Belarus Meeting Notes - Developments in 2020 Mean New Equilibrium for Economy, Bonds

After several years of relatively stable but slow growth, the Belarusian economy has been hit by several perturbations. The country's usually fairly predictable and staid political life has recently given way to a period of uncertainty. We met on video call with local experts order to get a better understanding of the political and economic situation in the country at the moment. In this note, we use the takeaways from these meetings to break down recent and ongoing developments and provide our own updated forecasts and analysis. > Protests break out across country. The protests that unfolded across the country since the polls for the presidential election closed on Sunday were triggered by accusations of irregularities in the voting and calls by the opposition for a re-count. The protest movement had been building prior to the election, fueled by growing dissatisfaction over the country's sluggish economic performance and the barring of several opposition candidates from the election. The gradual erosion of Lukashenko's traditionalist voter base has provided an impetus to this. The scale of the longer-term impact of the unrest will depend on the extent and longevity of the protests and on the severity of the measures used to quell them. > We expect 3% GDP contraction this year. At the beginning of this year, the Belarusian economy was hit by interruptions in oil deliveries from Russia and then the pandemic. While the government opted for only a mild quarantine and eschewed a full lockdown, the economy still suffered from a drop in exports, reduction in remittances and weaker domestic demand. GDP was down 1.7% y-o-y in 1H20, and we expect the economy to contract 3% this year. > Budget deficit could reach 5% of GDP. Due to the contraction of economic activity and drop in the oil export duty, as well as increased off-budget financing of state-owned enterprises, the overall budget deficit could reach up to $3 bln this year, or 5% of GDP (on a consolidated level and adjusted for off-budget payments). Including refinancing, Belarus's total financing needs through year-end could be close to $3 bln. This suggests a bigger appetite for borrowing. Belarus has started talks with various counterparties (including China, the IMF, World Bank and other IFIs). Officials recently disclosed that the government is negotiating for a sum of $3 bln. > Belarus tradable assets rattled by recent developments. Political uncertainty remains high, which has contributed to a widening in the spreads of Belarusian sovereigns. Until more clarity emerges, we expect the bonds to face headwinds. Whether the protests can be quelled or the political landscape changes under pressure from dissatisfaction with Lukashenko, bondholders look set to remain cautious, with worries over stability justifying wider credit spreads. At this juncture, we recommend against being long in Belarusian sovereigns.