Belarus Sovereign Debt - New Reality, But on Firm Ground

Recent developments have affected Belarus's credit profile in significant ways. The country has resolved its dispute with Russia over oil supplies, but the oil price slump has reduced the positive impact of this achievement. It has also left Belarus's budget, which is based on an average Urals price of $60/bbl this year, in need of a significant revision. Minsk has reassessed its borrowing needs and is now seeking sizable financial assistance. Moreover, although the protracted spat with Russia over oil supplies has been resolved, it has left question marks over how bilateral cooperation will proceed from here. > Paradigm shift in Belarus's FX-denominated budget revenues. Export duties on petroleum, petroleum products and potash, as well as receipts related to the re-export of Russian oil, used to constitute Belarus's major FX-denominated budget revenues, which were primarily used to finance foreign debt payments. The overall volume of these receipts has shrunk. On our estimates, Belarus may collect $0.7 bln in export duties on oil products in 2020-24, versus the $2.9 bln collected in 2016-19. In addition, the re-export agreement between Belarus and Russia expired in 2019.> Government financing to be revised. In the wake of the oil price slump and the pandemic's impact on fiscal balances, according to our economists, the budget deficit could grow from an initially penciled in 0.5% of GDP to 3.0% of GDP this year. If we also account for government "directed lending" as de-facto budget spending, the deficit could grow to 3.7% of GDP, or $2.2 bln.> Relations with Russia evolving. Though the disagreement over oil supplies has been resolved, others remain. Minsk has now initiated talks with Russia over gas prices, while transit tariffs on Russian gas have emerged as an issue. Meanwhile, Belarus has started to try to diversify its oil supplies away from Russia. Looking beyond these new developments, Belarus's net borrowing from Russia since 2018, excluding an NPP export loan, has been negative. > Belarus's borrowing appetite has increased. With the fiscal deficit widening, the Finance Ministry is discussing $3 bln in new borrowing with official-sector creditors. That said, plans for debt refinancing have been unchanged. In particular, the sovereign is likely to tap the Eurobond market - we expect a 10y, $1 bln transaction or a similar set-up.> Sovereign credit spreads to find new fair level. Taking into account the country-specific developments and also the probability that a deterioration of economic activity and fiscal balances may justify wider credit spreads for risky assets in general, we feel comfortable overweighting the Belarus 27 and 30, while the paper trades with a premium over the Russian curve of more than 300 bps. Indeed, the Belarus 30 has been on our top-pick list since May 8.