Belarus Pharmaceuticals and Healthcare Report Q4 2012

Includes 3 FREE quarterly updates

BMI View:

We continue to hold a relatively bullish outlook on household consumption in Bahrain.

Although timely data out of the country is relatively sparse, previously announced hikes to public sector salaries are most likely beginning to feed through to the wider economy. Local reports have indicated that growth in car sales was well into double-digits through the first five months of 2012. With banking sector credit growth hitting three-year highs in H112, we expect private consumption to remain well supported in the near term.

Headline Industry Data (local currency)

• 2012 food consumption growth = +8.1%; compound annual growth rate (CAGR) to 2016 = +7.7%
• 2012 soft drink value sales growth = +6.9%; CAGR to 2016 = +6.7%
• 2012 mass grocery retail sales = +10.1%; CAGR to 2016 = +9.4%

Key Company Trends

Nestle Makes Major Investment: In June 2012, global food and drink giant Nestle announced plans to construct a new US$136.1mn production facility in Dubai. Nestle has signed a partnership agreement with Dubai World Central for a 175,000 sq m plot that will be used to manufacture nutrition, culinary and coffee products. By boosting its regional manufacturing presence, Nestle will be able to tailor an even greater proportion of its products to suit tastes and preferences across the Middle East and North Africa region. This will also allow for greater local sourcing, fresher product, and being the second production facility in Dubai, it will create opportunities for synergies.

Investments in Luxury Water: In July 2012, Qatar-based Tamani Foodstuffs announced that it has entered into an agreement with Canadian luxury drink producer Gize to expand Gizes presence in the Middle East region. Tamami Foodstuffs will be the new sales and distribution partner for the nonalcoholic drinks company that specialises in high-end mineral water. Tamani will represent Gize in Bahrain, Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Yemen. A Gize representative has said that this partnership with Tamani will benefit Gize greatly as it will allow it to benefit from Tamanis network and logistics in order to be present in luxury hotels and gourmet venues, and make the drink a recognised part of menus in luxury venues across the region.

Key Risks To Outlook

Inflation Remains A Dark Cloud: An ongoing concern is inflation; higher inflation will dilute the impact that higher government spending will have on real growth. Our optimistic stance on the region's macroeconomic prospects over the next few years is based, to a large extent, on the positive outlook for domestic consumption, which in turn depends on fiscal expenditure. Higher prices would weigh on consumer spending power and will likely mean that the Gulf Cooperation Council will be unable to sustain the robust growth rates seen in recent years.
Includes 3 FREE quarterly updates

BMI View:

We still expect a contraction in the value of the Belarusian pharmaceutical market in 2012 as a result of the devalued rouble, high inflation and weak household consumption. Belarus remains one of the most risky Eastern European markets, the economy remains vulnerable to political mismanagement and the business environment is undesirable. However, we are expecting stronger growth in 2013, with the pharmaceutical market expected to post its first year of dollar growth since 2010.

Headline Expenditure Projections

• Pharmaceuticals: BYR3,598bn in 2011 (US$692mn) to BYR5,334bn (US$651mn) in 2012; +48.2% in local currency terms and -6.0% in US dollar terms. Local currency US dollar forecast upgraded from Q312 on the basis of updated data.
• Healthcare: BYR12,775bn (US$2.46bn) in 2011 to BYR16,305bn (US$1.99bn) in 2012; +27.6% in local currency terms and -19.1% in US dollar terms. Forecast virtually unchanged from Q312.
• Medical Devices: BYR2,174bn (US$418mn) in 2011 to BYR3,060bn (US$373mn); +40.8% in local currency terms and -10.8% in US dollar terms. Forecast virtually unchanged since Q312.
• Risk/Reward Rating: The Pharmaceutical risk/reward rating (RRR) score for Belarus increased from 44.4 in Q312 to 45.9 in Q412, due to an upgrade to the pharmaceutical market forecast. Belarus nevertheless remains as the 18th most attractive pharmaceutical market in Central and Eastern Europe, behind Serbia and ahead of Moldova. Belarus underperforms the regional average for most indicators in the proprietary ranking system, except in country rewards, which assesses factors such as urbanisation and population ageing/growth.

Key Trends And Developments

• In September 2012, BMI moderately increased its 2012 projections for Belarus's pharmaceutical market to a 6% contraction when measured in US dollar terms (previously an 8.4% US dollar contraction). Due to devaluation of the Belarusian rouble in May and October 2011, coupled with high rates of inflation expected to average over 60% for the full year, nominal growth in Belarusian roubles is expected to be around 48% in 2012. For 2013, BMI's country risk team is not expecting a further devaluation of the currency from its current levels - a hefty unwinding of Belarus's external imbalances into Q212 indicate a stronger balance of payments position, pointing to stability in the exchange rate. We expect the pharmaceuticals market to post 9.3% growth in 2013 and 8.6% in US dollars, with inflation still elevated but less damaging than that posted in the early part of 2013.
• In the first six months of 2012, total pharmaceuticals imports into Belarus decreased by 3.5% in US dollar terms. Pharmaceuticals in finished dose form contracted by 7.9% in dollar terms from H111, while stronger vaccine imports and a moderate rise in bulk pharmaceuticals imports offset some of this larger contraction.

BMI Economic View:

Economic growth in Belarus is expected to remain positive in 2012 (though at 3.6% real GDP, growth will fall below the government's target. In 2013, we see growth picking up to 5.5%, though notably exports are set to remain the major driver of growth in light of the severely weakened currency while household demand and corporate investment are likely to struggle over the next few quarters. A key risk to our economic growth forecasts is the prospect of another fiscal spending boost, which would raise 2012's growth at the expense of the country's future potential given the likely knock-on effects on inflation and economic sentiment.

BMI Political View: Despite continued pressure from Western Europe on Belarus to liberalise politically, we expect upcoming parliamentary elections to yield no change to the political status quo. That said, we do see scope for further domestic protests, similar to those witnessed in the aftermath of presidential elections in December 2010. On the foreign policy front, the diplomatic spat with Sweden has only further cemented Belarus's political isolation from the EU. This is likely to result in a continued shift towards Russia, both economically and politically, which presents huge risks to Belarus's long-term economic potential.