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Business outlook 2014-18
Quarterly update – January 2015
by Dr Daniel Thorniley
News flash
Executive summary
Update on Russia-Ukraine crisis and impact on Belarus
Features of business
Corporate sales and profits outlook
Economic outlook
Currency outlook
Forecast table
News flash
News flash
In recent days the Belarus rouble has started to crash against the US dollar and Euro
The National Bank raised rates last week but more emergency measures will be needed if
the collapse continues
We expect further interest rate hikes and eventually informal or even formal capital
controls unless the currency stabilises
Some of this is due to a belated “catch-up” with the Russian rouble given the Belarus
rouble was widely thought to be over-valued compared with the Russian currency
It is unclear how substantial the currency fall will be, but we make initial amendments and
provisos to this report and stress now that all risks are to the downside as inflation could
spike further and/or GDP growth could decline much more than anticipated just 1-3
weeks ago
Already weakening trends could be pushed much further down and the economy is on the
edge of a recession
It seems the country is/was unable to avoid the Russian/Ukrainian contamination which
has filtered through via the exchange rate
Executive summary (1)
Russia is sinking into recession this year and Ukraine will remain in one as well
The other major CIS markets especially Kazakhstan and Belarus are worried about
The Belarus rouble collapsed in December during the Russian rouble turmoil of that
month and the government imposed a set of emergency currency measures, some of
which have since been rescinded
The National Bank announced a devaluation of the official rate and the currency has
shrunk to new lows in January
The currency slump was exacerbated by previous cuts to interest rates which were
designed to support consumer credit
But as we noted last October, such cuts compounded the risk of another devaluation,
which will have severe implications for already-tight government spending and growth,
as well as interest rates and inflation
Executive summary (2)
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”
But the uncertainty around sanctions (and particularly the possible impact on any firms
operating within the Customs Union), together with falling demand from Russian and
Ukraine will have an equally if not larger impact on trade, stability and the currency in
2015 and we have seen this already
For corporates operating in Belarus, any bounce-back from the 2011-12 currency crisis
has now faded and companies see Belarus very much as a single-digit growth market
and one where they are not focusing much in the way of resources owing to continued
concerns about long-term viability
Some 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 forthcoming Eurasian Economic Union (from Jan 2015)
The economy held up a bit better than expected in 2014 at 1.1% but will do well to be
able to repeat that performance this year and we think regional uncertainty and a
fragile Eurozone recovery could entail GDP growth this year at 0.3% which could slip
into negative territory
Executive summary (3)
2014 benefitted from a better harvest, reasonable exports and still positive (but
softening) retail growth and an industrial bounce-back in the early autumn
However, the government has stopped its usual policy of hiking wages in times of crises
and with inflation still around 20%, real wages are actually now falling
Industrial output grew about 2% last year on a rising trend and the number could be
repeated this year amid some import substitution which could appear more in 2015 if the
Belarus rouble weakens further
Inflation climbed from the start of 2014 at 15% to average close to 20% for much of the
year which is close to recent annual averages
In fact in October-November prices trended downwards to 18% but we think the recent
currency devaluation must flow through into higher prices in the first months of 2015
Another $1.6bn tranche of credit from Russia in September was intended to stave off any
currency crisis but the turmoil of December undermined this especially as the Belarussian
rouble was strong comparative to the Russian rouble (CIS managers are watching for
similar developments in Kazakhstan)
Update on Russia-Ukraine crisis and impact on
As we noted above, the main impact is now via the exchange rate: the Belarus rouble is playing
inevitable catch-up with the collapsed Russian rouble and general weak economic outlook
surrounding Belarus also pushes the currency and economy downwards
The Russia-Ukraine crisis looks likely to become a messy frozen conflict which will continue to
impact business in Belarus in 2014 and into 2015
However we continue to see low risk of local demonstrations in the style of those in Kiev –
authorities have too firm a grip on security and the media and there is also limited popular will
(about 11% of the population identify themselves as Russian)
Belarus is still trying to play the neutral card, for example, hosting the recent ceasefire talks
between Moscow and Kiev
It will benefit from transit trade as companies try to avoid Russian sanctions, as well as better
energy prices from Russia, which remains keen to keep it on side
But there will still be quite a bit of downside in the form of weak exports to these two
important markets, compounding already weak economic fundamentals (currency, foreign debt,
inflation, fiscal strain, falling real wages – see later)
The next presidential elections are scheduled for November 2015 but we are unlikely to see
Belarus, along with Kazakhstan, signed up for extending the current Customs Union to the
Eurasian Economic Union in January 2015, but it remains broadly a trading union and both want
to steer clear of closer political/institutional ties with Russia
Features of business (1)
From our December 2014 benchmarking survey (next survey in June 2015)
Due to its market size (9.5m), Belarus does not rank as a priority for most multinational
companies (about 4% of MNCs see it is a mid-term priority among CEE markets,
according to our latest, December 2014 survey)
For 80% of western companies Russia still represents more than 75% of their business
volume in the CIS region; Kazakhstan is becoming certainly more important
representing about 4-6%+ of CIS business but Belarus still only accounts for 1-2% for
most manufacturing companies
It would appear that most companies are sticking with their business model and
structures despite changes in the Custom Union and the Russia-Ukraine conflict but
more companies may look at sourcing products and transiting them through Belarus
because of either sanctions or opportunities from the Customs Union
Far fewer companies (just 4%) than 6 months ago (20%) say they are now reviewing
their route-to-market which suggest that companies addressed this mostly earlier last
Features of business (2)
It could 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
In general though this is a mixed market where some companies will be pulling back as
others investigate openings
One fifth of respondents (18%) state that consumers are down-trading and we expect
this figure to rise as real wages have now started to fall (see later)
About 4% of firms are planning to hire, mainly for local rep offices or small subsidiaries
– few are looking at larger investments owing to economic uncertainty
Belarus is about average for the CEE/CIS region when it comes to issues with
receivables and only 14% of firms report such issues ranking Belarus mid-table from 23
markets surveyed
Corporate sales and profits outlook (1)
From our December 2014 benchmarking survey (next survey in June 2015)
We already thought in early December that some of these corporate expectations were
on the optimistic side. Given the currency collapse in December-January, companies will
have to re-jig and re-forecast their business outlook downwards
Belarus is a small volume market but given the challenging times in the CIS region,
executives are looking for bits of growth everywhere and hence why Belarus gets a bit
more attention recently
But sales and profit growth is moderating after a recent, steady pick-up in 2012-13 along
with some bumps
In our Survey of 23 markets in the CEE region, Belarus actually ranks 8th in terms of “the
rate of sales growth” i.e. this does not account for volume
But this still means that 27% of respondents from all sectors predict flat sales growth for
2015 and 53% look to single-digit sales expansion with 18% forecasting double-digit
sales, again probably on low volumes
Given our Survey was conducted at end of November, we believe these numbers need
tweaking downwards and should be seen as best case
In fact our most recent figures suggest that in January 38% of firms forecast flat growth
and 12% predict negative sales
Corporate sales and profits outlook (2)
Given that budgets were set in September/October for 2015, most companies will be
reforecasting 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 market
Among consumer goods companies the outlook is not bad but could need some
downward modification: 46% of companies plan for single-digit sales growth and almost
one quarter predict double-digit sales. However, 15% expect flat growth and the same
number forecast falling sales
But such figures do rank Belarus No 6 in the region again for the rate of sales” growth
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 40% of firms in this sector predict felt growth and the remainder are clustered in
single digit sales
Corporate sales and profits outlook (3)
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 sales to western
markets and can finance purchases from their cash-flow, but this is a minority clearly
Most companies trade eastwards and denominate their business in a shrinking
(Russian) rouble
For pharmaceutical and health companies Belarus is ranked mid-table with a wide
spread of sales results for 2015 with equal proportions of companies looking to flat or
single digits or double digits
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
Revenue and profit results/forecasts, 2014-15
all sectors,Comparison of our June and December 2014 surveys
Revenue and profit results by sector, 2014
From our December 2014 survey
Revenue and profit forecasts by sector, 2015
From our December 2014 survey
Economic outlook (1) – GDP and growth drivers
The economy was surviving but is also coming under more pressure especially if the
currency sinks further
GDP stuttered along at 1.1% in 2014 after a weak number in 2013 (0.9%)
Given regional pressures and a slow Eurozone we expect GDP growth to decelerate
We expect GDP growth this year of 0.3% but with all risks on the downside
There is now a possibility that GDP will turn flat or negative by at least -1.0% this year
given the currency collapse which we have witnessed in recent days
GDP is then expected to average 2-3% in subsequent years with some chance of a
stronger bounce-back to 3%+ if the Russian economy rallies better than expected
2013 suffered from a poor harvest, falling potash exports after the break-up of an
export cartel, and a fall-out with Russia over oil re-exports
Growth was expected originally to do better in 2014 but then the Ukraine/Russia crisis
kicked in
Growth in 2014 was helped by a better agricultural output (up 4.0% year-on-year),
moderate industrial growth (up 2.0% on a rising curve in the latter months of the year)
and still-solid domestic trade (up 7%), thanks partly to continued wage growth (though
this is softening – see later)
Economic outlook (2) – investment, industry and
The industrial and agricultural numbers are a result as well of some “transit trade” as
exporters look to avoid Russian sanctions, but the scope for this is limited by weak Russian
demand (Belarus imports twice from Russia what it exports) as well as sluggish/falling
demand from its other two main markets, Ukraine and Europe
Exports averaged $3.2bn per month in 2014 compared with $3.5bn the year before and
the numbers were very similar for imports, so it does seem as though regional weakness
in the West and East is impacting trade flows and that could worsen or stabilise at these
weaker levels in 2015
Fixed investment was heavily negative in November year-on-year at -11% as investor
confidence remains hamstrung by continued devaluation concerns which are now
compounded by the Russia-Ukraine crisis. Fixed investment for all of 2014 will be down 6%
Economic outlook (3) – investment, industry and
Belarussian firms (75-80% of which are still in state ownership) remain unproductive
and Belarus is still reliant on cheap Russian oil and loans – it received another $1.6bn
tranche in September 2014 – to keep its currency afloat and the economy moving
The loan is part of a 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
Construction activity is also still negative – a result of low confidence and high interest
rates – but new household orders picked up 3-4% overall last year but we think
construction activity will be flat overall at best in 2015
Productivity, though low, has also improved thanks to the weaker currency and less
rampant wage growth, and Belarus is starting to attract some investment interest that
may perhaps have gone to Russia (particularly from China)
Economic outlook (4) – consumption, inflation,
wages and credit
In the past massive salary increases and subsidies kept consumption going, leading to
large trade deficits which led to a currency crash in 2011 ending in a 60% rouble
devaluation and a commensurate rise in inflation in 2011-12.
Even so, nominal wages still rose 40% (16% in real terms) in 2013. During 2014 nominal
wages were up on average by 18% matching inflation which entailed that real wages were
close to flat
But the trend in the final quarter of 2014 was for nominal wages to be falling slightly
faster than inflation and if continues, real wages will turn negative in early 2015 and
household consumption could be much softer given also currency fluctuations
We now think that the weaker currency will entail an upward spike in inflation especially
at the start of the year and then average about 21.5% or higher in 2015. This will exert
more downward pressure on real wages and on household consumption
Bank credits were rising at 7% until October-November last year which stimulated private
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 1.0% growth in October. We expect retail sales to
turn flat in January/February as the weakening currency raises inflation and undermines
consumer confidence
Economic outlook (5) – government budget and
Only about 40% of external debt is public (the rest mainly held by firms), since the
largely state-owned banking sector functions to support government spending and
state-owned enterprises (SOEs)
Still government debt is rising on the back of Russia financing – it is now about 35% of
GDP and Belarus spends 10% of GDP servicing its debts
Thus government spending will remain tight: the weak currency brought it close to
deficit in 2013 and the budget balance will be zero or negative again in 2014 with
spending also flat
Russia has agreed to relieve Belarus of proposed oil duties from next year, and it will
doubtless keep providing cheap oil in return for political support or at least neutrality vis
a vis Ukraine and the EU
There will likely be some pre-election spending next year ahead of presidential elections
planned for November and we could see spending rising and a small budget deficit
Any shaper rouble depreciation would make spending matters worse, while a lack of
progress on privatisations will continue to limit funds available for investment
Currency outlook (1)
We said in October that, “To help consumers and promote investment, the central bank
cut its reference interest rate to 20% in September (from 45% at the start of 2012), but
this is likely to keep inflation elevated while adding to currency risks”. This has certainly
proven the case given the Russian rouble contamination
Prior to the closing days of December the Belarus rouble had already fallen 15-20%
versus the dollar during 2014
In mid-December 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, perhaps
prematurely, a few weeks later
Last week (early January) the Bank was forced to revert to protective polices to prevent
a Belarus rouble implosion. The Bank increased its benchmark rate for the first time
since 2011 and rolled out other emergency measures
The key refinancing rate was bumped back up to 25% with immediate effect
The Bank also devalued the rouble by 7% against the dollar and scrapped entirely the
remaining 10% fee imposed on purchases of foreign currency by individuals
Currency outlook (2)
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:
US dollar
1 December 2014
20 December 2014
1 January 2015
8 January 2015
13 January 2015
This represents 28% decline against the dollar in just 3 weeks. Much will depend
on whether measure instituted by the national Bank can curb the collapse
We presume that government measures may be able to stabilise the FX rate but
there is no guarantee. We do presume that at whatever rate the Belarus settles
this year, it will then depreciate about 3-4% in subsequent years again presuming
stabilisation in Russia and Ukraine
Economic forecast table
(The 2015 economic forecast is variable deepening on the extent of the rouble
depreciation which accelerated in January)
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)*
17.000 17,780 18,120 18,480
14,600 15,330 15,900 16,500
Note: Real annual % change unless stated
*base-case, see our earlier notes on depreciation/devaluation risks
© 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 5, 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