GDP slowdown adjustment will lead to increased imports and problems on Belarusian currency market

May 26, 2016 15:42

Compared with 2015, GDP in 2016 slowed down, however it somewhatimproved in April 2016 compared with early 2016 (the backlog shrank from 4.3% to 3%). Better dynamics was due to the increase in production of machine-building enterprises, but only some products have improved their sales on foreign markets. Inflated domestic demand for engineering products is likely to increase imports of raw materials, thereby increasing the pressure on the Belarusian rouble in the view of low gold reserves levels.

According to the National Statistics Committee, in January-April 2016 Belarus’ GDP declined by 3%. There is a gradual reduction in the backlog of indicators on the 2015 results. The January decline in GDP was 4.3%. The main reasons for GDP decline in 2016 include reduced production volumes in the industry, frozen investment programmes at the majority of enterprises and budget cuts on state programmes, and reduced wholesale trade due to falling sales of potash on foreign markets. Only the agriculture, food processing, pharmaceuticals, and wood processing have demonstrated some improvements as compared with 2015.

By April 2016, GDP has somewhat improved due to the boost in industrial production in mechanical engineering. In April 2016, enterprises increased the production of tractors by 31%, trucks by 57%, and dump trucks by 2.9 times as compared with April 2015. There was demand for haul trucks on the Russian and Kazakh markets, more than 19 units were sold outside the CIS. The situation is different on the tractor and truck market. Russia is the main export market for trucks and tractors. In Q1 2016, the sales of trucks and tractors in Russia decreased by 40%. MTZ was able to partially compensate for the losses from reduced exports to Russia by increasing exports to Ukraine by 3.7 times, which was not enough to reach the overall export volume of 2015. The production could have increased due to the increased demand for agricultural equipment on the domestic market.

In the past, in the time of a crisis, the Belarusian government attempted to achieve positive economic growth by stimulating domestic demand. After the global crisis in 2009, the state adopted a programme to reequip villages, which had increased industrial production volumes in mechanical engineering. The main problem is the engineering’s high dependence on imported raw materials. More than 30% of raw materials used for to manufacture products are imported. In addition, some materials purchased on the domestic market will have an imported component. Amid a decline in sales on foreign engineering markets, growth in imports of metal supplies, spare parts, components and assemblies would lead to an increased demand for foreign currency. Given the low levels of international reserves, the pressure on the currency market will step up and have a negative effect on the Belarusian rouble exchange rate. The government is nevertheless is likely to take this risk in order to demonstrate that the country is coming out of a recession, and will wait for the oil prices to grow to pay for the additional imports of raw materials for engineering.

The Belarusian government is likely to boost economic growth by increasing production by domestic engineering companies. Additional production volumes will target the domestic market, while the increased demand for foreign currency to buy imported raw materials would be compensated with higher prices for oil and petrochemical products on foreign markets.