"Belarus Business Forecast Report Q1 2014" is now available at Fast Market Research

The Belarusian economy remains in a very precarious position despite the nascent resolution of the potash dispute that threatened to engender a balance of payments crisis. The current account deficit is set to remain substantial (we forecast 9.5% of GDP in 2014) and foreign exchange reserve levels remain woefully inadequate, covering just 1.4 months of imports in September 2013. If state-owned potash producer Belaruskali can begin to increase production substantially in 2014, it could prove the key factor in avoiding a similar crisis to that experienced in 2011/12.

The political relationship between Belarus and Russia is set to improve after deteriorating to breaking point during the potash crisis - when Minsk and Moscow engaged in a game of brinkmanship that threatened to ruin the Belarusian economy. With no sign from the administration of President Alexander Lukashenko that there will be political reform on the horizon, we believe Russia will remain the country's key political ally in the years ahead.

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Consumer price inflation will increase from an estimated 15.0% year-on-year (y-o-y) at end-2013 to 18.0% y-o-y by end-2014 on the back of continued depreciation of the Belarusian ruble, exacerbated by a negative trade balance. This will result in refinancing rate hikes of a cumulative 150 basis points during the course of 2014, from 23.50% to 25.00%, as the central bank attempts to avert another period of hyperinflation as seen in 2011/12.

Major Forecast Changes

We forecast the contraction in Belarusian real GDP in 2014 and 2015 to be smaller than previously projected, coming in at -1.8% and -0.4% respectively, from previous forecasts of -2.5% and -1.9%. The end to the potash dispute, which will very likely engender an increase in export levels as well as a reduced decline in fixed investment, is the primary factor behind this upgrade.

Given that Belarus's trade deficit is not expected to widen to the extent previously projected, we have revised our forecast for the ruble to average BYR9,975/US$ and BYR10,550/US$ in 2014 and 2015 respectively, from previous forecasts of BYR11,250/US$ and BYR12,000/US$.

Key Risks To Outlook

With balance of payments data from the period at the height of the potash crisis yet to be released, we could see a significant deterioration in the country's current account deficit, sparking another currency devaluation and a period of hyperinflation. This would undoubtedly have a severely negative impact on our real GDP growth forecast in the long term.

A repeat of the potash crisis or a similar political risk event could result in Russia cutting off Belarusian oil supplies, not only crippling the economy but leaving Belarus diplomatically isolated for the foreseeable future.

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