Holdings as an example of pro-forma attitude to enterprises’ mergers

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April 22, 2016 18:21

Belarusian enterprises are actively merging into holdings. However, as a rule, these processes are not based on a business plan or aiming to achieve the maximum effect, rather they are declarative by nature and meant to fulfill authorities’ administrative tasks.

On November 8th, 2012 a meeting about the merger of the country’s diary processing enterprises was held.

In 2012, ‘holding business model’ started forming in Belarus. A number of holdings in various industries have been created. New enterprises joined the newly created holdings. In August 2012, there were 45 holdings in Belarus, which included 297 companies. Before the end of 2012, 16 more holdings are planned to be created in various industries. In addition, there are international merger projects, in particular, “Rosbelavto” holding.

The meeting demonstrated that mergers are often rooted in the local authorities’ desire to fulfill administrative orders pro-forma. Merger projects’ economy is not being calculated: there are no business plans; efficient enterprises are merged with ineffective, thus putting off distressed companies to those which have proven their efficiency with financial results.

One of the problems with holdings’ creation is de-facto repetition of the five-year plans practices in holdings. Enterprises, from being mobile structures, capable of quick response to market changes, become colossal structures with bureaucratized administrative core, often acting not because of the economic feasibility, but following orders and plans developed by the authorities. 

Thus, the state, by artificially enlarging its assets into holdings, loses the basic economic sense for the mergers, i.e. the enterprises’ efficiency. Businesses merge in holdings, not because it creates a synergy effect and boosts development of companies inside a holding, but solely for the formal consolidation purpose and the potential subsequent sale as one. It would be a lot more effective to allow businesses to decide when and how to merge, and on what principles.

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Growth in real wages may disrupt macroeconomic balance in Belarus
October 02, 2017 12:12
Фото: Дмитрий Брушко, TUT.BY

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.

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