OREANDA-NEWS. September 7, 2012. Belarus’ economy could hear alarm bells ringing at the start of the second half-year period: inflation growth started to accelerate in early August; although industries and agriculture expanded significantly, the country’s GDP growth lost its pace rolling back to 2.8% in January-July after a 2.9% growth in January-June and 3.1% in January-May 2012. Over the seven-month period Belarus’ GDP stood at 264.8 trillion Belarusian rubles (USD 31.751 billion at the central bank’s exchange rate).

Industrial output in January-July 2012 increased 8.6% on the year to Br370.3 trillion. Farm output rose 12.3% to Br48.6 trillion (see Table 1). Amid favourable weather conditions agriculture became the third biggest contributor to Belarus’ GDP growth in January-July – 0.6% after minus 0.2% the year before. The other two contributors are industries (2.6%) and transport and communications (0.7%).

Table 1. Belarus’ macroeconomic indicators for 2012:

Besides, Russian oil companies in August would cease naphta exports to Belarus, depriving the country of the basic material for producing solvents and paint thinners. At the same time, official statistic reports for January-July 2012 I have not yet been updated to take into account the latest change on the petrochemical market. We may presume that in August Belarus’ macroeconomic indicators may deteriorate both in the real economy sector and on the foreign exchange market.

Growing household incomes, both in nominal and real terms, along with reducing interest rates on the money market, have come to stimulate the collective buying power, which caused the retail turnover to expand and provoked inflation growth (partially by means of adjusting the prices of sensitive commodities controlled by the government. Belarus’ retail turnover, including the public catering sector, went up 10.1% on the year in January-July 2012 to 101.261 trillion Belarusian rubles. At the same time, Belarus saw the consumer price index grow 1.5% over the first 14 days of August 2012 and 13.7% since early this year.

The largest increase in retail prices was registered with technical maintenance of dwellings (26.6%),

electricity supply (23.7%), telecommunication (16.8%), railway communication (11.1%), vodka (4.8%), bread and bakery goods (4.6%), wheat flour (4.1%), prefabricated poultry (4%), margarine (2.3%), household services (2.3%), milk and dairy products, smoked sausage, salt (1.7-2%), beer (1.3%), canned meat, butter, spice cakes (1.2%), pasta (0.9%), children’s clothes (0.8%), furniture (0.7%).

Chief of the National Bank of Belarus, Nadezhda Yermakova, voiced concerned over August’s growing inflation. Cutting down the refinancing rate is so far an unacceptable option for Belarus in view of the high level of inflation growth: consumer prices have grown 1% over the first ten days of August, according to preliminary estimates, Yermakova told reporters on August 16. According to Yermakova, the National Bank of Belarus may consider further reducing the refinancing rate in September. However, she admitted that the key rate should be reduced slowly, by 0.5 percentage points at a time. “We see that a move to further reduce the refinancing rate is out of the question so far, so we have to wait and see how much inflation will grow over the 20 days of the month. We expect inflation to grow higher in August because of the administrative decision to raise utility tariffs, transport fares and foodstuff prices,” Yermakova said.

In the meantime, according the findings of the company monitoring survey conducted by the National Bank of Belarus, there are growing medium-term inflationary expectations, as opposed to short-term expectation.

The greatest brake on GDP growth in the seven-month period has been Belarus’ construction industry. As reported by the National Statistics Committee, Belarus’ fixed-capital investments and investments in construction totalled 73.127 trillion Belarusian rubles in January-July 2012, down 17.7% year on year. As much as 30.9 trillion rubles was spent on buying machines, equipment, and vehicles in January-July 2012, down 23.6% from the 2011 level.

Investments in construction and assembly operations totalled 35.7 trillion rubles, down 15.9% on the year in January-July 2012. As much as 2.641 million square metres of new homes was commissioned in the period, down 5.9% on the year.

Experts of the Belarusian Economic Research and Outreach Centre (BEROC) attribute the decrease in fixed-capital investments to the fact that the cost of banks’ credit resources still remains high. Companies find it expensive to take out loans to finance their investments. Instead of borrowing, they prefer making bank deposits.

Another reason behind the decline in fixed capital investments, according to BEROC analysts, is the government’s move to curtail direct lending, which put a brake on housing output. At the same time, the authorities have adopted pro-housing rhetoric: they plan to resume intensive housing construction, with 6.5 million square metres of houses to be built in 2013 to compare with 4.2 million square metres planned for 2012.

Standing behind the country’s foreign trade surplus is the government’s naphtha processing business, which developed successfully in the first half of the year to promote exports of solvents, paint thinners and lubricants. Belarus’ foreign trade surplus amounted to USD 3.667 billion in January-June 2012, compared to a USD 2.194 billion deficit in January-June 2011, according to the website of the National Bank of Belarus.

The overall turnover of commodities and services reached USD 52.541 billion in January-June 2012, up 17.1% on the year.

Exports of commodities and services rose 31.7% to USD 28.104 billion, and imports increased 3.8% to USD 24.437 billion.

However, although statistic reports look positive and inspires optimism, Belarus is losing competition on traditional export markets, Economy Minister Nikolai Snopkov told the government’s board meeting on August 8.

“The major reason why Belarusian commodities are becoming less competitive is that local manufacturers get their own from the domestic market, which is securely protected by the government. Now a similar situation is taking place in the Single Economic Space (SES): three countries would create a protective contour and hope to go on leading a comfortable life. The danger is that Belarus is now losing competition not because the capacity of our partners’ markets is decreasing, but because our commodities are becoming less competitive,” Snopkov said.

The minister pointed out that Belarus’ landmark commodities like tractors, trucks and dried milk are losing export markets. The number of foreign markets where Belarusian-made tractors are sold has reduced from 73 markets in 2006 down to 43 in 2012, while the share of the Russian market has grown from 56% to 63.5%. With trucks the trend is similar: the number of markets has reduced from 42 to 24 and the share of the Russian market has grown from 65% to 81.5%.

All in all, the share of Belarusian commodities in Russia’s imports has reduced from 11% in 2000 to 5% in 2012.

Belarus will soon face tough economic challenges now that Russia has become a full-fledged member of the World Trade Organization, the Research Centre of the Institute for Privatization and Management (IPM) said in its latest analytical overview of Belarus’ economy.

It appears that the Belarusian government has come to underestimate the risks which Russia’s accession to the WTO poses to the Belarusian economy. In the meantime, after Russia officially became a WTO member on August 22 there followed a decline in customs tariffs on certain commodities. This brings bad news for Belarus. On the one hand, the growing competition on the Russian market will narrow export opportunities for Belarusian commodities. On the other hand, Belarusian manufacturers will see their positions on the domestic market deteriorate.

Hence, the earlier risks accumulated in the Belarusian economy, which became less acute in the post-crisis recovery period on the eve of the parliamentary elections, have started to aggravate again. Although the authorities are well aware of the misbalances, they prefer to respond to economic and financial troubles rather than prevent them, which aggravates the prospects of macroeconomic stability in Belarus in the long-term perspective.