S&P affirms Belarus ratings, outlook negative

Interfax-Ukraine Standard & Poor's Ratings Services has affirmed its 'B+/B' foreign currency and 'BB/B' local currency long-term and short-term sovereign credit ratings on the Republic of Belarus. The outlook is negative, the agency said in a press release.

"The ratings are constrained by the economy's structural rigidities, including its reliance upon Commonwealth of Independent States (CIS) trading partners," said Standard & Poor's credit analyst Kai Stukenbrock. "They are also constrained by deteriorating external liquidity, and by Belarus' limited access to external financing. The International Monetary Fund standby-agreement (IMF SBA), concluded in January 2009, has helped to relieve what would otherwise be intense pressure on international reserves." The ratings on Belarus are underpinned by the country's moderate external debt position and the government's low debt burden.

Belarus' external position has been damaged by a sharp deterioration in its terms of trade and by reduced demand from key importers. As a result, the 12-month rolling current account deficit widened to 13% of GDP as of March 2009, compared with 8% as of year-end 2008. The $3.5 billion IMF SBA, complemented by further lending from official sources, has mitigated the impact of the otherwise reduced availability of external funding.

Notwithstanding an estimated $1.9 billion of official funding inflows and privatization receipts in the first five months of 2009, currency reserves remain unchanged from year-end 2008, at a low $2.6 billion (equal to one month cover of current account payments). The IMF's recent decision to increase its program by $1 billion should help instill confidence.

The deterioration in the international economic environment is taking a great toll on Belarus' export-oriented economy. S&P expects the economy to shrink by 5% this year, after buoyant growth of 10% in 2008. Low net general government debt is expected to rise to 15% of GDP from 9% in 2008, due largely to the weaker currency.

The negative outlook reflects Belarus' low levels of external liquidity and our view that the country faces challenges to its centralized economic model. The proposed increase in the size of the IMF SBA reflects these challenges, while failure to agree with Russia on payment of the remaining promised $500 million tranche of its stabilization loan makes clear the mounting difficulties Belarus faces in securing further external funding. Therefore, in our opinion potentially painful adjustment measures are unavoidable in order to narrow the current account deficit and maintain access to funding over the medium term.

"The rating could stabilize at the current level if Belarus bolstered its foreign reserves, while at the same time undertook measures to strengthen external competitiveness and reduce the import- and energy-dependency of the Belarusian economy," said Stukenbrock. "Conversely, a failure to reduce the large current account deficit, further deteriorations in external liquidity and reserves assets--potentially undermining the exchange rate regime--could lead us to lower the ratings."



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