ACRA has affirmed the following ratings to the Government of the Republic of Belarus (hereinafter, Belarus, or the country) under the international scale:

  • Long-term foreign currency credit rating at B+ and local currency credit rating at B+;

  • Short-term foreign currency rating at B and local currency credit rating at B.

The outlooks on the long-term foreign currency credit rating and the local currency credit rating are Developing. The Developing outlook indicates a variety of trends: the rating may stay unchanged, be upgraded or downgraded within the 12 to 18-month horizon.

ACRA has affirmed the followings ratings to the country’s bond issue:

  • B+ under the international scale;

  • BBB-(RU) under the national scale for the Russian Federation.

Positive rating assessment factors

  • Relatively high level of economic wealth.

  • Moderate public debt.

  • Deeper integration with Russia

Negative rating assessment factors

  • Reduction of reserves accumulated in previous years.

  • Risks of materialization of contingent liabilities.

  • Weak external position.

  • Limited domestic capital market capacity.

credit rating rationale

The Belarusian economy has showed signs of recovery in 2023. However, in ACRA’s opinion, the stability of this process remains uncertain, which is reflected by the Developing outlook. The prices for the country’s main exports have declined this year, volumes of exports of these products lag behind pre-crisis volumes, and transportation costs have grown. The IT sector, one of the drivers of the economy in the past, continues to decline. Consumer imports increased amid growth in lending to households. Inventories remain close to maximum levels. Positive factors include the recovery of industry, growth of investments, decline in inflation, reduction of external debt and maintaining reserves in the context of continued payments for external public debt in national currency. Ongoing integration with Russia, including trade, is a key factor supporting the country’s economic recovery. The future credit quality of Belarus will largely depend on the country’s ability to maintain the recovery momentum and the transition of the economy to sustainable growth rates in the absence of negative external and internal shocks.

Macroeconomics

ACRA expects Belarus’s economy to grow by 1.9% in 2023. The latest available data evidences the recovery of the country’s economy this year: for example, growth was 2% in the first half of the year. This is largely due to the low base in connection with the significant decline recorded in Q2 2022. The pre-crisis level of GDP has not yet been reached. Positive tendencies include a recovery in the volume of investments (by 24.5% year-on-year as of June 2023) and growth in industry (15.5%), as well as a recovery in household consumption. The upward revision of the growth rates of the Russian economy has a positive effect. Restraining factors are the continuing decline in employment and the growth of consumer imports, the volume of which exceeded pre-crisis levels. In addition, the IT sector continues to shrink, and product inventories remain close to maximum levels.

ACRA expects inflation to be 7.3% in Belarus in 2023. This June, the rate of inflation slowed to 2.9%, which was due to both a decline in global foods prices, as well as a fall in consumer prices in Russia, the country’s primary trade partner. At the same time, inflation expectations remain rather high (10.9% as of June 2023). According to the Ministry of Antimonopoly Regulation and Trade of the Republic of Belarus, price restrictions apply to a wide range of goods in the consumer basket. This may result in the accumulation of various risks, for example fiscal risks, to compensation of the budget for the lost income of economic agents and, as a result, have a negative impact on economic growth.

Public finances

According to preliminary information, the actual consolidated budget deficit turned out to be slightly higher than that of the initial target in 2022, and the ratio of public debt to GDP was almost unchanged. According to ACRA’s estimates, the main sources of funds to cover the budget deficit last year were previously accumulated funds and domestic borrowings. In addition, the government’s liabilities to the National Bank of the Republic of Belarus (NBRB) increased.

In 2023, the approved consolidated budget deficit is 1.5% of GDP. The main items of increased expenditures include social policy, general public activities (transfers to lower budgets), national defense, the judicial system, law enforcement and security. In terms of revenues, the main risk is the execution of tax revenues (VAT, corporate income tax) associated with planned growth (3.8%). An important revenue item this year will be transfers from foreign countries in the amount of BYN 5.4 bln (2.3% of GDP), including as compensation from Russia for the tax maneuver in the oil and gas industry. According to official estimates, about half of this amount will be compensated annually. In addition, the government has taken a number of measures to mobilize budget revenues, including indexing tax rates, increasing the general income tax rate by 2 pps (to 20%), and increasing the income tax rate on certain types of income.

ACRA assesses public debt refinancing risks as low, which is mainly explained by 1) the expected postponement of certain repayments due to Russia (historically, around 40–50% of total external government debt repayments are made to Russia); 2) the decision of the Council of Ministers of the Republic of Belarus and the NBRB on the fulfillment of obligations to certain international financial institutions and for Eurobonds denominated in hard currencies using various options, including the national currency; 3) the volume of accumulated balances, which stood at around BYN 13.3 bln as of the end of 2022.

As for point 2, according to the Ministry of Finance of the Republic of Belarus, it transfers full equivalent amounts in Belarusian rubles to the accounts in an authorized bank and takes all necessary steps to bring payments to ultimate holders.

Publication of preliminary data on budget execution and the size of public debt has ceased. Due to this, only the following conclusions can be drawn regarding H1 2023: 1) accumulation of balances continued to be the main source for financing the budget deficit (their volume declined from BYN 13.3 bln to 11.7 bln); 2) growth of liabilities to the NBRB stopped, their total volume stands at 2.2% of GDP.

An insignificant amount of public debt in the national currency is a structural risk as it increases the budget’s dependence on external funding sources.

A long-term problem for Belarus is rising expenditures associated with its ageing population. According to the IMF, these expenditures will increase by 3.4 pps of GDP by 2030 compared to 2022. The risks of contingent liabilities of real sector companies remain high, despite an improvement in the financial standing of the non-financial sector.

In order to support the banking system, the NBRB prolonged a number of countercyclical measures aimed at preserving banks’ capabilities to provide financial support to the real sector of the economy and ensure the sustainable functioning of the banking sector. In ACRA’s opinion, the risks of realization of contingent liabilities in the banking sector remain and are related to the quality of bank assets and the risk of deposit outflows.

External position

Foreign trade in goods and services was in surplus in H1 2023, but at a minimum level for the past few years. The decline in prices for export goods (potassium and oil products) and the fall in exports of information services limited overall exports. At the same time, the volumes of imports increased, mainly due to growth in consumer spending and transportation costs. According to the IMF, the share of Belarus’s external trade with Russia is growing, while the volume of trade with Poland and Ukraine, the countries that were among the five largest trade partners of Belarus, is decreasing.

External debt has remained high, while reserves are low. As of June 2023, the NBRB’s international reserves amounted to USD 7.8 bln (two months of imports of goods and services). An additional constraint is the sanctions imposed by the EU on transactions with the NBRB. On the other hand, as the volume of settlements in national currencies with Russia grows, the share of the NBRB’s external assets denominated in Russian rubles increases. Formally, these assets are not international reserves, but in fact, they can be used as such. At the end of Q1 2023, external debt amounted to USD 37.6 bln, including USD 14.2 bln due within a year (ACRA estimates direct repayments at about 20% of the specified amount, the rest is public debt, trade finance, and bank deposits). The rather low external debt coverage metrics are aggravated by Belarusian issuers’ limited access to foreign markets and the shrinking base of international creditors. Russia is increasingly becoming the main creditor to the Belarusian economy.

In 2023, ACRA expects a current account deficit of about 0.7% of GDP, which will be primarily associated with the growth of imports of goods and a decrease in export prices. The strengthening of the Belarusian ruble against the Russian ruble to the level as of the end of 2021 will limit incentives for export growth to Russia. The dynamics of reserves will be determined largely by the pace of import recovery, since external public debt repayments are made in, among others, the national currency.

Institutions

World Governance Indicators calculated for 2020 by the World Bank declined in 2020 and 2021, reflecting political unrest in the country after the August 2020 elections. In the Agency’s opinion, the risks of increased political activity will persist in Belarus until the start of structural social and economic reforms in the country. The sovereign credit ratings are supported by the high quality of Belarus’s human capital, which is based on high life expectancy and education levels. The UN-calculated index of education quality puts Belarus significantly higher than comparable countries. According to the UN, public spending on education amounted to 4.8% of GDP in 2017, exceeding the world average of 4.1% of GDP.

SOVEREIGN MODEL APPLICATION RESULTS

Belarus has been assigned a BB+ Indicative Credit Rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifier part of the model downgrade the Indicative Credit Rating. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

  • Potential economic growth;

  • Quality and sustainability of economic growth;

  • Effectiveness of monetary policy;

  • Contingent liabilities and the risk of their materialization;

  • Debt sustainability and access to markets and sources of funding;

  • External debt sustainability.

ACRA has lowered the country’s Indicative Credit Rating in view of the abovementioned modifiers. A Final Credit Rating of B+ has been assigned. There are no analytical adjustments or limitations that could adjust the Final Credit Rating. As such, the long-term foreign currency Final Credit Rating remains at B+.

POSSIBLE OUTLOOK OR RATING CHANGE FACTORS

A positive rating action may be prompted by:

  • Stable recovery of economic growth while maintaining macroeconomic stability.

  • Lower risk of contingent liabilities.

  • Improved public debt structure including reduced currency risk.

  • Strengthened external position via accumulation of international reserves.

  • Structural reforms aimed at increasing potential economic growth rates.

A negative rating action may be prompted by:

  • A significant decrease of the foreign trade balance.

  • Deterioration of the fiscal position.

  • Consistent and strong increase in the government’s liabilities to the NBRB.

  • Stronger pressure on international reserves.

  • Lower-than-expected economic growth rates.

  • Worse asset quality in the banking sector.

  • Significant outflow of deposits from the banking system.

ISSUE RATINGS

Government bonds of the Republic of Belarus, series 08 (ISIN RU000A1052U9), maturity date: April 2, 2026, issue volume: RUB 10 bln, under the international scale — B+, under the national scale for the Russian Federation: BBB-(RU).

Rationale. The bond issue represents senior unsecured debt of the Republic of Belarus. Therefore, the credit rating of the issue under the international scale is equal to the long-term foreign currency credit rating of Belarus under the international scale.

REGULATORY DISCLOSURE

The sovereign credit ratings have been assigned to the Republic of Belarus under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale. The credit rating of the series 08 (ISIN RU000A1052U9) issue of government bonds of the Republic of Belarus has been assigned under the international scale based on the Methodology for Assigning Credit Ratings to Financial Instruments under the International Scale. The credit rating of the series 08 (ISIN RU000A1052U9) issue of government bonds of the Republic of Belarus has been assigned under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation. The Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities was also applied to assign the credit ratings.

The sovereign credit ratings of the Republic of Belarus were published by ACRA for the first time on February 20, 2020. The credit ratings of the series 08 (ISIN RU000A1052U9) issue of government bonds of the Republic of Belarus under the international scale and the national scale for the Russian Federation were published by ACRA for the first time on April 6, 2023. The sovereign credit ratings and their outlooks, as well as the credit ratings of the series 08 (ISIN RU000A1052U9) issue of government bonds of the Republic of Belarus under the international scale and the national scale for the Russian Federation, are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.

The credit ratings were assigned based on information from publicly available sources and ACRA’s own databases. The credit ratings of the Republic of Belarus are unsolicited. The credit ratings of the series 08 (ISIN RU000A1052U9) issue of government bonds of the Republic of Belarus are solicited. The Government of the Republic of Belarus participated in the credit rating assignment.

Disclosure of deviations from approved methodologies. ACRA deviated from the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale when assigning the credit ratings of the Republic of Belarus. The compelled change of currency for payments on USD-denominated Eurobonds (ISIN: XS1634369067, XS1634369224, XS1760804184, XS2120091991, XS2120882183) is due to technical reasons driven by sanctions (foreign infrastructure organizations’ failure to transfer to bondholders the funds sent by the Republic of Belarus) and is not related to the creditworthiness of the Republic of Belarus. Therefore, ACRA does not view this as a default event.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to the Government of the Republic of Belarus. No conflicts of interest were discovered in the course of credit rating assignment.

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