Transcript Belarus

Belarus
Business outlook 2015-18
Quarterly update – October 2015
by Dr Daniel Thorniley
Contents
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Executive summary
Features of business
Business outlook
Corporate sales and profits
Economic outlook
Inflation outlook
Currency outlook
Forecast table
Executive summary (1)
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Belarus, like other CIS markets, was contaminated by the Russian-Ukrainian crisis
That conflict has subsided in recent months, especially with Russian focus shifting to Syria
But the fallout from the crisis and from Russia’s economic troubles is severe this year
GDP in Belarus has taken a further hit from the fall in oil prices as much Belarus export
revenue comes from oil products
The commercial links with the Russian economy are still very close
As a consequence the Belarus rouble has lost about 30% in value this year
Not to anyone’s surprise, President Aleksandr Lukashenko won a landslide victory (with
83.5% of the vote) in elections earlier this month
It will be his fifth term in office
Despite questions over the fairness of the vote, the EU has indicated its willingness to at
least temporarily suspend its sanctions on Belarus
That will be a boost for the economy and will help Belarus move away from its
dependence on Russia
But in the meantime, this year is looking even worse than we had previously expected
(and we knew things would be bad)
Executive summary (2)
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In Q2 2015 growth plummeted more than 4% year on year. That was the worst quarter
for Belarus GDP in years
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There were a number of reasons for the pitiful performance – the country’s close ties to
embattled Russia, a fall in private consumption and a steep drop in investment
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It looks like the fall in GDP will be closer to -2.8% with continued risk on the downside
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Some thing the picture could be even more dismal with a contraction closer to -4%
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Executives, as in other CIS markets, report worsening trends with downtrading, as real
wages have decelerated, and with receivables as local customers come under more
pressure
The Belarus rouble has lost about 30% of its value this year as a result of the drop in the
Russian rouble
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Executive summary (3)
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And the industrial output roller-coaster is in full swing: posting negative numbers in
2013, positive by 2% in 2014 but sharply down this year
Fully 36% of executives in our latest Survey said they’re forecasting negative sales
growth this year
And the picture probably even worse since economic conditions have deteriorated
since we ran that survey
But as in other CIS markets, companies think next year should be better
More than half say they are predicting single digit sales growth in 2016 and one in five
say sales will be flat
While flat sales are better than continued falling sales, this year has been so rough for
Belarus and many companies doing business in the market that even another year at
2015 levels is not great news
On the upside Belarus will continue to benefit from some “transit trade” as exporters
look to avoid Russian sanctions, while it will keep receiving cheap oil from Russia as it
tries to “keep Belarus on side”
Executive summary (4)
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But the uncertainty around sanctions together with falling demand from Russia and
Ukraine is having an even larger impact on trade and the currency in 2015
So far this year such transit trade has not compensated for the overall deceleration
For companies, volatility and uncertainty is now a reliable feature of doing business in
Belarus
Executives are talking about more cash management and taking more care and attention
with receivables
However, the government has now stopped its usual policy of hiking wages in times of
crises and continued high inflation, real wages are actually now falling
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The economy may benefit from some import substitution which has been supported by
the depreciated Belarus rouble
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But export and imports both crashed have crashed through 2015 and will both be down
by about 20% this year
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Inflation, despite the fall in the currency, stabilised this spring and actually decelerated to
14% in May; we now expect inflation to average 15% in 2015 and fall to about 12% next
Features of business (1)
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After a bounce-back from the 2011-12 currency crisis, companies now see Belarus as a
solidly single-digit growth market
Most companies that entered 2015 with expectations for double-digit sales have now
revised their forecasts downward
Executives are not planning to make big investments in Belarus due to continued
concerns about long-term viability
Russia still accounts for 75%-85% of sales revenues within the CIS for most companies.
Ukraine has fallen in revenue teems while Kazakhstan has grown and now represents
about 4-9% of CIS business
Belarus meanwhile only accounts for 1% to 1.5
Some companies may be looking to increase their presence while others will be
consolidating and pulling back
Some companies will try to benefit from leverage in light of developments within the
Customs Union and the Eurasian Economic Union
Features of business (2)
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It could be that companies are downsizing their distribution activities or changing the
numbers of distributors owing to the Customs Union, while equally some may be trying
to upscale as an alternative to Russia
Due to its market size (9.5m), Belarus does not rank as a priority for most multinational
companies
But somewhat surprisingly about 8% of MNCs see it is a mid-term priority among CEE
markets, according to our last Survey
Fewer companies (10%) than in 2014 (20%) are now reviewing their route-to-market,
which suggests that companies addressed this mostly earlier last year
The amount of companies reporting downtrading as a feature has leapt in the last 6
months from (18%) of respondents to 45% in June which ranks Belarus as No 3 in this
category behind only Russia and Ukraine
Features of business (3)
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Only about 3% of firms are planning to hire, mainly for local rep offices or small
subsidiaries – few are looking at larger investments owing to economic uncertainty
As with Kazakhstan and other CIS markets, the situation with receivables has
deteriorated with now 34% of firms refer to this as an issue compared with only 14% in
our previous Survey
There is some increasing risk that payments and cash management will become
marginally more challenging and it is something to monitor without yet being a serious
threat
Business outlook (1)
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We conduct two Surveys of the Belarus market: one which compares another 23 CEE and
CIS markets and the charts and figures below refer to the most recent June 2015 Survey
Keep in mind, these figures refer to the rate of sales growth and not the volume of
business
For 2015 fully 36% predict negative sales growth, which puts the market towards the
bottom of our Survey at No 19 in the region
Another 17% expect flat sales this year
Meanwhile, 30% estimate single digit sales and 17% of optimistic holdouts expect to
obtain double digit growth this year
The outlook for overall sales improves quite a bit in corporate budgets for 2016 and
Belarus rises to No 8 (from 19) in our rankings
Next year those predicting negative sales fall to just 7% with 20% estimating flat sales
As in other markets there is a solid clustering in single digits next year with 54% of
companies planning for such numbers and almost 20% forecasting low-double digit
recovery
The rate of Belarus rouble depreciation will define whether these results turn out to be
not so bad in FX terms or very weak
Business outlook (2)
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Given that budgets for this year were set in September/October (before the situation
deteriorated), most companies have been revising their targets downwards
Companies are also cautious about profit growth in Belarus owing to high inflation as well
as a typically small level of resources dedicated to the mark
Consumer goods companies are adapting to a changing and volatile market and this is
reflected in wide spread of forecast for this year: some 27% of companies forecast a double
digit fall in sales
Almost 20% predict flat sales and 28% forecast single digit sales
But another 25% of firms budget for double digit sales this year
Such figures rank Belarus No 12 (mid-table) in the region for the rate of sales’ growth in B2C
Given weaker wages, a mild recession, falling confidence and downtrading, we think the
targets above for 2015 were overly optimistic
Next year there is more clustering “in the middle”: 13% plan for negative sales but less deep
than in 2015; fully 38% predict flat sales and almost have aim for single digits spread evenly
over low and high-single digits
So CP companies are not planning for any solid bounce-back next year, just steady
consolidation
Business outlook (3)
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As usual, the B2B sector is expected to perform weakly as financing remains an issue and
cross border trade softens and the currency could come under more pressure
Fully 42% of firms in this sector predict negative growth this year, one fifth predict flat sales
with the remaining 28% looking for single digit sales
Some companies, as in Ukraine, report that some local companies do have access to “grey
funds” or some off-shore FX funds or are generating cash though exports and can finance
purchases from their cash-flow, but this is a minority clearly
In 2016 there is some consolidation in this sector with 30% planning flat sales and almost
50% aiming for single digits with few forecasting negative of double digits
For pharmaceutical and health companies, sales are spread widely: 45% forecast negative
trends, 20% see flat sales, 18% look to low-single digits and 17% predict high double-digit
sales
Next year, once again there is clustering around flat sales (19%) and with fully 63%
budgeting for single digit growth
Much will depend on whether firms are selling to government or “across-the-counter”
retail and the latter tends to perform better these days across markets as governments
tighten the purse strings
Belarus
Latest forecasts: revenue and profit results by sector, 2015
From our June 2015 survey
Belarus
Latest forecasts: revenue and profit results by sector, 2016
From our June 2015 survey
Economic outlook (1)
GDP and growth drivers
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We knew that 2015 would be difficult for Belarus but the economy is doing even worse
than most expected
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In Q2 2015 growth plummeted more than 4% year on year. That was the worst quarter
for Belarus GDP in years
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There were a number of reasons for the pitiful performance – the country’s close ties to
embattled Russia, a fall in private consumption and a steep drop in investment
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Given regional pressures, depreciating currency, high inflation and mixed news out of
Russia, we have downgraded our forecast for Belarus this year
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It looks like the fall in GDP will be closer to -2.8% with continued risk on the downside
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Some outlets think the contraction could be even closer to -4%
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Authorities are finally taking a look at implementing reforms
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But that won’t be easy – Belarus is one of the most statist economies in Europe with
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It remains dominated by government-run businesses and the state spends billions on
houd outs
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We don’t Belarus will seek any IMF funds, but if it did reforms would be needed
Economic outlook (2)
investment, industry and trade
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GDP should return to very feeble growth next year of about 0.5% as exports pick up –
that’s assuming a less dire situation in Russia and a more receptive EU
The on-going recovery in the Eurozone will allow for some trade switching to that
market helped by the weaker (but more stable) rouble and improving relations with the
West
The industrial output roller-coaster continues in full swing: posting negative numbers in
2013, positive by 2% in 2014 but sharply down this year averaging -6%
Industrial output was as bad as -10.3% in March and by August was dropping at about
6%
The fall in industrial output is a due to a drop in manufacturing and less output in
electricity and gas
These trends underline the tough environment for B2B firms operating in Belarus
Exports averaged $3.6bn per month in 2012-13 and averaged $3.2bn monthly in most
of 2014 but on falling scale to $2.7bn in December. After peaking in July this year at
$2.7bn exports have slid in recent months to closer to $2.1bn
Overall exports should drop about 20% this year
Economic outlook (3)
investment, industry and trade
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Imports saw a similar picture at an average last year of $3.3bn per month and this was
maintained to the end of the year but then imports too slumped and have been
between $2.1bn and $2.5bn for most of this year
Repeated devaluations in recent years have prompted large agricultural and industrial
exporters to price in US dollars and the rising dollar has helped them this year as have
lower energy prices
Belarussian firms (75-80% of which are still in state ownership) remain unproductive
and Belarus is still reliant on cheap Russian oil and loans
On-going Russian loans form part of the deal struck when Russia bailed out Belarus
from its currency crisis in 2011 – in return Belarus is supposed to sell a number of state
assets to Russia, but many of these sales are now in doubt amid worries about the
impact of sanctions on any businesses with Russian ties
Economic outlook (4)
household consumption and wages
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Nominal wages rose 40% (16% in real terms) in 2013 but during 2014 nominal wages only
matched the 18% inflation level which entailed that real wages were exactly zero
The government has had a fiscal response to the crisis this year and thus public wages are
no longer matching inflation and local companies are following the CIS trend of paying
average wages below inflation
Thus each month this year real wages have been negative by -4.5% and we expect the
average for the year to be close to -4.0%, one of the very worst figures in recent years
This is certainly a major factor why downtrading is increasing and we note that consumer
product companies need to manage expectations downwards and look at more value
products
Retail sales were surging at the start of 2014 averaging 12.5% growth in the first quarter of
that year but had slumped to just 0.4% in December averaging 8% for the whole year.
At the start of 2015 retail sales held up at 4.7% in January but have slowed – shrinking in
April and spending the rest of the year between 15-1.8%.
Retail sales could slow to about an average of 1% growth this year before recovering to
2.3% next year and getting close to 3% growth in subsequent years
Officially unemployment is artificially low at 1-2% as the government and public sector
companies hold on to employees
But real unemployment is probably creeping up against this weakening backdrop
Economic outlook (5)
budget and external accounts
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Government spending was quite tight last year and was relatively subdued for much of
this year considering the economic woes – but did pick up as the election neared
We expect the budget to post a -1.0% deficit this year
Export and import weakness will probably balance out this year but with imports down
more than exports and thus we see the trade balance improving marginally along with
the current account deficit decreasing from -8.0% last year to about -5.3% this year
We do not expect the need or desire for any IMF funding and a $1bn Eurobond is likely
to be postponed until 2016
Russia will disburse another $760mn this year from existing facilities and to roll over
existing debt by approving another $3bn credit; China has also approved up to $3.5bn
of credits linked to industrial, mining and infrastructure projects
Government debt is rising on the back of Russia financing – it is now about 39% of GDP
and Belarus spends 10% of GDP servicing its debts
Such assistance is needed when FX reserves are down to just about $2.5bn – or just
about one month of import coverage
Inflation outlook
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After rising over 18% in both 2013 and 2014, inflation is easing…a little
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The inflation rate has come down from its 2015 high of 17% in January, falling steadily to
a low of about 12% in August
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Food inflation has dropped through the year, reaching its lowest level (just 8%) in August
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We expect inflation will average about 15% in 2015, falling to about 12% next year and
then finally dropping into the single digits in subsequent years
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This moderation in inflation is due to some government fiscal tightening and weaker
demand, softer wages and downtrading in the market as well as lower energy prices
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And comes despite steady (and more steeper) depreciation of the currency through
2015
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Bank credits were rising at 7% last year but in this more depressed climate we except
new bank credit emission to stay close to zero or even dip into negative territory
Currency outlook (1)
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The Belarus rouble started to fall against the dollar last December – for the year it will
have lost about 30% of its value versus the greenback
The depreciation has been in line with the drop in the Russian rouble
But some downward pressure can be explained by the low level of international reserves
and high foreign debt payments that have prevented authorities from supporting the
Belarus currency very much
Last December, as the depreciation began, the National Bank introduced emergency
measures including a 30% tax on foreign currency purchases and temporarily banned
“over the counter” foreign currency purchases. However, these measures were then
rescinded, a few weeks later
The key refinancing rate was bumped up (for the first time since 2011) to 25% in January
and has stayed at that level all year – it will likely be unchanged until the rouble
strengthens and inflation
We expect the Belarus rouble to average about 15,000 versus the dollar this year
The currency could come under further downward pressure, along with most other
emerging markets currencies, when the US federal reserve raises interest rates
Currency outlook (2)
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For reference the National bank of Belarus has posted the following record of the
exchange rate versus the US dollar and Euro which shows the extent of the recent
currency collapse (in thousand roubles)
January 2015
February 2015
June 2015
August 2015
September 2015
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US dollar
14.38
15.10
15.30
16.31
17.66
Euro
16.75
17.16
17.11
18.12
19.84
We do presume that at whatever rate the Belarus settles this year, it will then
depreciate at an annual average rate of about 3-6% in subsequent years again
presuming stabilisation in Russia
Economic forecast table 2012 - 2018
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales
Consumer prices (average)
Budget balance (% GDP)
Current account (% GDP)
Rouble/euro (average)
Rouble/dollar (average)
2012
1.5
-9.8
5.9
7.8
-1.0
22.0
14.0
59.2
0.5
-6.1
10,762
8,336
Note: Real annual % change unless stated
2013
0.9
7.5
-6.0
14.3
-2.5
15.8
18.2
18.3
0.2
-10.2
11,834
8,971
2014
1.6
-8.0
4.0
2.0
-0.5
0.0
8.0
18.1
-0.5
-8.0
13,800
10,300
2015
2016
2017
2018
-2.8
0.5
1.4
2.4
-7.7
2.5
3.4
4.2
-6.0
1.2
3.1
3.3
-1.2
1.8
2.5
2.9
2.2
0.5
1.0
1.5
-4.0
1.3
2.4
2.6
1.0
2.3
3.0
3.2
15.0
12.0
9.9
8.7
-3.4
-2.8
-1.8
-1.7
-3.7
-3.5
-4.2
-4.1
17,400 17,700 18,000 18,700
15,700 16,400 17,200 17,900
Disclaimer
© 2015 CEEMEA Business Group*
*a joint venture between
DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,
Company registration: FN 331137t
and GSA Global Success Advisors GmbH, Hoffeldstraße 1 , 2522 Oberwaltersdorf, Austria
Company registration: FN 331082k
Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey,
governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DTGlobal Business Consulting GmbH and CEEMEA Business Group.
This material is provided for information purposes only. It is not a recommendation or advice of any investment or
commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by
any party acting on information in these materials.
Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH
M: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com