gold and Forex Reserve.

As a result, Belarus managed to end rather complicated 2012 year as far as servicing the external debt is concerned, but did not succeed to significantly improve the situation with the external debt. The debts were refinanced by new loans, and the foreign trade performance at the end of 2012 is not encouraging concerning the results in 2013.

3. Unusually low GDP growth

The estimated figure of GDP growth of 5-5.5% was approved for 2012. The optimal plan, recommended by the IMF, was to reduce the growth rate to 3.0% with a focus on the quality of growth, instead of reaching the quantitative result at any cost.

The maximum rate of GDP growth in 2012 was recorded in January and amounted to 4.1%. During the second half of 2012, after the projects with solvents and lubricants were suspended, the rate of GDP growth slowed down considerably and by the end of 2012 it may amount to 1.8 – 1.9%.
The low GDP growth rates are associated with negative trends, especially in the construction, wholesale trade and a number of industries.

It was decided to reduce the volume of housing construction by 23.5% in relation to the volume of new housing built in 2011. Enterprises reduced their investments in the replacement of fixed assets due to high interest rates on loans. The foreign trade in construction services deteriorated. This resulted in a negative impact on the rate of GDP growth, which at the end of 11 months was 0.7% of GDP growth.

The results of the wholesale worsened due to problems with the sale of potash fertilizers, which are commodities with a high share of the added value, and on account of loss of value effect due to which the products were sold at a new price in 2011, but with expenses formed in pre-depreciation period. In addition, there was a decrease in export prices for a number of major export items of Belarus.
For objective reasons, there was a decrease in the mining industry. Reducing oil production is attributable to the depletion of old deposits and absence of major new oil fields. The power system reduced electric power output and increased import of energy from Russia and Ukraine.

Thus, Belarus technologically is close to its limits at this stage. A further increase in GDP is directly related to the modernization of industry and determination to implement structural reforms in the economy.

4. The rapid growth of household incomes compared to pre-depreciation level

After the depreciation of the national currency in 2011, household incomes, the main source of which is salary, reduced sharply. The government announced a target value of the salary level in the amount of USD 500 gross salary across all sectors of economy by the end of 2012. The target was set due to a sharp outflow of personnel from a number of industries.

The growth of salary in 2012 significantly surpassed the inflation. With the inflation projected at 22% in 2012, nominal salary grew by 47.8%, leading to an increase in real salary by 21%. The real salary most actively grew in March (+5%), May (+7.7%) and June (+3.5%)

Approaching the set target and reaching the nominal gross salary mark of USD 470, the rate of salary growth decreased significantly, and in September and November the real salary was lower.

The salary growth was different in the regional context. The residents of the regions of Belarus significantly fell behind the residents of Minsk as far as the level of salary is concerned. In 2012, the gross salary increased in the regions faster than in Minsk. The real salary of the residents of Brest region increased by 31.7% for 10 months of 2012, while in Minsk it grown by only 20%. At the same time it was Brest region where the reduction of GRP (Gross Regional Product) was recorded over the most part of 2012.

The negative aspect of salary increase was a violation of the fundamental macroeconomic ratio. Over the 10 months of 2012 the labor productivity by GDP was 104.3% compared to the same period of 2011, while the salary growth – 118.1%. There was a rapid redistribution of income from businesses to individuals in the economy.

Therefore, a positive factor for the population was the return of income to the pre-depreciation level over a very short period of time. But for the economy this rapid recovery of income means a significant increase in costs and a loss of competitiveness, in both external and internal markets. The Belarusian authorities were forced to raise salary, regardless of the performance to prevent migration and outflow of highly qualified specialists to the neighboring countries and, primarily, Russia.

5. Expectations and forecasts for the economy in 2013

The main issues to be addressed by the Belarusian economy in 2013 are as follows.

1. A search for sources of refinancing the external debt. As the IMF reiterated its demand to start the new program and the Belarusian authorities have not accepted it, the range of possible sources of credit for Belarus is significantly narrowed. The access to Asian and European capital markets can be assumed both for the state and individual enterprises and banks. Individuals will be offered new issues of public bonds denominated in foreign currency. Privatization processes will be only “spot”, one or two large companies, and long-term tenders for holding of shares. Several medium-sized enterprises will be offered for sale, but at the overestimated price. And there will be new appeals to the authorities of Russia, Azerbaijan, with urgent requests for new loans.

2. The foreign trade. First of all, a search for new projects, similar to the solvents and lubricant business. Violation of all possible agreements for the balance of goods supplies to the Russian market. Public and silent bans and stiffening for importers of goods. Increase in control over the flow of currency earnings and cash flow within the country. Requirements and restrictive initiatives regarding import from third countries to the territory of the Customs Union. Without new projects and taking into account intensification of competition after Russia joining WTO, the balance of foreign merchandise trade cannot be positive.

3. The economy. The priorities are construction and agriculture. Further gradual waiving of social obligations and construction of real estate for sale at a market price. Modernization of industry will remind the real modernization only in some cases, becoming most often a formal process without a clear outcome. Small private businesses will be driven out by big business with the full support of the public officials and government.

4. Household income and inflation. Salaries will be restricted in terms of growth. The process of salary growth will be forced in some industries, especially in the social sphere. The growth of household expenditures on housing and utilities, transport, communication will be at the rate higher than that of salary growth. The inflation performance even with the directive management will fail.

An overall forecast. There will likely be a change of government in favor of more odious personalities. The Decree on tying employees to enterprises undergoing modernization will be replicated in various forms and industries. The refusal of tight monetary and credit policy and emission pumping of the economy are possible with corresponding consequences in the form of the national currency rate weakening in the amount exceeding the rate set by the state budget.