Salary Zugzwang Situation In Belarus
- 21.07.2022, 13:16
The expert indicated the main shocks to the Belarusian economy.
According to Belstat, the Belarusian economic decline is accelerating: in May it reached almost 9%. How does this decline threaten banks and depositors? What factors and to what extent may influence it in the near future?
Answers to these questions to the Belorussians and Market newspaper gave BEROC researcher Dzmitry Kruk.
— Sanctions have been in full force since June. How does it affect the economy? Which of the sanctions-hit harder? Which one has the greatest negative potential?
— Direct export sanctions are the most troublesome. They cover about 25% of the export basket. Taking into account exports to Ukraine, the restrictions affect over 35% of exports. If all these exports are cut (the corresponding goods cannot be sold, and therefore cease to be produced), then, taking into account spillovers, this will lead to a drawdown in output and income by about 20% compared to the peak of Q2 2021.
This is the most important shock that awaits the economy. The remaining sanctions are important in two ways. First, they close the bypass options, preventing the dropping exports from being 'redirected' to other markets. Secondly, they generate a whole series of shocks that hit certain areas of the national economy: the financial market, price dynamics, and business and consumer confidence.
— Taking into account the high base in 2021, the 1st quarter, and the start of the war in Ukraine this year, the GDP in the 2nd quarter is increasingly falling every month, for example, in May it reached 8.7%. What could be the final figures?
— Although the mechanics of the sanctions are already clear today, this does not mean that the economic consequences are predetermined. The above scenario of a 20% income drawdown (most likely followed by debt and full-blown financial crisis) is a worst-case scenario, a potential bottom, but it may not be reached. The actual consequences will depend on several factors.
The most important of them is the speed and level of measures taken by the authorities to stop the export shock and return to normal levels (of 60%, 80% or 90% of the 2021 level). It depends on a large number of circumstances, including non-economic ones. The second critical question is: how strong and long-lasting will the second-order effects be? For example, in connection with the loss of exports, enterprises reduce wages and pay less to the budget. Accordingly, households and the government can afford to spend less. The consequences of this process development are no less important than the direct response to the initial export shock. The answer to this question in many respects depends on the answer to the first one.
Two main conclusions follow from the above-mentioned. First, the situation in the economy is very unstable and can change quickly. The scenario of a tailspin with a quick (two-three quarters) falling to the 20% bottom is still possible, and this option will remain on the agenda for a long time to come. Second, there is another way by reducing second-order effects, it is more likely in 2022 than in other scenarios. In this case, compared to 2021, GDP will decrease by 6-7%, and its level will roll back to the values of 2010.
— Is the banking sector well prepared for the stagnation? Is there a threat of 'bad credits', 'bank runs', or other potential troubles?
— Unfortunately, I have to avoid clear answers, as a large number of measures distort banking statistics, and there are significant doubts about the real situation. Officially, everything looks reasonably well: the value of non-performing assets is almost stable, capital adequately covers risks (especially after the recapitalization of state-owned banks), and the shocks associated with the outflow of deposits seem to be 'digested' and liquidity is improving.
However, based on past reports from rating agencies, we can assume that de facto asset quality is significantly worse and, in addition, is often supported by writing off ultimate risks to the budget. Regarding the latter, there is little room for manoeuvre due to a large number of issues.
Thus, contrary to official figures, I am inclined to believe that the accumulated risks in the banking sector are high. Economic problems may become apparent after enterprises run out of resources accumulated until 2021. The likelihood of a debt and banking crisis remains significant. Such a phenomenon could serve as an impetus for a sharp economic collapse and a worse scenario.
— Inflation is as high as ever, and the fight against it is relegated to the background...
— It seems that the authorities are not very concerned that the economy is in the 15-20% inflationary range. The reaction to these new realities is extremely weak at least in the area of monetary policy. It seems that there are two reasons for this. First, the goal of regulating inflation has come into strong conflict with the issue goal, and priority is given to the last one. Second, probably against the backdrop of war and sanctions, the authorities view the price shock as inevitable and one-time and see no reason to suppress it.
They seem to believe that the price shock will be one-time, and in the long term, inflation will begin to fade against the backdrop of shrinking incomes and output. This is possible if the rollback and stabilization of the ruble exchange rate are long, and monetary policy is not softened at least. However, both seem unlikely. Therefore, at least a long-term fixation of inflation in the range of 15–20% seems more likely, but rather even a further unwinding of the inflationary spiral.
— What will happen to people's incomes in the coming months?
— They should decrease in proportion to issue and even a bit faster since the level of labour costs in the economy is somewhat overestimated, all other things being equal. The figures that are specified above for the issue predetermine the dynamics of income.
However, there is one more important thing to keep in mind. It is the high level of income today that makes it possible to hold on to second-order effects. Therefore, we faced a kind of zugzwang with salaries. If the authorities do not prevent income compression, then the second-order effects will increase, plunging the economy into the abyss of recession. This will be a new impulse to compress income. In this case, reaching a potential bottom of 20% becomes more and more likely. Therefore, as we can already see, the authorities are using more and more monetary and fiscal incentives to hold salaries decline. This is the way to unleash the inflationary salary-price spiral. Such a way can really make it possible to somewhat smooth out and prevent a recession by spinning up inflation, with the right response to the main problems. If the reaction is wrong, it could lead to the worst-case scenario, a full-scale financial crisis and economic ruin.