Moody's confirms Belarus government bond ratings at B3, outlook negative
November 7, 2011 Moody's Investors Service
New York, November 04, 2011 -- Moody's Investors Service has today confirmed at B3 the foreign- and local-currency government bond ratings of Belarus. The country's B3 foreign-currency bond ceiling and the Caa1 foreign-currency bank deposit ceiling were also confirmed. The outlook on the ratings is negative. In addition, Moody's has confirmed the local-currency bond ceiling at Ba3 and downgraded the local-currency bank deposit ceiling to B1 from Ba3.
Today's actions conclude a review for possible downgrade initiated in July 2011. The confirmation of the government bond ratings was prompted
1) The potential narrowing of the country's account deficit due to currency depreciation
2) The possibility of Belarus obtaining near-term financing for the deficit
3) Incremental efforts (such as exchange rate liberalisation) to rebalance the macro-economic framework
The negative outlook on the rating reflects the following concerns: (i) a likely significant slowdown in economic growth in 2012 will worsen profitability and asset quality in the banking system, increasing the government's contingent liabilities; (ii) the relatively low levels of foreign currency reserves leave Belarus's balance of payments vulnerable to event risk; and (iii) political risks.
The 65-70% depreciation of the Belarusian ruble against the US dollar in
2011 could help narrow the country's current account deficit to US$3.5 billion - US$4 billion in 2012 from an estimated US$6 billion in 2011.
This would considerably reduce the country's external financing requirements in 2012. In the near term, Moody's expects these financing requirements to be met by disbursements from the Eurasian Economic Community (EurAsEc), continued energy subsidies from Russia and privatization revenues.
However, until authorities substantially raise international reserve levels, secure medium-term external financing and rebalance the economy away from credit driven growth, Belarus will remain susceptible to domestic and external shocks. Moody's believes that an International Monetary Fund (IMF) agreement would alleviate external financing risk while supporting the establishment of a more balanced macro-economic policy framework. However, at this time, the prospects of an IMF agreement are uncertain.
Exchange rate depreciation has raised the ruble value of foreign-currency debt, bringing the external debt to gross domestic product (GDP) ratio to 70% in 2011, from 25% in 2008. With the change in exchange rate regime from fixed to managed float in October, the ruble may depreciate further over the next year. This will substantially raise the external debt repayment burden, heightening repayment risk. On the other hand, the market-based determination of the exchange rate will signal the true cost of additional foreign borrowing to Belarusian borrowers, which the fixed-exchange rate did not. Therefore, liberalizing the exchange rate removes one of the regulatory distortions that underpinned Belarus's dependence on external credit for growth.
While loose credit drove GDP growth of 7.9% over the first three quarters of 2011, Moody's anticipates that growth will slow in 2012 on the back of ruble devaluation, external liquidity constraints, producer price inflation, creditor restrictions on fiscal stimulus and a less benign global growth environment.
Indeed, the main driver of today's one-notch downgrade of Belarus's local-currency bank deposit ceiling is Moody's assessment that lower growth prospects will pose a risk to bank profitability and asset quality. In an adverse situation, the government may be able to support banks through capital infusions of local currency. However, foreign-currency reserve levels are too low to meet banks'
foreign-currency deposit and external debt obligations. As the Caa1 foreign-currency bank deposit ceiling suggests, the risk of a freeze on foreign-currency bank deposits remains high.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on the ratings indicates three main concerns held by Moody's. First, at its current rate of 35%, the central bank's benchmark refinancing rate is negative in real terms. If inflation, which stood at 79.6% in September, and credit growth remain high, the current account deficit will not correct to the extent required to alleviate balance of payments pressures.
Second, the large scale of the country's short-term debt ($14.3 billion) relative to reserves leaves external finances vulnerable to refinancing risk. It should be noted that most of this short-term external debt consists of trade credits and bank liabilities and has generally been rolled over in the past.
Third, the ability of Belarusian authorities to maintain political stability will be tested in 2012, as household incomes decline in real terms because of the impact of devaluation and inflation. Meanwhile, EurAsian Economic Community (EurAsEc) loan-related restrictions on the country's budget deficit may not allow for the compensation of this decline via increased subsidies.
WHAT COULD CHANGE THE RATING UP/DOWN
A downgrade could be triggered by (i) Belarus's failure to maintain reserve levels, secure medium-term external financing or take additional steps to rebalance the economy; (ii) an acute growth downturn, which precipitates a prolonged and severe banking crisis; or (iii) a worsening political situation that jeopardises growth and repayment capacity.
A reconsideration of the negative outlook on the government bond ratings would depend upon (i) Belarus securing sufficient external financing to raise reserve levels and meet repayment obligations over the medium term;
(ii) the Belarusian economy avoiding a major and prolonged deterioration in growth; (iii) a shift in policy focus that removes existing distortions while raising international competitiveness; and (iv) a stable domestic and foreign policy outlook, including relations with external creditors.
PREVIOUS RATING ACTION & METHODOLOGY USED
The previous rating action on Belarus was implemented on 21 July 2011 when Moody's downgraded the government's bond rating to B3 from B2, the foreign currency bond and bank deposit ceilings to B3 and Caa1(from B1 and B3 respectively), and the local currency bond and bank deposit ceilings were downgraded to Ba3 from Ba1. In addition, the ratings were placed under review for downgrade.
The principal methodology used in determining the rating of Belarus was "Moody's Sovereign Bond Methodology", which was published in September
2008 and can be found on www.moodys.com.
Country of riskBelarus
Redemption (put/call option)*** (***)
М/S&P/F— / — / —
Company — Belarus
Full nameMinistry of Finance of the Republic of Belarus