Moody's Investors Service has downgraded the government of Belarus' foreign and local currency bond ratings from B1 to B2 and has assigned a negative outlook to the ratings due to the country’s significant near term external financing gaps, and the medium term difficulties of reorienting the current external debt funded, domestic demand-led growth model.
In addition, Belarus' foreign currency bond ceiling has been lowered to B1 and the foreign currency bank deposit ceiling to B3. Belarus' local currency bond and deposit ceilings were lowered to Ba1.
Moody's said its immediate concern is the external financing requirements of Belarus' large current account deficit, which was about 16% of GDP in 2010. Current levels of official foreign exchange reserves of $1.3 bln fall short of Moody's estimate of a 2011 external financing requirement of $8-10 bln.
Recent indications are that authorities are likely to obtain some funding from Russia. Additional funds may also flow in from planned privatizations. Still, since a large part of the external financing will be in the form of debt, Belarus' debt levels will continue to worsen and the funding may not be enough to prevent external financing gaps from emerging again over the medium term. Therefore, even taking into account the likelihood of obtaining near term funding, the risk of recurrent and significant external financing problems in Belarus has risen higher than that consistent with a B1 government bond rating.
In addition to external financing constraints, Moody's downgrade reflects a concern that Belarus will not be able to smoothly transition from its current external debt funded growth model to one that relies on productivity and competitiveness improvements for output growth.
Belarus' per capita income ($13,040 on a PPP basis) is high relative to peers in the B rating range, as is its average annual growth rate (7% over the last decade). However, the country's high levels of income growth owe much to external financial assistance and subsidized oil imports from Russia. External borrowings have funded wage increases, high credit growth as well as subsidies for households and corporations. These have, in turn, eroded competitiveness, and shifted the growth impetus away from exports and towards domestic demand. Over the past few years, this has led to a deterioration in the current account deficit, external debt and government debt ratios.
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