BelarusBusiness outlook 2015-18

Quarterly update – July 2015by Dr Daniel Thorniley

Contents

• Executive summary• Update on Russia-Ukraine crisis and impact on

Belarus• Features of business• Business Outlook • Economic outlook • Forecast table

Executive summary (1)

• Belarus, like other CIS markets, has been contaminated by the Russian-Ukrainian crisis• The economy has been double-hit with the fall in oil prices as much Belarus export

revenue comes from oil products• The commercial links with the Russian economy are still very close• As a consequence the Belarus rouble slumped at the turn of 2014/2015 and collapsed

about 25% and has sunk further since then• Temporary emergency measures were introduced and then later rescinded • The base interest rate was jacked up to 25% on 8 January and rates will stay high as long

as an inflationary threat remains in place• After some relative stability the Belarus rouble started to fall again in May and it was at a

level we predicted in our last quarterly report • The economy was hardly buoyant in 2012-2014 and negative drivers ensure a mild

recession in 2015 which is our prediction with GDP at -1.6% with some downside risk • The World Bank forecasts -3.5% this year but this looks like a worst case but is not

impossible

Executive summary (2)

• We think enough Russian and Chinese financial support ought to prevent this worst case

• But we underline that risks are to the downside in our own estimates• Executives, as in other CIS markets, report worsening trends with downtrading, as real

wages have decelerated, and with receivables as local customers come under more pressure

• Neither feature is yet at crisis levels though• It seems the country is/was unable to avoid the Russian/Ukrainian contamination

which has filtered through via the exchange rate • Note: quite a few of the major Belarus economic indicators have swung sharply from

highs and lows within recent calendar years and so the average figures cited here do not always reflect what was roller-coaster annual calendar period

• For example retail sales year-on-year in January 2011 were + 22% and zero in November 2011 while in autumn 2014 retail sales were rising 5% but then zero in December of the same year. Other indicators such as real wages perform similarly

Executive summary (3)

• And the industrial output roller-coaster is in full swing: posting negative numbers in 2013, positive by 2% in 2014 but sharply down this year averaging -7%

• After the 25-30% devaluation at the turn of the year, companies are faced with a similar situation as in Russia and Azerbaijan and less so than in Ukraine

• The currency slump was exacerbated by previous cuts to interest rates in 2011-13 which were designed to support consumer credit

• The market was often a mixed one or a roller-coaster one for many western companies and remains so

• With recessions in Russia and Ukraine, executives had turned to other CIS markets for growth options and until the start of this year, Belarus offered some potential for small compensation

• But even here the market is getting tough and this is reflected in the Survey results below

• As with other markets executives predict some business pick-up in 2016

Executive summary (4)

• Only 15% of companies are now forecasting rouble sales above 10% this year and if the currency stays down by 15-25%, then the large majority of companies will see declining FX sales in the market this year

• Currently 36% of executives forecast negative sales this year with another 17% expecting flat sales

• On the upside Belarus will continue to benefit from some “transit trade” as exporters look to avoid Russian sanctions, while it will keep receiving cheap oil from Russia as it tries to “keep Belarus on side”. But the uncertainty around sanctions together with falling demand from Russia and Ukraine will have an equally if not larger impact on trade and the currency in 2015

• But so far this year such transit trade has not compensated for the overall deceleration• Companies will plan for increased volatility and uncertainty• Executives are talking about more cash management and taking more care and

attention with receivables

Executive summary (5)

• 2014 benefitted from a better harvest, reasonable exports and still positive (but softening) retail growth and an industrial bounce-back in the early autumn

• However, the government has now stopped its usual policy of hiking wages in times of crises and with inflation still around 17%, real wages are actually now falling

• After finishing quite well last year at 2% growth, industrial output this year will be minus -7% while investment will be flat at best after a fall of -8% last year

• Risks to investment are clearly to the downside and also looks set to fall this year by -7%• The economy may benefit from some import substitution which could appear more this

year as the Belarus rouble weakens further• But export and imports both crashed at the start of 2015 with exports having slowed

already for several months but in spring 2015 we note some recovery• Inflation, despite the recent currency fall, stabilised this spring and actually decelerated

to 14% in May; we now expect inflation to average 16% in 2015 and again next year

Update on Russia-Ukraine crisis and impact on Belarus (1)

• The main impact is now via the exchange rate: the Belarus rouble is playing inevitable catch-up with the collapsed Russian rouble and general weak economic outlook surrounding Belarus

• The fall in the Belarus rouble looked more inevitable after the 25% decline of the Azeri manat

• The Russia-Ukraine crisis looks likely to become a messy frozen conflict which will continue to impact business in Belarus in 2015 and the after-effects will still be felt in 2016

• However we continue to see low risk of political contagion (about 11% of the population identify themselves as Russian). Belarus is still trying to play the neutral card, for example, hosting the recent ceasefire talks between Moscow and Kiev

• The next presidential elections are scheduled for November 2015 but we are unlikely to see change

Update on Russia-Ukraine crisis and impact on Belarus (2)

• The crisis ought to benefit transit trade as companies try to avoid Russian sanctions, as well as better energy prices from Russia, which remains keen to keep Belarus “on side”

• But there will still be quite a bit of downside in the form of weak exports to these two important markets (Russia and the Eurozone) compounding already weak economic fundamentals (currency, foreign debt, inflation, fiscal strain, falling real wages – see later)

• But just as the Russian currency and economy may be showing signs of stabilisation, so too the Eurozone displays some signs of improvement which could in turn buttress Belarus trade and exports: so while the East and West did look very weak just 3 months ago, there are signs of at least marginal support now

Features of business (1)

• For corporates operating in Belarus, any bounce-back from the 2011-12 currency crisis has now faded and companies see Belarus very much as a single-digit growth market

• As we predicted 6 months ago, those companies who planned double-digit growth this year will be more challenged to achieve those numbers now

• It is a market where executives are not focusing much corporate investment in the way of resources owing to continued concerns about long-term viability

• Yes, companies have looked at alternatives to the Russian market but recent trends across the CIS and in Belarus show that there are no easy compensations for a slower Russia

• Russia still accounts for 75%-85% of sales revenues within the CIS for most companies and Belarus usually only accounts for1% to 1.5% while Kazakhstan represents 4-9% of CIS business

• Some companies may be looking to increase their presence while others will be consolidating and pulling back. Some companies will try to benefit from leverage in light of developments within the Customs Union and the Eurasian Economic Union

Features of business (2)

• It could be that companies are downsizing their distribution activities or changing the numbers of distributors owing to the Customs Union, while equally some may be trying to upscale as an alternative to Russia

• In general though this is a mixed market where some companies will be pulling back as others investigate openings

• Due to its market size (9.5m), Belarus does not rank as a priority for most multinational companies (but surprisingly (?) about 8% of MNCs see it is a mid-term priority among CEE markets, according to our latest, June 2015 Survey)

• Fewer companies (10%) than one year ago (20%) are now reviewing their route-to-market which suggests that companies addressed this mostly earlier last year

• The amount of companies reporting downtrading as a feature has leapt in the last 6 months from (18%) of respondents to 45% in June which ranks Belarus as No 3 in this category behind only Russia and Ukraine

Features of business (3)

• Only about 3% of firms are planning to hire, mainly for local rep offices or small subsidiaries – few are looking at larger investments owing to economic uncertainty

• As with Kazakhstan and other CIS markets, the situation with receivables has deteriorated with now 34% of firms referring to this as an issue compared with only 14% some 6 months ago. There is some increasing risk that payments and cash management will become marginally more challenging and it is something to monitor without yet being a serious threat

Business outlook (1)

• As the MD of one of the world’s top-10 consumer goods companies commented last quarter and his remarks remain highly relevant:

“It’s been a mixed market for us in recent years, sometimes up 8-15% and then low-singles or flat on a weakening currency. But the Russian crisis has started to impact and we sense this in consumer confidence and spending patterns. I do not predict a major crash this year but we have had to reforecast for a negative trend versus our budget which was set last autumn. But as you know, in recent days the strong Russian rouble may turn some of this around but how quickly or if at all are still questions. All our CIS markets are now uncertain and that includes Belarus. We have started to examine more some of the smaller central Asian markets through distributors”

• The local MD of a European conglomerate reported last week that:“Our CIS management in Moscow and our European boss have looked at Belarus as “a small little earner to compensate a tiny bit for Russia and Ukraine. We have been able to raise sales in the last year by 10% but we were lucky in that several local customers had good access to finances. Since the start of the year with increased currency volatility, sales growth is down to 3-4% but if we get some stability, I think we can grow 7-8% this year on a small volume with ok profits”.

Business outlook (2)

• We conduct two Surveys of the Belarus market: one which compares another 23 CEE and CIS markets and the charts and figures below refer to the most recent June 2015 Survey

• We underline that these figure refer to the rate of sales growth and not the volume of business

• For 2015 fully 36% predict negative sales growth which puts the market towards the bottom of our Survey table at No 19

• Another 17% look to flat sales this year while 30% estimate single digit sales• Some 17% expect to obtain double digit growth this year • The outlook for overall sales improves quite a bit in corporate budgets for 2016 and

Belarus rises to No 8 (from 19) in our rankings• Next year those predicting negative sales fall to just 7% with 20% estimating flat sales • As in other markets there is a solid clustering in single digits next year with 54% of

companies planning for such numbers and almost 20% forecast low-double digit recovery

• The rate of Belarus rouble depreciation will define whether these results turn out to be not so bad in FX terms or very weak ; given the Belarus rouble is down about 50% on one year ago and 10% on January versus the US dollar, then most FX results will be either weak or possibly worse if any further deterioration occurs

Business outlook (3)

• Given that budgets were set in September/October for 2015, most companies will be reforecasting their targets downwards

• Companies are also cautious about profit growth in Belarus owing to high inflation as well as a typically small level of resources dedicated to the mark

• Consumer goods companies are adapting to a changing and volatile market and this is reflected in wide spread of forecast for this year: some 27% of companies forecast negative sales and with falls of more than 10%

• Almost 20% predict flat sales and 28% forecast single digit sales • But another 25% of firms budget for double digit sales this year • Such figures rank Belarus No 12 (mid-table) in the region for the rate of sales’ growth in

B2C• Given weaker wages, a mild recession, falling confidence and downtrading, we think the

targets above for 2015 could be a stretch, especially for those companies aiming for double-digit growth and we did highlight this risk in our last quarterly report

• Next year there is more clustering “in the middle”: 13% plan for negative sales but less deep than in 2015; fully 38% predict flat sales and almost have aim for single digits spread evenly over low and high-single digits

• SO CP companies are not planning for any solid bounce-back next year, just steady consolidation

Business outlook (4)

• As usual, the B2B sector is expected to perform weakly as financing remains an issue and cross border trade softens and the currency could come under more pressure

• Fully 42% of firms in this sector predict negative growth this year, one fight predict flat sales with the remaining 28% looking for single digit sales

• Some companies, as in Ukraine, report that some local companies do have access to “grey funds” or some off-shore FX funds or are generating cash though exports and can finance purchases from their cash-flow, but this is a minority clearly

• Most companies trade eastwards and denominate their business in a shrinking (Russian) rouble and such companies may soon be benefitting from the Russian rouble revival

• In 2016 there is some consolidation in this sector with 30% planning flat sales and almost 50% aiming for single digits with few forecasting negative of double digits

• For pharmaceutical and health companies sales are spread widely and wildly (!): 45% forecast negative trends, 20% see flat sales, 18% look to low-single digits and 17% predict high double-digit sales

• Next year, once again there is clustering around flat sales (19%) and with fully 63% budgeting for single digit growth

• Much will depend on whether firms are selling to government or “across-the-counter” retail and the latter tends to perform better these days across markets as governments

tighten the purse strings

BelarusLatest forecasts: revenue and profit results by sector, 2015

From our June 2015 survey

BelarusLatest forecasts: revenue and profit results by sector, 2016

From our June 2015 survey

Economic outlook (1)GDP and growth drivers

• Opening note: quite few of the major Belarus economic indicators have swung sharply within recent calendar years and so the average figures cited here do not always reflect what may have been a roller-coaster calendar year

• As we predicted in our last two quarterly reports, the risks for the GDP outlook this year were all to the downside and that has taking place

• The economy stuttered along at 1.4% growth in 2014, after a weak number in 2013 (0.9%)

• The first quarter 2015 results reflects this with the quarter down on this 2014 equivalent by minus -2.1% and was mostly due to weak industrial output at -7.3% which was not compensated by increases in agriculture, retail sales and construction

• But even retail sales started to soften further in the second quarter (see below) • Given regional pressures and a slow Eurozone (until start of 2015), the 2014 figures

were not bad but with the depreciating currency and mixed news out of Russia, we expect a small recession this year of minus -1.6% (close to the consensus view) and with some possible downside risk to -2.5% (while the World Bank predicts – 3.5%)

Economic outlook (2)investment, industry and trade

• GDP is then expected to average around 2% or slightly higher in subsequent years with some chance of a stronger bounce-back to 3%+ if the Russian economy rallies better than expected

• The on-going recovery in the Eurozone will allow for some trade switching to that market helped by the weaker rouble and improving relations with the West thanks to acting as an intermediary in the Minsk talks)

• But the industrial output roller-coaster is in full swing: posting negative numbers in 2013, positive by 2% in 2014 but sharply down this year averaging -7%

• Industrial output was as bad as -10.3% in march and still -8.7% in May• We predict an average fall this year of -7% with a slow recovery next year • These trends underline the tough environment for B2B firms operating in Belarus• Exports averaged $3.6bn per month in 2012-13 and averaged $3.2bn monthly in most

of 2014 but on falling scale to $2.7bn in December. But the year-end turmoil took its toll: exports crashed to just $2.3bn average in the earlier months but have rallied a bit to $2.5bn in May

Economic outlook (3)investment, industry and trade

• Imports saw a similar picture at an average last year of $3.3bn per month and this was maintained to the end of the year but then imports too slumped by 50% through the first half of 2015

• Repeated devaluations in recent years have prompted large agricultural and industrial exporters to price in US dollars and the rising dollar will help them this year as will lower energy prices

• We will see in the coming months whether traders can bounce back quickly from the devaluation effects and the news in the first 5 months of the year is mixed with some mild positives

• Belarussian firms (75-80% of which are still in state ownership) remain unproductive and Belarus is still reliant on cheap Russian oil and loans

• On-going Russian loans form part of the deal struck when Russia bailed out Belarus from its currency crisis in 2011 – in return Belarus is supposed to sell a number of state assets to Russia, but many of these sales are now in doubt amid worries about the impact of sanctions on any businesses with Russian ties

Economic outlook (4)investment, industry and trade

• Construction activity was still negative through most of 2014 at -6% but at the turn of the year construction and investment figures surged according to official data as new housing construction rose by more than 20% and this is still in double figures in May

• This also contradicts the sharp downward trend seen in fixed investment: this fell by -8% last year and after an upward spurt in January, fixed investment is now running at -10% in May

• Productivity, though low, has also improved thanks to the weaker currency and less rampant wage growth, and Belarus is starting to attract some investment interest that may perhaps have gone to Russia (particularly from China)

• But we still think investment will disappoint this year at an average of -7% before recovering by 1.8% in 2016

Economic outlook (5)household consumption and wages

• Nominal wages rose 40% (16% in real terms) in 2013 but during 2014 nominal wages only matched the 18% inflation level which entailed that real wages were exactly zero

• The government has responded to the current crisis with a together fiscals response and thus public wages are no longer matching inflation and local companies are following the CIS trend of paying average wages below inflation

• Thus each month this year real wages have been negative by -4.5% and we expect the average for the year to be close to -4.0%, one of the very worst figures in recent years

• This is certainly a major factor why downtrading is increasing and we note that consumer product companies need to manage expectations downwards and look at more value products

• Retail sales were surging at the start of 2014 averaging 12.5% growth in the first quarter of that year but had slumped to just 0.4% in December averaging 8% for the whole year.

• At the start of 2015 retail sales held up at 4.7% in January but then slowed to 1.2% in February and since then have trending weak at -0.4% in April and back up to +1.0% in May.

• Retail sales could slow to about an average of 1% growth this year before recovering to 2.5% next year and getting close to 3% growth in subsequent years

• Officially unemployment is artificially low at 1-2% as the government and public sector companies hold on to employees

• But real unemployment is probably creeping up against this weakening backdrop

Economic outlook (6)budget and external accounts

• Government spending was quite tight last year but we expect pre-election spending this year ahead of October presidential elections and we could see the budget deficit increase from +0.1% in 2014 to -3.4% this year

• Russia has agreed to relieve Belarus of proposed oil duties from 2015, and it will doubtless keep providing cheap oil in return for political support or at least neutrality vis a vis Ukraine and the EU

• Export and import weakness will probably balance out this year but with imports down more than exports and thus we see the trade balance improving marginally along with the current account deficit decreasing from -8.0% last year to about -3.7% this year

• We do not expect the need or desire for any IMF funding and a $1bn Eurobond is likely to be postponed until 2016

• Russia will disburse another $760mn this year from existing facilities and to roll over existing debt by approving another $3bn credit; China has also approved up to $3.5bn of credits linked to industrial, mining and infrastructure projects

• Government debt is rising on the back of Russia financing – it is now about 39% of GDP and Belarus spends 10% of GDP servicing its debts

• Such assistance is needed when FX reserves shrank to a mere $2.86bn in march which was just one month import coverage

Inflation outlook

• After rising just over 18% in both 2013 and 2014, inflation ought to average 16% this year level which is the consensus outlook

• Inflation averaged 16% in the first quarter 2015 and then dipped to 13.7% in May• Food and transport price increases are currently ranging between 15-18% as an

annualised average while utility prices are at a higher end of +26%• This moderation/stabilisation in inflation comes despite the currency collapse at the

start of the year followed by a further dip this late spring• This control over inflation is due to some government fiscal tightening and weaker

demand, softer wages and downtrading in the market as well as lower energy prices• Nearly all will depend on the strength/weakness of the currency and intended

government spending in 2015 (an election year)• Bank credits were rising at 7% last year but in this more depressed climate we except

new bank credit emission to stay close to zero or even dip into negative territory • Looking forward over the next 2-3 years we see some downside and upside risks (no

further energy spike but still soft domestic demand) with inflation averaging again 16% in 2016 and at 15% in 2017

Currency outlook (1)

• During last December and January the Belarus rouble started to fall and by April had slumped about 25-28% versus the US dollar

• In mid-December the National Bank introduced emergency measures including a 30% tax on foreign currency purchases and temporarily banned “over the counter” foreign currency purchases. However, these measures were then rescinded, a few weeks later

• The key refinancing rate was bumped up (for the first time since 2011) to 25% with immediate effect and this is likely to stay at his level until the rouble and inflation start to show better trends

• In spring the rouble again came under pressure and shrank from 14,000 in mid-May to 15.380 in mid-July

• It is now in the average range for this year which we predicted some 4-6 months ago• Presuming that there is stabilisation in eastern Ukraine and that the Russian rouble

stabilises close to current levels, then the Belarus rouble ought to mange some relative stability for the rest of this year, especially with tight fiscal policy and with inflation under control

• The currency could then again come under downward pressure, along with most other emerging markets, currencies when the US federal reserve raise interest rates towards the end of his year

Currency outlook (2)

• For reference the National bank of Belarus has posted the following record of the exchange rate versus the US dollar and Euro which shows the extent of the recent currency collapse (in thousand roubles)

US dollar Euro1 December 2014 10.81

13.478 January 2015 12.80

15.3013 January 2015 14.00

16.508 February 2015 15.30

17.1031 May 2015 14.85

16.3314 July 2015 15.38

16.90

• We do presume that at whatever rate the Belarus settles this year, it will then depreciate at an annual average rate of about 3-6% in subsequent years again presuming stabilisation in Russia and Ukraine

• The Belarus rouble has already achieved some degree of competitiveness but further steady depreciations at these levels would probably benefit the growth outlook without damaging inflation too much

Economic forecast table 2012 - 2018

2012 2013 2014 2015 2016 2017 2018GDP 1.5 0.9 1.6 -1.6 1.0 1.9 2.6Fixed investment -9.8 7.5 -8.0 -7.0 2.8 3.4 4.2Industrial output 5.9 -6.0 4.0 -7.0 1.8 3.1 3.3Household spending 7.8 14.3 2.0 -0.5 2.0 2.5 2.9Government spending -1.0 -2.5 -0.5 2.6 0.5 1.0 1.5Real wages 22.0 15.8 0.0 -4.0 1.3 2.4 2.6Retail sales 14.0 18.2 8.0 1.0 2.5 2.9 3.2Consumer prices (average) 59.2 18.3 18.1 16.0 16.0 15.0 12.8Budget balance (% GDP) 0.5 0.2 -0.5 -3.4 -2.8 -1.8 -1.7Current account (% GDP) -6.1 -10.2 -8.0 -3.7 -3.5 -4.2 -4.1Rouble/euro (average)* 10,762 11,834 13,800 17.200 17,400 18,000 18,700Rouble/dollar (average)* 8,336 8,971 10,300 15,700 16.400 17.200 17,900

Note: Real annual % change unless stated

*base-case, see our earlier notes on depreciation/devaluation risks

Disclaimer

© 2015 CEEMEA Business Group*

*a joint venture betweenDT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, AustriaCompany registration: FN 331082k Source: DT-Global Business Consulting GmbH and CEEMEA Business Group researchBasic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.

This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by any party acting on information in these materials.

Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbHM: +43 676 534 6852 / E: danielthorniley@dt-gbc.com / W: www.ceemeabusinessgroup.com