Belarus, Europe's newest patient seeks urgent cure

27th March 2011, Comments 0 comments

A gaping current account deficit and depleted reserves have turned Belarus into Europe's latest economic casualty, raising fears the ex-Soviet state is on the verge of a devaluation or even default.

Economists have sounded alarm over the government's cheap state loans and salary hikes for civil servants -- a relentless dash for growth that comes amid an opposition crackdown after unprecedented election protests in December.

The country is now running one of the widest current account deficits in the world at 16 percent of Gross Domestic Product and worries intensified earlier this month when Standard & Poor's downgraded its debt deep into junk status.

The short-term solution -- aside from devaluation or default that would have unpredictable consequences for President Alexander Lukashenko's authoritarian regime -- is likely to be a big bailout from its neighbour Russia.

Belarussians have been besieging exchange booths in Minsk to buy dollars as they prepare for a devaluation of the Belarussian ruble while yields on the country's 2015 dollar bonds have soared to record highs.

Belarus' foreign reserves shrank $1.4 billion to $5.5 billion in the first two months of the year alone as the government tried to cover the current account deficit.

"The market has been gripped with fears of a possible devaluation and even a sovereign default in Belarus," Bank of America Merrill Lynch economist Ivan Tchkarov said.

"Fears have been fuelled by declining foreign reserves as Belarus struggles to contain a widening current account deficit," he wrote in a note to clients.

The IMF issued a scathing assessment of the government's economic management after its latest consultation mission this month, saying its policies were "unsustainable" and urging "difficult decisions."

Belarus had a $3.5 billion standby credit agreement with the IMF from January 2009 to help it though the economic crisis but the last tranche was paid in March 2010, freeing Minsk from IMF controls on its fiscal policy.

With Belarus unlikely to privatise its prize asset Belaruskali, the biggest potash producer in the former USSR, or want the strings of a new credit line from the IMF, a bailout from Russia remains its best get-out.

While the West condemned the arrest of opposition leaders who led protests in Minsk on the night of Lukashenko's ceremonial re-election on December 19, Russia has yet to break with the man dubbed "Europe's last dictator."

Russian Finance Minister Alexei Kudrin said this month Belarus had asked Russia for a $1.0 billion loan and a $2.0 billion credit from a Moscow-led regional economic grouping. Russia was considering the request, he said.

But even if this injection materialises and staves off default, economists warn that the problems of the country of 10 million are now so dire the loan from Russia will not be enough on its own.

"Even if the scenario of Belarus obtaining a loan from Russia were to transpire, it will only provide a temporary respite," said Tchkarov.

"The market will need stronger reassurance that the key underlying vulnerability in the economy, the current account deficit, is being addressed in earnest."

For economist Sanna Kurronen at Danske Bank, a loan from Russia "would only help in the immediate term" as the current account is set to stay deep in deficit in 2011.

"Thus the situation seems to be escalating rapidly. We see no other reasonable alternative but for a devaluation against the currency basket" of the dollar, euro and Russian ruble.

Tatiana Orlova, economist at Nomura, said "although external assistance and currency controls may stave off devaluation for a few weeks or months we think that given the severity of the imbalances, the authorities will still need to devalue the currency."

In the current political climate after the December elections, the authorities were also highly unlikely to follow the IMF's advice and reverse the public sector wage increases and cut subsidies.

"If the authorities have learned anything from the situation in the Middle East, they will probably try to avoid any moves that may increase the population's discontent with the regime," Orlova said.

© 2011 AFP

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