The international rating agency Fitch left the credit rating of Belarus at the same level - RD, limited default. The agency told what caused this rating, and how the country's economy is holding up under sanctions.

Eurobonds paid in national currency.

Fitch estimates that Belarus' RD rating reflects the ongoing payment of liabilities when the country attempts to make payments on its USD Eurobonds in local currency.. This is contrary to the terms of the bonds, which do not allow settlements in alternative currencies..

Further recession expected in the country.

There has been a broad economic contraction of 3.6% in the two months of 2023 (YoY) and 4.7% in 2022. This was the result of Western sanctions.

Economic activity was supported by an increase in Russian demand for Belarusian products. But at the same time, the Belarusian ruble depreciated against the Russian ruble.. The situation was exacerbated by uninterrupted production at state-owned enterprises, which led to significant overstocking of warehouses.

In addition, IFI-funded projects were suspended in 2022. Therefore, further migration of skilled workers is likely, posing risks to macro-financial conditions..

Fitch forecasts a 1.3% fall in GDP in 2023 and 0.3% in 2024 due to continued reorientation of trade flows and weak investment, followed by business adjustment to sanctions.

Inflationary challenge, loose monetary policy.

Inflation eased to 6% in March from 11.7% in February and peaked at 18.1% in July 2022, supported by underlying effects and food price inflation weakening to 9.2%. Price controls introduced in October have also had some positive impact, although previous use of such policies to curb inflation has proven ineffective..

At the same time, Fitch forecasts that inflation will remain fairly high, averaging 8.7% in 2023 and 9.5% in 2024, due in part to ongoing supply chain issues, currency depreciation and relatively loose monetary policy..

The current account is set to weaken.

Fitch forecasts the current account balance to deteriorate steadily to a deficit of 1.2% of GDP in 2024 on the back of falling export prices, the ongoing reorientation of trade spending and a lower contraction of imports.

Stable international reserves.

Foreign exchange reserves amounted to 8.1 billion. US dollars at the end of March 2023 compared to 8.3 billion. US dollars at the start of Russia's invasion of Ukraine.

Weak public finances, lack of data.

Authorities have not published fiscal data since June 2022. At the same time, Fitch forecasts that the general government deficit will widen to an average of 3.8% of GDP in 2022-2023 from 0.2% in 2021, and total public debt will reach 42.4% of GDP by the end of 2023. The lack of financing options after the war in Ukraine has led to the deficit being financed primarily by local currency domestic bonds.

Fitch expects a similar funding strategy this year, complemented by Russian ruble issuance in the Russian market and loans from Russia and China.

High geopolitical risk.

Further military cooperation with Russia due to the war in Ukraine exacerbates geopolitical and sanctions risks. Although Belarusian forces were not deployed in the war, Belarus provided military support, Russian missiles were fired at Ukraine from Belarusian territory, and there have been recent claims that Russia could deploy tactical nuclear weapons in Belarus..

At the same time, plans for economic integration were stepped up thanks to the agreements of the allied states, there was a large-scale change in the route of Belarusian exports through Russian ports, and a new three-year gas agreement was agreed at preferential prices..

Political situation.

Fitch forecasts further tightening of EU sanctions against Belarus, the duration of which has not been determined.

On the other hand, relations between Belarus and China formally improved after the start of the war thanks to the meetings between President Lukashenko and President Xi Jinping, as well as the signing of a number of bilateral agreements to deepen trade relations..

Fitch also sees no splits within the Belarusian political elite due to support for Russia or a threat to the president's rule.. There is a lack of public dissent about the conflict, although this increases potentially fears about the consequences for the country. And opposition groups in exile seem to be diminishing their political influence..