OREANDA-NEWS. International ratings agency Standard & Poor’s has changed its outlook on Belarus’ “B-“ long-term foreign currency rating to positive from stable, the agency said in a press release.

S&P affirmed its long- and short-term sovereign credit ratings on Belarus at “B-/B”.

The transfer & convertibility (T&C) assessment for Belarus is unchanged at “B-“.

“The outlook revision reflects the possibility of an upgrade if Belarus’ high inflation continues to decline, its current account deficit remains fairly narrow in the face of a strengthening economy, and its fiscal spending is contained. Inflation declined to 22% at the end of 2012 after averaging more than 50% in 2011 and 2012, and we expect it to fall to below 20% in 2014. Helped by this decline and the narrower current account deficit, we consider that pressure on the exchange rate is easing. The National Bank of Belarus (NBRB) made net foreign currency purchases in 2012, which indicates to us some improvement in confidence in the local currency,” the press release says.

Political risks, high government financing needs, and a reliance on external funding constrain the ratings. The Belarusian government’s reluctance to introduce much-needed structural reforms to improve competitiveness and growth prospects is also a key ratings weakness.

The ratings are supported, however, by the country’s relatively high GDP per capita for the rating level (2012 estimate: USD 6,700) and moderate general government deficits. Belarus also benefits from a strong industrial capital stock and a highly educated workforce, it says.

“Real economic growth in 2012 was 1.5%. While below the government’s target, we think that this growth is in line with the government’s efforts to tighten its macroeconomic policies. We note that both government consumption and investment contracted in 2012, while gains from currency depreciation and fewer imports, among other factors, bolstered net exports to a surplus amount in the first half of the year,” reads to the press release.

However, the trade balance returned to a deficit in the second half of the year. This indicates that, without structural reforms that focus on competitiveness, Belarus remains vulnerable to exogenous factors that could impair external liquidity.

“We consider that the exchange rate’s stabilization has been instrumental in limiting the increase in general government debt. This is typically influenced more by exchange rate movements than the headline deficit, which we estimate to have been in surplus, of 0.4% of GDP for the consolidated budget, in 2012,” it says.

“The government has streamlined lending under its programs in line with the Eurasian Economic Community Anti-Crisis Fund (ACF) program, to 1.3% of 2012 GDP. We calculate that disbursements under the ACF program will cover more than one-half of government debt due in 2013, which amounts to about 3% of GDP. The residual amount may be raised from selling foreign currency government bonds domestically, as well as possibly tapping international capital markets. Belarus is also in discussions with Russia about a USD 2 billion loan to shore-up external liquidity.”

“We expect growth to remain moderate in 2013, at no more than 3%, in line with the improvement in the government’s macroeconomic policies, which is necessary to buttress further reductions in the inflation rate and to contain exchange rate volatility.”

“We expect inflation to average 22% in 2013, although this will depend on the NBRB maintaining positive interest rates in real terms. We forecast that as Belarusian exports face higher competition in Russia (its leading export market) the current account deficit will widen to about 6% of GDP from 3% in 2012. Since 2011, when Russia secured a rescue package for Belarus, the two countries have become increasingly intertwined. We therefore expect Russia to continue providing strong support to Belarus, as and when required, in return for political and economic concessions.”

"The positive outlook reflects the possibility of an upgrade if the government can sustain the decline in inflation, while keeping the current account deficit narrow, even as the economy strengthens. An upgrade would also depend on the government containing fiscal spending. We could raise the ratings over the next 12 months if the economic policy mix continues to rein in inflation and prevent a new build-up of external imbalances."

“We could revise the outlook back to stable if renewed expansionary policies - for example, in the run-up to presidential elections in 2015--lead to the return of exchange rate and inflationary pressures. We could also lower the ratings if external liquidity or the availability of external funding decline significantly. Deterioration in Belarus’ relationship with Russia would also likely pose downside risks to the ratings.”