Belarus is looking for investors in Europe
Belarus’ EBRD Director, First Deputy Prime Minister Vladimir Semashko said that during the past year bank’s operations in Belarus reached a record high EUR 194 million. During the EBRD Board Meeting Mr. Semashko requested to send members of the Board of Directors and Bank’s specialists to Belarus this summer to assess the country’s economic situation. Therefore, one can expect some political concessions to be made by Belarus to allow expanding of possibilities for bilateral cooperation in the future.
On 22nd - 24th May, Belarusian government delegation held a series of meetings and talks with representatives of the leading international investment firms in London and discussed current economic situation in Belarus, short-and medium-term objectives and how to use macroeconomic policy instruments.
The delegation included Deputy Finance Minister Vladimir Amarin, Deputy Economy Minister Dmitry Golukhov, Deputy Chairman of the National Bank Taras Nadolny, and Council of Ministers’ Deputy Chief of Staff Alexander Zaborovsky.
According to Mr. Amarin, one of the key challenges the Belarusian delegation addressed during the London meetings was “finding support for Belarusian Eurobonds listings and country’s international credit ratings”. The government is currently interested in placing new Eurobonds however the current market environment is unfavorable for Belarusian residents (see Figure 1).
Thus, the yield on sovereign Eurobonds is still high. According to Cbonds, on May 24th, 2012 effective yield of the first issue of Belarus Eurobonds maturing on August 3, 2015 was 11.25%. This profitability level for sovereign Eurobonds makes the new placement of Belarusian bonds unwise.
Currently investors assess Belarusian risks as the highest, after Argentina and Venezuela, among the developing countries - Eurobond market players. For comparison: on May 24th, the effective yield of Ukrainian Eurobonds maturing in 2021 was 10.07%, Hungarian maturing in 2020 - 7.96%, Russian maturing in 2030 - 4.22%, Polish, maturing in 2019 - 3.98%, South Korean maturing in 2019 - 3.03%.
From the viewpoint of reducing the yield on sovereign Eurobonds, and reducing the costs of new foreign borrowings, it would be more appropriate for Belarus to improve its political relations with the European Union, which would reduce political risks for investors in the Belarusian securities (bonds, stocks, etc.).
Currently, there are two outstanding Belarusian Eurobond issues: maturing on August 3, 2015 for USD 1 billion (coupon rate is 8.75%) and maturing on January 26, 2018 for USD 800 million (at 8.95%).
In fact, the first payment of coupon profit from the first issue of Belarusian Eurobonds was USD 43.75 million, made on February 3, 2011, the second payment on August 3, 2011 (also USD 43.75 million), third payment – on February 2, 2012 (USD 43.75 million). The first payment of coupon profit from the second issue Eurobonds was made on July 26, 2011 (USD 35.8 million), the second payment on January 25, 2012 (USD 35.8 million).
Therefore, currently Belarus has paid off to investors USD 202.9 for both Eurobond issues. Following payments are due on July 26, 2012 for the second Eurobond issue (USD 35.8 million), and on August 3, 2012 for the first Eurobond issue (USD 43.75 million).
Simultaneously, the Belarusian government is looking for opportunities to attract private foreign capital from European countries. In May a delegation of Estonian businessmen visited Minsk to discuss investment cooperation. In particular, Estonian investors were interested in building a 3-4 star hotel in Belarus and a woodworking plant.
The Estonian delegation included General Manager, Chairman of the Board at JSC “Infortar”, Chairman of the Supervisory Board at a shipping company “Tallink Group”, Chairman, Association of large entrepreneurs in Estonia Ain Hansshmidt, Marketing Director at SILPORT Andrey Birov, and Estonian Ambassador to Belarus Jaak Lensment. The delegation met with the Prime Minister Mikhail Myasnikovich and Economy Minister Nikolai Snopkov.
During talks, Estonia invited Belarus to open own cargo terminal at the Sillamae port, which is the largest private port in the European Union (50% of the shares are owned by the Estonian port SILMET Group and 50% by Russian entrepreneurs). Belarus is studying this proposal in order to increase goods’ exports via Estonia.
In 2011 Estonian investments in Belarus totaled USD 63.7 million, of which USD 29.3 million were direct investments. There are more than 100 companies with Estonian capital, and over 10 representative offices of Estonian companies registered in Belarus.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.