Economist: I Don't Rule Out the Likelihood of Default in Belarus

Factory workers may face delays and pay cuts.

Economist Uladzimir Kavalkin, head of the Cosht Urada project, told onliner.by what basis 2020 has laid in the economy and how it will affect the current year:

- All forecast indicators for 2020 have failed, including inflation, which was going to be at the level of no more than 5.5%. This is one of those parameters that directly depend on the actions of the National Bank. The GDP, trade turnover, export, and import of goods decreased. This happened both against the background of a slowdown in the global economy and the crisis associated with the coronavirus pandemic and for absolutely subjective reasons related to politics.

With regard to oil, it was absolutely obvious that Belarus had no other options for the supply of cheap oil, except from Russia. Here it was necessary to try to negotiate and not to arrange a trade war out of the blue.

The second important point is the absence of a lockdown in Belarus. Belarusian enterprises continued to produce goods at a time when the demand for goods in the world fell. As a result, stocks have grown. In fact, real money was turned into dead weight in the warehouses of Belarusian enterprises. On the one hand, this influenced the fact that the economy did not earn money, and on the other, the financial indicators of both the banking sector and enterprises deteriorated significantly.

Then a political crisis and a crisis of confidence in monetary policy were superimposed on all this, which were accompanied by massive outflows of deposits from banks and the expectation of devaluation. This entails a loss of confidence both in international markets and on the part of Western markets, as well as the impossibility of refinancing public debt in the West and an increase in dependence on the Russian Federation. That is, all those actions in the economic sphere that were taken in 2020 (if we are talking about actions related to the highest official in our country) were absolutely disastrous. Against this background, the National Bank tried to prevent a sharp financial collapse of the banking system. This was partly successful but at the cost of a decrease in liquidity and efficiency of the banking sector.

We are witnessing the state's archaization and a rollback to those very nineties, from which, in the opinion of the political authorities, we were supposed to get out. The increase in taxes will be accompanied by the fact that more and more businesses will go into the shadows and pay less taxes. This is absolutely understandable because the level of taxes in Belarus is high. If we take the ratio of collected taxes to GDP, it is close to the world's highest rates - for example, as in Sweden.

Economics tells us that there is a certain limit in raising taxes, after which businesses and people simply stop paying taxes and go into the shadows. This is what we saw in the nineties, and what, quite possibly, we will observe in the near future. Of course, this will increasingly worsen the business climate in the country, reduce investments, which will mean a reduction in the number of jobs. That is, real unemployment will grow. Everyone who can find work in the West will go to the West, those who cannot - in the east direction, in particular to Russia, to work. Those who stay in Belarus will earn far from the money they would like.

A possible financial crisis could be accompanied by a default. True, it may not be accompanied, simply expressing itself exclusively in devaluation against the background of a banking crisis, a crisis of non-payments and delinquencies. Such a crisis will finish off the economy much faster and more efficiently than a slow increase in taxes, an increase in fines, and the destruction of the investment climate.

What is the default for an average person? This is the probability of not receiving a salary. If some large state-owned enterprise places a large number of tenders and contracts and then does not pay, then the private business will not be able to pay salaries to its employees. Such a crisis of non-payments will spread throughout the economy. We are talking about the micro-level. If we take the macro-level, the entire country's level, then for 2021, we are planning a huge budget deficit and rather large payments on the state debt. Today it is not clear how to refinance this national debt. Taking these funds from the economy will be extremely problematic since this will mean a fall in the ruble exchange rate and the population's living standards. And it will be impossible to refinance in Western markets. Only Russia or countries such as China or Azerbaijan remain.

If borrowing does not work, then, on the one hand, it will be necessary to reduce budget expenditures, and on the other, to spend gold and foreign exchange reserves, which were already decreasing this year, despite the placement of Eurobonds for $ 1.5 billion and an additional loan of $ 1 billion from Russia. In the absence of the opportunity to refinance, it will be necessary to spend gold and foreign exchange reserves more quickly; respectively, this will put pressure on the Belarusian ruble, which in such conditions will lose in value and devalue. All of this will affect the state of the economy and the well-being of people.

Whether it will be a sharp jump in the exchange rate of the Belarusian ruble depends on the cash gap, that is, on the availability of money when it will be necessary to pay off the debts. If an opportunity is found to refinance them, the situation will develop slowly. If, relatively speaking, it will be necessary to pay the debts, but there is no money and the gold and foreign exchange reserves remain at a low level, there may be a jump. As an extreme option, I do not exclude the likelihood of default - in other words, we will stop paying on loans. State organizations that issued the loan will make claims to us and demand collection of loans through debt restructuring. That is, partly through the shares of state-owned enterprises, this money will have to be given at the expense of some state property. A default will also mean the depreciation of the Belarusian currency, which can cause a very strong devaluation and a drop in the population's standard of living.