Analytical commentary

The mass protests that began in Belarus following the country’s presidential elections in August 2020 have led to a significant revaluation of the premium for Belarusian sovereign risk by investors. This August, country premiums for external government bonds either reached the previous highs seen in March 2020 caused by the global increase in risks amid the coronavirus pandemic or exceeded them (Fig. 1–2).

See the press release “ACRA affirms LT B+ to Belarus, assigning the status “Rating under revision: negative” from August 7, 2020.

A growth in premiums was observed for all of the government’s external bonds. The country risk premium for two-year Russian ruble-denominated bonds placed in the Russian market more than doubled (Fig. 2), while for US dollar-denominated Eurobonds that mature in 2027 it increased by around 1.5x (Fig. 1). Investors are demanding a higher premium for Eurobonds1 with shorter maturities and are thereby reacting to increased uncertainty with regard to the Belarusian government’s ability to repay its debts on time and in full (compared to longer-term securities).

1 Eurobonds are Belarusian government bonds issued in external markets and denominated in foreign currency.

Sources: Reuters, ACRA

ACRA notes that this May, Belarus was able to place RUB-denominated bonds with a lower coupon (RUB 10 bln worth of bonds were placed on the Moscow Exchange for five years with an 8.5% coupon) compared to last year, when a placement was made in August 2019 for three years at 8.65%. However, this is largely due to the fall in RUB interest rates.

This situation — the considerable growth in risk premiums for government
bonds — can potentially be deemed as a possible restriction of the Belarusian government’s access to foreign markets. In the event of new market sovereign borrowings, investors may request a higher premium, which would lead to growth in costs of debt servicing and consequently, reduce the room to maneuver in budget expenditures. This would have a negative impact on the debt load and may limit opportunities for market refinancing.

In the current conditions, it is important to assess the government’s ability to repay its debt solely using its own assets and without resorting to market funding, in other words, we need to understand the ratio of liabilities to foreign currency assets. Belarusian sovereign debt is primarily (more than 95% as of April 1, 2020) denominated in foreign currency. As of August 1, the government must make payments on domestic and external debt to the amount of around USD 1.5 bln (USD 1.1 bln for the principal and USD 0.4 bln for servicing it, Fig. 3) by the end of this year. It is noteworthy that net debt payments amount to less than USD 1 bln, taking into account USD 300 mln in planned refinancing in the domestic market.

Sources: Ministry of Finance of the Republic of Belarus, NBRB, ACRA

The abovementioned debt is entirely covered by the accumulated FX liquidity of the Ministry of Finance of the Republic of Belarus. Foreign currency cash is a part of the international reserves of the National Bank of the Republic of Belarus (NBRB) and amounted to USD 4.9 bln as of August 1. Consequently, this year the risks of Belarus failing to pay its public debt are low. In the future, however, in ACRA’s opinion, the possibility of this happening may grow considerably due to the following factors.

Firstly, the sovereign’s limited access to external markets complicates the process of refinancing external debt for companies and banks. According to ACRA’s assessment, the share of external debt in the total debt of companies and banks amounts to around 30% and 20%, respectively, and their overall external debt due in 2020 (principal and interest) stood at around USD 9 bln as of July 1.

Secondly, the fall in external demand, which reduced the revenues of export-oriented companies, and also the strikes and protests in the country, are having an adverse effect on the resources available to banks which are necessary for them to independently fulfil their obligations. Taking into account the limited opportunities to refinance external debt, the possibility that the government may end up having to shoulder the debt of a number of companies and banks cannot be ruled out.

Much will depend on the financial self-sufficiency of such companies (some of which already experienced a worsening in their position in the first quarter of the year due to the oil disputes with Russia), and the stability of the banking sector. It is hard to judge the need for international reserves in the current situation. According to ACRA’s assessment, the NBRB’s net international reserves (around USD 3.7 bln as of July 1, 2020) can only partially (approximately 45%) cover the external debt payments of companies and banks until the end of this year. At the same time, companies possess their own foreign currency assets, which will be used first of all to repay debts, while reserves will most likely be only be employed in case of emergency.

Net international reserves of the NBRB are international reserves minus the foreign currency balances of the budget.

Thirdly, the NBRB’s interventions to support the exchange rate of the national currency may lead to a major decline in reserves by the end of the year, which will limit the possibility of using them to repay foreign currency debt. In August 2020, international reserves declined by USD 1.4 bln compared to the July indicator and amounted to USD 7.5 bln. The NBRB does not disclose the volume of its interventions, however, it can be assumed that it was the main reason why reserves fell (the volume of foreign currency debt payments of the government and the NBRB totaled USD 351.7 mln in August).

A spike in demand for foreign currency among the population is also putting pressure on reserves. If confidence in the Belarusian ruble falls and as a result, individuals decide to withdraw foreign currency from the banking system en masse, the NBRB may have to use reserves to provide foreign currency liquidity to banks. Declining foreign currency revenues of non-financial companies (brought on by weak external demand) may become an additional factor in the banking sector’s falling foreign currency liquidity, and this is fraught with potential delays in payments on these companies’ foreign currency obligations. However, ACRA notes that a number of foreign-owned banks (primarily Russian) operate in Belarus, the parents banks of which can provide liquidity support, and this will reduce possible pressure on the NBRB’s international reserves.

According to the Republic of Belarus Monetary Policy Guidelines for 2020, the NBRB has set a target for the minimum value of international reserve assets at USD 7.3 bln on January 1, 2021. ACRA notes that the Belarusian economy adapting to shocks through reduced imports will act as a mitigating factor capable of maintaining reserves and foreign currency liquidity. Although this will help lower the pressure on the exchange rate of the national currency, in ACRA’s opinion, it is highly likely that reserves will be below the boundary set by the NBRB by the end of this year.

Despite all the above-mentioned risks, ACRA notes the presence of a factor that will contribute to retaining reserves and maintaining the stability of the country’s external and fiscal position. This is the structure of Belarusian public debt, the majority of which is made up of interstate loans and loans from international organizations (Fig. 4). The latter provides opportunities for refinancing even when capital markets are closed.

For example, on September 14 it was announced that Russia will provide a USD 1.5 bln loan to Belarus, part of which will be used to refinance existing debts. Russia is the biggest lender to Belarus, with public debt to Russia amounting to around USD 7.9 bln (12–13% of GDP as of April 1, 2020). Belarus is also in talks with China, which it currently owes around USD 3.3 bln (approximately 5–6% of GDP), on securing two new loans.

Sources: Ministry of Finance of the Republic of Belarus, ACRA

The Belarusian government can also receive credit facilities to a total of EUR 215 mln from international organizations. In particular, the management of the European Investment Bank (EIB) recently approved the provision of a EUR 15 mln loan to support the country’s healthcare system, and the government has an agreement on preparing a joint healthcare project worth EUR 200 mln with this development bank.

The Belarusian government is actively working on raising external financing to support the financial stability of the real sector of the economy. The size of these resources may amount to around EUR 519 mln. The European Bank for Reconstruction and Development (EBRD) has approved EUR 200 mln in loans to corporate and private sector entities in Belarus. The Development Bank of the Republic of Belarus has an agreement with the World Bank and the Asian Infrastructure Investment Bank (AIIB) on preparing a project to render financial support to small and medium-sized enterprises, with the World Bank and the AIIB contributing EUR 100 mln each. In addition, the EIB is looking at the possibility of providing Belarusian banks with EUR 190 mln in credit facilities, and Belarusian partner banks are continuing to work with the International Finance Corporation.

All these measures can help support the liquidity of the country’s banking sector.

At the same time, ACRA cannot rule out growing political tensions associated with the recent presidential elections and the change in government leading to problems in securing financing from official creditors.

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Mikhail Nikolaev
Director, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 179
Vasilisa Baranova
Senior Analyst, Sovereign Ratings and Macroeconomic Analysis Group
+7 (495) 139 04 80, ext. 136
Ilona Dmitrieva
Managing Director - Head of the Sovereign Ratings and Macroeconomic Analysis Group
+7 (495) 139 04 80, ext. 124
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