Belarus in recession, banking sector in difficulties – Russia to the rescue

After a long period of economic growth, which weakened from 2012, Belarus slid into recession in 2015, which has continued into 2016. The downturn was triggered by a sharp contraction of exports to Russia, which itself had fallen into recession, largely on account of the plunge of the oil price. The Belarusian banking sector is mostly state-owned and has served as a conduit for directed lending to state-owned enterprises, the backbone of the economy. The currency devalued sharply in 2015, deposit and credit growth ground to a halt and banking activity started to contract, already high levels of dollarization increased further, nonperforming loans more than doubled, and profitability shrank to low levels. Meanwhile, periodic bank recapitalization measures (of an estimated 2% of GDP a year) have held capital adequacy at seemingly satisfactory levels. Major risks include exchange rate, credit, liquidity, and state solvency challenges. The salient shock-absorbing factor is Russia – essentially performing a function of external “lender of last resort” to Belarus and, a fortiori, to its banking sector. The outlook is for high short-term vulnerability, a sluggish recovery and continuing costly and externally financed muddling-through policies.