CASE Belarus team has utilised the concept of Economic Value Added (EVA) to discover how the Belarusian economy has changed over the last ten years .
What is EVA?
Economic Value Added (EVA) comes from consulting business. The theory of EVA has traditionally suggested that a company’s primary goal is to maximise the wealth of its shareholders, as far as any sensible investor expects a good return on his or her investment. Developed in 1982, EVA is probably the most widely used approach to measuring value-creation in private business.
Economic Value Added estimates what amount of value is added to the invested capital. The indicator is most generally calculated as the difference between net operating profit after tax (NOPAT) less market money value of capital invested (MVC):
EVA = NOPAT – MVC
The crucial point of EVA estimating is calculating the market money value of invested capital:
MVC = Weighted Average Cost of Capital (%) * Capital Invested
Since firms use both private equites (E) and debt (D) to finance their investment projects, it is important to use the wieghted structure of cost of capital:
WACC = %D * Cost of Debt + %E * Return on Equity,
where %D – share of debt invested in project; %E – share of equities invested in project; and %D + %E = 1
EVA is shown as money value, in local or international . This value usually results in higher net economic profit of a firm and higher devidends. Negative EVA indicates that either i) cost of capital is higher than return on capital (the firm is currently earing less than expected giving the its cost cost of capital) or ii) capital invested does not create enough of value for specific investment projects.
Now, imagine that Belarus is a big company, how does it perform, and how its divisions are doing?
EVA results for the Belarusian economy
We calculated the EVA indicator for the entire economy of Belarus since 2010 in terms of the average US dollar (USD) to control for the inflationary changes and the exchange rate of the Belarusian ruble (BYN).
Unsurprisingly, EVA for the Belarusian economy developed in waves. The most significant changes took place in 2013 (decline) and 2017 (growth). The fall in economic value added in 2013 was caused by a significant increase in investments in BYN and as of USD (36% and 28% respectively, compare to the average annual investment growth in 2010-2020 equal to 20.3% for BYN and -0.9% as of USD). A fast rise in EVA in 2017 was caused by a record high increase in operating profit (EBIT) by 25% and 29% in BYN and USD (compare to average annual EBIT growth for 2011-20 in BYN / USD equal to 14% / -6% accordingly).
In 2019 and 2020 the EVA indicator for the entire economy has been stagnating. The slowdown in EVA growth in 2019 was due to a 15% increase in investment and unchanged EBIT (in BYN). Most important is that the cost of capital increased in 2019 from 9.1 to 9.3%. In the first half of 2020, the average cost of capital grew even more to 10%, but the EVA of the Belarusian economy in BYN increased by 6.6%. However, this growth in BYN was completely offset by the depreciation of the Belarusian ruble and in USD terms the EVA indicator decreased by 3% in the first half of 2020 and continued the general downward trend from 2018.
Belarusian economy structure in terms of EVA
Over the past 10 years, the structure of the Belarusian economy in terms of EVA has become more diversified. The Top-5 sectors share in the total amount of EVA decreased from 70% to 40% in 2019. Over the past 3 years, the key drivers of the economy are non-industrial sectors (information and communication in 2019, transport and warehousing in 2018, production of food, beverages and tobacco products in 2017). Also, the number of sectors with negative EVA reduced from 9 in 2010 to 2 in 2019.
Based on the results of 2019, the greatest value was created by the “Information and communications” sector with IT companies as a key sector driver. Significant preferences for the IT sector since 2015 made it one of the Top4 industries in terms of EVA in 2015–2019. The EVA created by the IT and telecom companies almost tripled from 584 to 1.424 million BYN. There are two sectors that were on Top-3 list both in 2010 and 2019: production of chemical products and production of food, beverages and tobacco products. Another sector, transport, recorded the best performance jump, from the 25th place in 2012 to the 1st place in 2018, creating 1.3 bn BYN of economic value added and indicating how important is transport services for the Belarusian economy.
The industries from the bottom of the 2019 EVA table, education, healthcare, social services, and real estate, recorded the poorest EVA performance throughout the entire period. In fact, these industries do not create value, instead they spend value created by other sectors of the economy. As expected, education, healthcare and social services play an important social role in Belarusian political and economic systems and are heavily subsidised. However, we do not have a precise answer why the real estate is an outsider in the Belarusian economy. Among possible reasons are statistical peculiarities; understatement of sector key players profits for various reasons; relatively large share of social state-owned housing; huge government housing programs, etc. For an accurate answer, a more detailed analysis of the sector is needed.