BelarusBusiness outlook 2015-18

Quarterly update – October 2015by Dr Daniel Thorniley

Contents

• Executive summary• Features of business• Business outlook • Corporate sales and profits• Economic outlook• Inflation outlook• Currency outlook• Forecast table

Executive summary (1)

• Belarus, like other CIS markets, was contaminated by the Russian-Ukrainian crisis• That conflict has subsided in recent months, especially with Russian focus shifting to Syria• But the fallout from the crisis and from Russia’s economic troubles is severe this year• GDP in Belarus has taken a further hit from 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 has lost about 30% in value this year• Not to anyone’s surprise, President Aleksandr Lukashenko won a landslide victory (with

83.5% of the vote) in elections earlier this month• It will be his fifth term in office • Despite questions over the fairness of the vote, the EU has indicated its willingness to at

least temporarily suspend its sanctions on Belarus• That will be a boost for the economy and will help Belarus move away from its

dependence on Russia• But in the meantime, this year is looking even worse than we had previously expected

(and we knew things would be bad)

Executive summary (2)

• In Q2 2015 growth plummeted more than 4% year on year. That was the worst quarter for Belarus GDP in years

• There were a number of reasons for the pitiful performance – the country’s close ties to embattled Russia, a fall in private consumption and a steep drop in investment

• It looks like the fall in GDP will be closer to -2.8% with continued risk on the downside• Some thing the picture could be even more dismal with a contraction closer to -4%• 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

• The Belarus rouble has lost about 30% of its value this year as a result of the drop in the Russian rouble

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

• Fully 36% of executives in our latest Survey said they’re forecasting negative sales growth this year

• And the picture probably even worse since economic conditions have deteriorated since we ran that survey

• But as in other CIS markets, companies think next year should be better• More than half say they are predicting single digit sales growth in 2016 and one in five

say sales will be flat• While flat sales are better than continued falling sales, this year has been so rough for

Belarus and many companies doing business in the market that even another year at 2015 levels is not great news

• 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”

Executive summary (4)

• But the uncertainty around sanctions together with falling demand from Russia and Ukraine is having an even larger impact on trade and the currency in 2015

• So far this year such transit trade has not compensated for the overall deceleration• For companies, volatility and uncertainty is now a reliable feature of doing business in

Belarus• Executives are talking about more cash management and taking more care and attention

with receivables • However, the government has now stopped its usual policy of hiking wages in times of

crises and continued high inflation, real wages are actually now falling • The economy may benefit from some import substitution which has been supported by

the depreciated Belarus rouble• But export and imports both crashed have crashed through 2015 and will both be down

by about 20% this year• Inflation, despite the fall in the currency, stabilised this spring and actually decelerated to

14% in May; we now expect inflation to average 15% in 2015 and fall to about 12% next

Features of business (1)

• After a bounce-back from the 2011-12 currency crisis, companies now see Belarus as a solidly single-digit growth market

• Most companies that entered 2015 with expectations for double-digit sales have now revised their forecasts downward

• Executives are not planning to make big investments in Belarus due to continued concerns about long-term viability

• Russia still accounts for 75%-85% of sales revenues within the CIS for most companies. Ukraine has fallen in revenue teems while Kazakhstan has grown and now represents about 4-9% of CIS business

• Belarus meanwhile only accounts for 1% to 1.5• 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

• Due to its market size (9.5m), Belarus does not rank as a priority for most multinational companies

• But somewhat surprisingly about 8% of MNCs see it is a mid-term priority among CEE markets, according to our last Survey

• Fewer companies (10%) than in 2014 (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 refer to this as an issue compared with only 14% in our previous Survey

• 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)

• 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

• Keep in mind, these figures 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 at No 19 in the region

• Another 17% expect flat sales this year • Meanwhile, 30% estimate single digit sales and 17% of optimistic holdouts 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% forecasting 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

Business outlook (2)

• Given that budgets for this year were set in September/October (before the situation deteriorated), most companies have been revising 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 a double digit fall in sales

• 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 were overly optimistic• 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 (3)

• 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 fifth 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

• 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: 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

• We knew that 2015 would be difficult for Belarus but the economy is doing even worse than most expected

• In Q2 2015 growth plummeted more than 4% year on year. That was the worst quarter for Belarus GDP in years

• There were a number of reasons for the pitiful performance – the country’s close ties to embattled Russia, a fall in private consumption and a steep drop in investment

• Given regional pressures, depreciating currency, high inflation and mixed news out of Russia, we have downgraded our forecast for Belarus this year

• It looks like the fall in GDP will be closer to -2.8% with continued risk on the downside• Some outlets think the contraction could be even closer to -4% • Authorities are finally taking a look at implementing reforms • But that won’t be easy – Belarus is one of the most statist economies in Europe with • It remains dominated by government-run businesses and the state spends billions on

houd outs• We don’t Belarus will seek any IMF funds, but if it did reforms would be needed

Economic outlook (2)investment, industry and trade

• GDP should return to very feeble growth next year of about 0.5% as exports pick up – that’s assuming a less dire situation in Russia and a more receptive EU

• The on-going recovery in the Eurozone will allow for some trade switching to that market helped by the weaker (but more stable) rouble and improving relations with the West

• The industrial output roller-coaster continues in full swing: posting negative numbers in 2013, positive by 2% in 2014 but sharply down this year averaging -6%

• Industrial output was as bad as -10.3% in March and by August was dropping at about 6%

• The fall in industrial output is a due to a drop in manufacturing and less output in electricity and gas

• 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. After peaking in July this year at $2.7bn exports have slid in recent months to closer to $2.1bn

• Overall exports should drop about 20% this year

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 and have been between $2.1bn and $2.5bn for most of this year

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

• 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)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 had a fiscal response to the crisis this year 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 have slowed – shrinking in April and spending the rest of the year between 15-1.8%.

• Retail sales could slow to about an average of 1% growth this year before recovering to 2.3% 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 (5)budget and external accounts

• Government spending was quite tight last year and was relatively subdued for much of this year considering the economic woes – but did pick up as the election neared

• We expect the budget to post a -1.0% deficit this year• 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 -5.3% 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 are down to just about $2.5bn – or just about one month of import coverage

Inflation outlook

• After rising over 18% in both 2013 and 2014, inflation is easing…a little• The inflation rate has come down from its 2015 high of 17% in January, falling steadily to

a low of about 12% in August• Food inflation has dropped through the year, reaching its lowest level (just 8%) in

August• We expect inflation will average about 15% in 2015, falling to about 12% next year and

then finally dropping into the single digits in subsequent years• This moderation in inflation is due to some government fiscal tightening and weaker

demand, softer wages and downtrading in the market as well as lower energy prices• And comes despite steady (and more steeper) depreciation of the currency through

2015 • 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

Currency outlook (1)

• The Belarus rouble started to fall against the dollar last December – for the year it will have lost about 30% of its value versus the greenback

• The depreciation has been in line with the drop in the Russian rouble• But some downward pressure can be explained by the low level of international reserves

and high foreign debt payments that have prevented authorities from supporting the Belarus currency very much

• Last December, as the depreciation began, 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% in January and has stayed at that level all year – it will likely be unchanged until the rouble strengthens and inflation

• We expect the Belarus rouble to average about 15,000 versus the dollar this year• The currency could come under further downward pressure, along with most other

emerging markets currencies, when the US federal reserve raises interest rates

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 EuroJanuary 2015 14.38

16.75February 2015 15.10

17.16June 2015 15.30

17.11August 2015 16.31

18.12September 2015 17.66

19.84

• 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

Economic forecast table 2012 - 2018

2012 2013 2014 2015 2016 2017 2018GDP 1.5 0.9 1.6 -2.8 0.5 1.4 2.4Fixed investment -9.8 7.5 -8.0 -7.7 2.5 3.4 4.2Industrial output 5.9 -6.0 4.0 -6.0 1.2 3.1 3.3Household spending 7.8 14.3 2.0 -1.2 1.8 2.5 2.9Government spending -1.0 -2.5 -0.5 2.2 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 2.3 3.0 3.2Consumer prices (average) 59.2 18.3 18.1 15.0 12.0 9.9 8.7Budget 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 17,400 17,700 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

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 1 , 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