ANALYSIS: Adverse factors persist in Belarus’ monetary sector

Monthly overview of Belarus’ monetary market, Jan-Mar 2021 MINSK, Apr 30 - PrimePress. Belarus’ monetary sector still stays under the influence of negative factors, which took shape in 2020. Due to the unfolding political crisis, economic policy uncertainty persists and inflation and devaluation expectations of economic agents are intensifying. The devaluation of the Russian currency against the U.S. dollar creates additional pressure on the exchange rate of the Belarusian ruble and Belarus’ foreign exchange reserves. In order to restrain inflationary processes, the National Bank is forced to significantly limit money supply, which has a negative impact on the growth dynamics of the economy as a whole and is not much liked by lobbyists of the real sector. The banks’ lending capacity is affected by the population’s continued mistrust in the authorities' actions, which is expressed, among other things, in a reluctance to keep their savings in banks. Table. Key performance indicators of Belarus’ monetary sector in 2021 <table border="1" cellspacing="0" cellpadding="0"> <tbody> <tr> <td> </td> <td> Real standing as of Apr 1, 2021 </td> <td> Official forecast, as anticipated on Jan 1, 2022 </td> </tr> <tr> <td> Belarusian ruble’s average exchange rate against US dollar, Br/$1 </td> <td> 2.5935* </td> <td> 2.5678** (annual average rate) </td> </tr> <tr> <td> Refinancing rate, per cent per annum </td> <td> 7.75*** </td> <td> 7.75-8.25** </td> </tr> <tr> <td> Year-on-year inflation growth, % (key target of monetary policy) </td> <td> 8.5 (Mar 2021 on Mar 2020) </td> <td> not more than 5 (Dec 2021 on Dec 2020) National Bank’s adjusted forecast – around 7% </td> </tr> <tr> <td> Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars </td> <td> 6.94 </td> <td> at least 6 </td> </tr> <tr> <td> Growth in broad money supply since early 2018, % (intermediary target of monetary policy) </td> <td> 1.8 (Mar 2021 on Mar 2020) </td> <td> 7-10 (Dec 2021 on Dec 2020) </td> </tr> </tbody> </table> * Average official exchange rate of the Belarusian ruble to foreign currencies, calculated as arithmetic average, Jan-Mar 2021 ** as stated in the government’s medium-term finance programme of Belarus’ republican budget, which covers the 2021-2023 period (govt resolution #227 of Apr 20, 2021) *** raised by 0.75 percentage points to 8.5% on Apr 21, 2021 National Bank raises refinancing rate to match inflation level On 14 April 2021 without warning (the preliminary schedule of fiscal policy meetings was cancelled in March) the National Bank decided to raise the refinancing rate by 0.75 p.p. to 8.5% per annum from 21 April, which corresponds to the annual inflation rate in March. The overnight credit rate (9.5% p.a. since 21 April) and the overnight deposit rate (7.5% p.a.) also underwent corresponding changes. The decision is belated and under the National Bank’s tightened control over money supply has little effect on the cost of resources on the market. The regulator continues to distribute resources among banks in a virtually manual mode. At the same time, the demand from the latter for Br liquidity at relatively adequate rates remains elevated. The regulator says it conducted credit auction #746 on March 21, 2021 for a period of 180 days, with quoted interest rate set at 10.5% per annum. 18 bids from 13 banks for a total of Br1.243 billion were accepted. It was decided to set the volume of loans at Br50.0 million. Returning to the refinancing rate, it is worth noting that in March 2021 it continued to stay below inflation level, and the interbank credit market rates reflected little of the real value of money due to the regulator’s manipulation of liquidity. Some idea of the cost of money in the market can be gleaned from the interest rates on deposits. Thus, the average rate on new personal fixed-term deposits in Belarusian rubles in March 2021 amounted to 17.54% per annum against 17.76% a month earlier and 9.19% in March 2020. Thus, the belated increase in the refinancing rate to the level of annual inflation can be called a compromise between the desires of the agro-industrial lobby and common sense. As noted above, the National Bank is curbing inflationary pressure in the emerging environment by limiting money supply. The regulator’s tough policy in this sphere has led to the fact that March’s average broad money supply increased by only 1.8% year on year, with the end-of-year target range set at 7-10%; ruble money supply increased by 2.2%, with the target range of 11-14%. No tangible increase in Br deposits despite rising rates The increase in interest rates has not contributed much to private households’ interest in Br deposits in March. According to the National Bank, the balances of fixed-term and conditional personal deposits in Belarusian rubles increased by 0.6% in March 2021, to the tune of Br4.678 billion as of April 1, 2021 (+3.2% in Q1 2021). Thus, taking into account the magnitude of interest rates, we can say that the growth of fixed-term deposits in March was even lower than the amount of interest capitalization on deposits. The balance of transferable deposits (mainly salary card accounts) stood at Br2.674bn as of Apr 1, 2021, down 15.9% month on month (minus 6% year to date). Given the drop in retail turnover in Belarus in March and ongoing uncertainty in the country, it can be assumed that money from households' salary accounts was transformed into FX cash savings. Fixed-term and conditional personal deposits in foreign currency amounted to $4.439 billion as of April 1, 2021, down 2% month on month. During the first three months of the year, the decrease was 4.3%, or just over $200 million. The balances on transferable FX accounts of individuals in March 2021 increased by a modest 0.2% to $1.297bn. As of Apr 1, 2021, the increase amounted to 7.2%, or $86.9m. High inflation and devaluation expectations not only among individuals, but also in the economy as a whole, have a negative impact on the resource base of banks. The situation is unlikely to improve in the coming months, not only because of the uncertainty, but also because of the worsening financial situation of households due to the crisis in the economy. In the emerging environment, many will be forced to spend their savings to maintain their usual standard of living. FX reserves continue to decline Significant payments on FX debts, as well as increased demand for foreign currency and the need to maintain the exchange rate of the Belarusian ruble, are depleting Belarus’ gold and foreign exchange reserves. Based on the data of the National Bank, in Q1 2021 $970.6 million was spent to repay external and internal FX liabilities of the government and the National Bank. The net purchase of foreign currency by individuals and companies on the domestic market amounted to $326.5 million (i.e. FX purchases from banks exceeded FX sales to banks by the stated amount). The regulator says Belarus’ international reserve assets decreased by $528.5 million in January-March 2021, or 7.1% to $6.94 billion. At the same time, international reserve assets are projected to reach at least $6 billion as of January 1, 2022. Thus, the dynamics of the country’s gold and foreign exchange reserves can be called depressing. Belarus’ FX reserves have been reducing not only in absolute terms, but also in relative terms. As of 1 April 2021 they stood at around 2.4 months of import against 2.5 months at the start of this year and 2.7 months at the start of 2020. The regulator says the level of FX reserves in Q1 2021 was maintained at the expense of foreign currency revenues of the public budget, including proceeds from placement of FX-denominated bonds by the Ministry of Finance. As we noted above, apart from payments on foreign currency liabilities, a significant pressure on foreign exchange reserves was exerted by increased demand for foreign currency on the domestic market. At the same time, the situation differs in different segments of the foreign exchange market. Private households are the most predictable in their behaviour. They have been net buyers of foreign currency for 16 months in a row. However, it is worth noting that in March private households’ the net demand for foreign currency (i.e. the margin between FX purchases and FX sales) was the lowest for the last 16 months. According to the National Bank, in Mar 2021, net FX purchases by individuals (both cash and cashless) stood at $24.5 million, to compare with $47.2 million in Feb 2021. All in all, FX purchases by individuals totalled $756.6 million in March 2021, up 19% month on month; FX sales - $875.9 million, up 23.5%. In March, FX purchases by resident companies totalled $2.337bn (up 17.7% month on month), FX sales – $2.268 bn (up 25.4%). Thus, FX purchases by resident legal entities exceeded their FX sales in Mar 2021 by $69.3m, to compare with $176.1m in Feb 2021. Belarusian banks bought in Mar 2021 at their own expense (without conversion operations) $4.124 billion (up 15.9% month on month), sold – $4.215 billion (up 23.5%), margin – $90.5 million ($147.5m in Feb 2021). Belarus’ domestic currency to stay under influence of devaluation expectations A significant problem for the Belarusian authorities is the disruption of the savings process, which has intensified after the 2020 presidential election. The outflow of personal fixed-term FX deposits has continued for 15 months in a row, amounting to almost $1.8 billion. This trend creates problems not only in terms of its impact on the resource base of banks, but also in terms of its impact on the country’s foreign exchange market. In March, the Eurasian Development Bank presented a macroeconomic survey of Eurasian Economic Union member countries. The baseline scenario based on the forecasts of the EDB analysts provided that the average exchange rate will be Br2.63/$1 in 2021; the risk scenario - Br2.8/$1. According to the National Bank, the actual average dollar exchange rate in the first quarter was about Br2.59/$1. According to the EDB, devaluation expectations will continue to affect the Belarusian currency. The Eurasian Bank estimates that the trend of weakening of the Belarusian ruble will continue in the medium term due to the relatively low rate of economic growth in Belarus. High devaluation expectations coupled with the negative dynamics of the country's foreign exchange reserves form the risks of FX restrictions in Belarus. Threats will come both from the domestic economic environment and from ill-considered actions of the authorities, as well as from the external circuit (Russia, the US and the EU). PrimePress Business Analysis Agency

2021-05-01

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ANALYSIS: Adverse factors persist in Belarus’ monetary sector

Monthly overview of Belarus’ monetary market, Jan-Mar 2021

MINSK, Apr 30 - PrimePress. Belarus’ monetary sector still stays under the influence of negative factors, which took shape in 2020. Due to the unfolding political crisis, economic policy uncertainty persists and inflation and devaluation expectations of economic agents are intensifying. The devaluation of the Russian currency against the U.S. dollar creates additional pressure on the exchange rate of the Belarusian ruble and Belarus’ foreign exchange reserves.

In order to restrain inflationary processes, the National Bank is forced to significantly limit money supply, which has a negative impact on the growth dynamics of the economy as a whole and is not much liked by lobbyists of the real sector. The banks’ lending capacity is affected by the population’s continued mistrust in the authorities' actions, which is expressed, among other things, in a reluctance to keep their savings in banks.

Table. Key performance indicators of Belarus’ monetary sector in 2021

	Real standing as of Apr 1, 2021	Official forecast, as anticipated on Jan 1, 2022
Belarusian ruble’s average exchange rate against US dollar, Br/$1	2.5935*	2.5678** (annual average rate)
Refinancing rate, per cent per annum	7.75***	7.75-8.25**
Year-on-year inflation growth, % (key target of monetary policy)	8.5 (Mar 2021 on Mar 2020)	not more than 5 (Dec 2021 on Dec 2020) National Bank’s adjusted forecast – around 7%
Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars	6.94	at least 6
Growth in broad money supply since early 2018, % (intermediary target of monetary policy)	1.8 (Mar 2021 on Mar 2020)	7-10 (Dec 2021 on Dec 2020)

* Average official exchange rate of the Belarusian ruble to foreign currencies, calculated as arithmetic average, Jan-Mar 2021

** as stated in the government’s medium-term finance programme of Belarus’ republican budget, which covers the 2021-2023 period (govt resolution #227 of Apr 20, 2021)

*** raised by 0.75 percentage points to 8.5% on Apr 21, 2021

National Bank raises refinancing rate to match inflation level

On 14 April 2021 without warning (the preliminary schedule of fiscal policy meetings was cancelled in March) the National Bank decided to raise the refinancing rate by 0.75 p.p. to 8.5% per annum from 21 April, which corresponds to the annual inflation rate in March. The overnight credit rate (9.5% p.a. since 21 April) and the overnight deposit rate (7.5% p.a.) also underwent corresponding changes.

The decision is belated and under the National Bank’s tightened control over money supply has little effect on the cost of resources on the market. The regulator continues to distribute resources among banks in a virtually manual mode. At the same time, the demand from the latter for Br liquidity at relatively adequate rates remains elevated.

The regulator says it conducted credit auction #746 on March 21, 2021 for a period of 180 days, with quoted interest rate set at 10.5% per annum. 18 bids from 13 banks for a total of Br1.243 billion were accepted. It was decided to set the volume of loans at Br50.0 million.

Returning to the refinancing rate, it is worth noting that in March 2021 it continued to stay below inflation level, and the interbank credit market rates reflected little of the real value of money due to the regulator’s manipulation of liquidity.

Some idea of the cost of money in the market can be gleaned from the interest rates on deposits. Thus, the average rate on new personal fixed-term deposits in Belarusian rubles in March 2021 amounted to 17.54% per annum against 17.76% a month earlier and 9.19% in March 2020.

Thus, the belated increase in the refinancing rate to the level of annual inflation can be called a compromise between the desires of the agro-industrial lobby and common sense.

As noted above, the National Bank is curbing inflationary pressure in the emerging environment by limiting money supply. The regulator’s tough policy in this sphere has led to the fact that March’s average broad money supply increased by only 1.8% year on year, with the end-of-year target range set at 7-10%; ruble money supply increased by 2.2%, with the target range of 11-14%.

No tangible increase in Br deposits despite rising rates

The increase in interest rates has not contributed much to private households’ interest in Br deposits in March. According to the National Bank, the balances of fixed-term and conditional personal deposits in Belarusian rubles increased by 0.6% in March 2021, to the tune of Br4.678 billion as of April 1, 2021 (+3.2% in Q1 2021). Thus, taking into account the magnitude of interest rates, we can say that the growth of fixed-term deposits in March was even lower than the amount of interest capitalization on deposits.

The balance of transferable deposits (mainly salary card accounts) stood at Br2.674bn as of Apr 1, 2021, down 15.9% month on month (minus 6% year to date). Given the drop in retail turnover in Belarus in March and ongoing uncertainty in the country, it can be assumed that money from households' salary accounts was transformed into FX cash savings.

Fixed-term and conditional personal deposits in foreign currency amounted to $4.439 billion as of April 1, 2021, down 2% month on month. During the first three months of the year, the decrease was 4.3%, or just over $200 million. The balances on transferable FX accounts of individuals in March 2021 increased by a modest 0.2% to $1.297bn. As of Apr 1, 2021, the increase amounted to 7.2%, or $86.9m.

High inflation and devaluation expectations not only among individuals, but also in the economy as a whole, have a negative impact on the resource base of banks. The situation is unlikely to improve in the coming months, not only because of the uncertainty, but also because of the worsening financial situation of households due to the crisis in the economy. In the emerging environment, many will be forced to spend their savings to maintain their usual standard of living.

FX reserves continue to decline

Significant payments on FX debts, as well as increased demand for foreign currency and the need to maintain the exchange rate of the Belarusian ruble, are depleting Belarus’ gold and foreign exchange reserves. Based on the data of the National Bank, in Q1 2021 $970.6 million was spent to repay external and internal FX liabilities of the government and the National Bank. The net purchase of foreign currency by individuals and companies on the domestic market amounted to $326.5 million (i.e. FX purchases from banks exceeded FX sales to banks by the stated amount).

The regulator says Belarus’ international reserve assets decreased by $528.5 million in January-March 2021, or 7.1% to $6.94 billion. At the same time, international reserve assets are projected to reach at least $6 billion as of January 1, 2022. Thus, the dynamics of the country’s gold and foreign exchange reserves can be called depressing.

Belarus’ FX reserves have been reducing not only in absolute terms, but also in relative terms. As of 1 April 2021 they stood at around 2.4 months of import against 2.5 months at the start of this year and 2.7 months at the start of 2020.

The regulator says the level of FX reserves in Q1 2021 was maintained at the expense of foreign currency revenues of the public budget, including proceeds from placement of FX-denominated bonds by the Ministry of Finance.

As we noted above, apart from payments on foreign currency liabilities, a significant pressure on foreign exchange reserves was exerted by increased demand for foreign currency on the domestic market.

At the same time, the situation differs in different segments of the foreign exchange market. Private households are the most predictable in their behaviour. They have been net buyers of foreign currency for 16 months in a row. However, it is worth noting that in March private households’ the net demand for foreign currency (i.e. the margin between FX purchases and FX sales) was the lowest for the last 16 months.

According to the National Bank, in Mar 2021, net FX purchases by individuals (both cash and cashless) stood at $24.5 million, to compare with $47.2 million in Feb 2021. All in all, FX purchases by individuals totalled $756.6 million in March 2021, up 19% month on month; FX sales - $875.9 million, up 23.5%.

In March, FX purchases by resident companies totalled $2.337bn (up 17.7% month on month), FX sales – $2.268 bn (up 25.4%). Thus, FX purchases by resident legal entities exceeded their FX sales in Mar 2021 by $69.3m, to compare with $176.1m in Feb 2021.

Belarusian banks bought in Mar 2021 at their own expense (without conversion operations) $4.124 billion (up 15.9% month on month), sold – $4.215 billion (up 23.5%), margin – $90.5 million ($147.5m in Feb 2021).

Belarus’ domestic currency to stay under influence of devaluation expectations

A significant problem for the Belarusian authorities is the disruption of the savings process, which has intensified after the 2020 presidential election. The outflow of personal fixed-term FX deposits has continued for 15 months in a row, amounting to almost $1.8 billion. This trend creates problems not only in terms of its impact on the resource base of banks, but also in terms of its impact on the country’s foreign exchange market.

In March, the Eurasian Development Bank presented a macroeconomic survey of Eurasian Economic Union member countries.

The baseline scenario based on the forecasts of the EDB analysts provided that the average exchange rate will be Br2.63/$1 in 2021; the risk scenario - Br2.8/$1. According to the National Bank, the actual average dollar exchange rate in the first quarter was about Br2.59/$1.

According to the EDB, devaluation expectations will continue to affect the Belarusian currency. The Eurasian Bank estimates that the trend of weakening of the Belarusian ruble will continue in the medium term due to the relatively low rate of economic growth in Belarus.

High devaluation expectations coupled with the negative dynamics of the country's foreign exchange reserves form the risks of FX restrictions in Belarus. Threats will come both from the domestic economic environment and from ill-considered actions of the authorities, as well as from the external circuit (Russia, the US and the EU).

PrimePress Business Analysis Agency

2021-05-01

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