Belarus: Devaluation seems likely

by Danske Research EmergingMarkets Team - Danske Bank A/S | View company's profile

* Belarus is running out of foreign currency reserves, due to the intolerable current account deficit.

* In 2010, the current account deficit accounted for 16% of GDP and this year the situation does not look to be much better.

* Belarus is trying to avoid devaluation and hopes for a bilateral loan from Russia. However, that would only postpone the problem and a devaluation seems likely, in our view.

Assessment and outlook

Belarus has been running a deep current account deficit for years now and the presidential election year of 2010 led to excessive fiscal spending. The foreign currency reserves have been declining rapidly during the past months, but Belarus is still trying to avoid devaluation and is hoping for a bilateral loan from Russia. Last week, S&P cut its credit rating for Belarus from B+ to B due to declining reserves.

However, we believe that a loan would only help in the immediate term given that the current account seems to be remaining deeply in deficit in 2011 as well. In addition to that, commodity prices have continued to increase, adding on the imports. Already, the Belarus Central Bank has hiked interest rates, introduced strict currency controls and increased fees on foreign currency transactions. Problems with payments have been reported from companies operating in Belarus.

Thus, the situation seems to be escalating rapidly. We see no other reasonable alternative but for a devaluation against the currency basket.


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