OREANDA-NEWS. June 6, 2011. Standard & Poor's Ratings Services said that it lowered its long-term local currency sovereign credit rating on the Republic of Belarus to 'B' from 'B+' and placed it on CreditWatch with negative implications. At the same time, we placed our 'B' long-term foreign currency and our 'B' short-term foreign and local currency sovereign credit ratings on CreditWatch negative. The transfer & convertibility (T&C) assessment for Belarus remains at 'B'.

The recovery rating on Belarus' senior unsecured debt is unchanged at '4'. “This indicates our expectations of a 30%-50% recovery of principal in the event of a default on Belarus' commercial debt. The estimate draws on a scenario--not a base case--of severely negative external financing trends that economic policies cannot offset.”

“The CreditWatch placement reflects the likelihood of a downgrade if Belarus falters in securing external funding for its large current account deficit or if its external needs grow larger because of negative developments in bank deposits. These factors continue to pressure the exchange rate, despite the 36% devaluation via the U.S. dollar on May 24, 2011. The downgrade of the long-term local currency rating reflects our view that the devaluation has significantly increased the debt burden for the government and that fiscal flexibility is becoming more limited.”

Belarus remains vulnerable to external funding pressures because of economic and political pressures, as well as the very low level of usable reserves. Together with advances from the International Monetary Fund, the National Bank of the Republic of Belarus (NBRB) foreign currency deposits due to banks exceed the NBRB's convertible gross international reserves at year-end 2010.

Moving from the current exchange rate regime to a flexible exchange rate, together with even tighter fiscal and monetary policies, could help to narrow the external financing gap going forward and retain external investor confidence. Tighter policies will also be important to moderate inflationary pressures, which have led to a recent spike in inflation and could eventually further undermine macroeconomic stability. Accompanied by a rise in unemployment and continued goods shortages, these could, in our view, potentially erode the social contract.

“Standard & Poor's intends to resolve its CreditWatch listing within the next three months. We could lower the ratings at least one notch if prospective external funding, most likely in the form of lending from the Eurasian Economic Community and through privatization receipts, does not materialize, or only partially does so, potentially resulting in further downward exchange rate pressure and economic stress. If bank deposits decline and put the financial stability in Belarus at risk, we could likewise lower the rating. If Belarus receives the financing that is anticipated and manages to bolster its net international reserves, which would likely entail initiating reforms to strengthen external competitiveness, this could support the ratings at their current level.”