ANALYSIS: Authorities increase pressure on National Bank to soften monetary policy
<p> Monthly overview of Belarus’ money-crediting & banking sector, Jan-May 2020 </p> <p> </p> <p> MINSK, Jun 26 – PrimePress. In May, Belarus’ monetary sector continued a smooth recovery from the March shock: inflation returned to the track outlined by the forecast, the Belarusian ruble rate stabilized, the situation in the FX market got back to normal; after a two-month decline, the growth of personal time deposits in Belarusian rubles started growing again, while the growth rate of broad money supply slowed down. </p> <p> </p> <p> At the same time, in the absence of tangible financial resources the authorities keep making attempts quickly to restore the pace of economic growth in the near future, which increases the pressure on the monetary sector. In June, the authorities have raised the ceiling on directed lending for the third time since early year. And on June 19, during a meeting with the government to discuss support measures the banking system could provide for the real economy sector, President Lukashenko demanded a rapid reduction of the refinancing rate and urged banks to increase credit support to the real sector. </p> <p> </p> <p> Table. Key performance indicators of the Belarusian monetary sector in 2020 </p> <table border="1" cellspacing="0" cellpadding="0"> <tbody> <tr> <td> <p> </p> </td> <td> <p align="center"> Real </p> <p align="center"> standing as of June 1, 2020 </p> </td> <td> <p> Official forecast, as anticipated on Jan 1, 2021 </p> </td> </tr> <tr> <td> <p> Belarusian ruble’s average exchange rate against US dollar, Br/$1 </p> </td> <td> <p align="center"> 2.41 </p> </td> <td> <p align="right"> 2.2784* </p> </td> </tr> <tr> <td> <p> Refinancing rate, per cent per annum </p> </td> <td> <p align="center"> 8** </p> </td> <td> <p align="right"> 9.5* </p> </td> </tr> <tr> <td> <p> Year-on-year inflation growth, % (key target of monetary policy) </p> </td> <td> <p align="center"> 4.9 (May 2020 on May 2019) </p> </td> <td> <p align="right"> not more than 5% (Dec 2020 on Dec 2019) </p> </td> </tr> <tr> <td> <p> Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars </p> </td> <td> <p align="center"> 7.879 </p> </td> <td> <p align="right"> at least 7.3 </p> </td> </tr> <tr> <td> <p> Growth in broad money supply since early 2018, % (intermediary target of monetary policy) </p> </td> <td> <p align="center"> 15.4 (May 2020 on May 2019) </p> </td> <td> <p align="right"> 8–11 (Dec 2020 on Dec 2019) </p> </td> </tr> </tbody> </table> <p> *as stated in the government’s medium-term finance programme of Belarus’ republican budget, which covers the 2020-2022 period (govt resolution #3 of Jan 3, 2020) </p> <p> **reduced by 0.75 percentage points on May 20, 2020 </p> <p> </p> <p> President demands banks should ease their credit policy more vigorously </p> <p> </p> <p> The decision taken by the National Bank in May in favour of transition from neutral to moderately soft monetary conditions did not suit the renewed team of economists of the presidential administration, as well as the president himself. </p> <p> </p> <p> During the meeting on June 19, 2020 President Lukashenko demanded to secure sustainable credit support to the real sector. He pointed to the need to use all instruments to replenish the resource base of banks: deposit auctions of the Ministry of Finance, the weakening of reserve requirements to maintain liquidity, the profit of the banking system. Lukashenko also gave guidance for National Bank to reduce the refinancing rate by the end of June. “Also pay attention to the refinancing rate. All countries are actively reducing it in a bid to revive their economies. The consumer price index is within the social and economic development forecast, this is why we should work harder to make bank loans cheaper. I will be waiting for the government and the National Bank to take relevant decisions without delay. Do it till the end of June,” said Lukashenko. </p> <p> </p> <p> The decisions followed on June 22, when the National Bank announced it will lower the refinancing rate by 0.25 percentage points on July 1, 2020 to 7.75% per annum; overnight loan and deposit rates – by 0.25 pp to 8.75% per annum and 6.75% per annum, respectively. The decision was made following the meeting on monetary policy held on June 22. The previous major meeting was held earlier: at a regular meeting on monetary policy on May 13, when the National Bank ruled to reduce the refinancing rate by 0.75 p.p. to 8% per annum from May 20, 2020. </p> <p> </p> <p> The regulator explained the motives behind its decisions: “Inflation is slowing faster than expected. In May 2020, consumer prices grew by 4.9% in annual terms against 5.4% in April 2020. The annual core inflation slowed to 3.9% (4.5% in April 2020)”. </p> <p> </p> <p> Tangibly easing monetary conditions, while inflation risks remain high and the economy needs reforms, may result not only in increased availability of credit resources at the time of crisis. This step also indicates that the authorities have lost hope for the emergence of non-inflationary sources of financing for the economy and decided to resort to the old tried and tested methods - pumping the economy with cheap credit resources, which threatens the preservation of price stability and financial stability in the long term. </p> <p> </p> <p> At present, the level of interest rates is adequate to the situation in the economy. According to the National Bank, amid current uncertainty, the average interest rate on new time bank deposits in Belarusian rubles has increased to 9.47% per annum in May 2020 against 8.90% April 2020 and 8.65% in May 2019. In turn, the average rate on new Br loans (except for soft loans) in May this year amounted to 10.69% against 10.67% per annum in Apr 2020 and 11.16% per annum in May 2019. </p> <p> </p> <p> The average rate on overnight loans in the interbank market, which most accurately reflects the cost of borrowing in the economy, stood at 9.27% in May 2020 to compare with 9.16% in Apr 2020 and 10.78% in May 2019. </p> <p> </p> <p> Further reducing credit interest rates, as demanded by the president, will inevitably lead to cheaper deposits. In the face of growing inflationary expectations, this may become a catalyst for the outflow of personal Br savings from banks, which will end up with having their resource base exhausted. In other words, the administered cheapening of resources may provoke their deficit in the market. </p> <p> </p> <p> May sees modest growth in personal Br-denominated time deposits </p> <p> </p> <p> After the negative dynamics of March-April, the market of Br deposits demonstrated a slight increase in personal fixed-term deposits denominated in Belarusian rubles. </p> <p> </p> <p> At the same time, personal savings in foreign currency continued to decline for five consecutive months. The situation in the deposit market is conditioned by the economic sentiment of Belarusians under the influence of the dynamics of interest rates, the perceived level of inflation, as well as the exchange rate of the Belarusian ruble. </p> <p> </p> <p> The total balance of fixed-term personal deposits in Belarusian rubles amounted to Br5.038 billion as of June 1, 2020, up 0.3% month on month (or Br14.1m) in May (minus 1.8% or Br93.5m since early 2020). In turn, fixed-term personal deposits in foreign currency decreased by 1.2% (minus 7.2% or by $448.5m) in May, amounting to $5.768 billion as of June 1. </p> <p> </p> <p> The waning interest in fixed-term foreign currency savings was offset by an increase in on-demand accounts. As of June 1, they stood at $1.503 billion, up 2.9% or $42.4 million in May, up 13.7% or $181.2 million since early 2020. </p> <p> </p> <p> The main factors of such stratification can be called a small difference in rates between FX fixed-term deposits and card account balances, which make up the bulk of the population's transferable deposits. </p> <p> </p> <p> The main factor behind Belarusians’ interest in card accounts, which make up the bulk of transferable personal deposits, is low interest rates on fixed-term foreign currency deposits. Amid uncertainty, individuals prefers to have access to their savings in the 24/7 mode rather than to expect the expiration of an irrevocable deposit. </p> <p> </p> <p> At the same time, the events of June this year, when the regulator unexpectedly introduced an interim administration at Belgazprombank, which had no external financial problems, as well as the subsequent disruption supply of foreign currency in ATMs and bank offices, may significantly affect the desire of Belarusians to keep their savings in banks, even in foreign currency. Given the insignificance of interest rates, it is much safer and less disturbing to keep dollars in a secret place at home. </p> <p> </p> <p> Reserves get stabilized, with remaining risks of further decline </p> <p> </p> <p> The relevant stability of the exchange rate of the Belarusian ruble, as well as the waning degree of uncertainty in the global markets has contributed to stabilization of Belarus’ gold and foreign exchange reserves, which currently exceed the level specified in the 2020 end-of-year forecast. </p> <p> </p> <p> The regulator says Belarus’ gold and FX reserve assets amounted to $7.879 million as of June 1, 2020, down 0.05% (or $3.7 million) month on month. </p> <p> </p> <p> The situation in the foreign exchange market in 2019 made it possible to accumulate a substantial reserve stock, however, in early 2020 this reserve started melting dangerously fast under the influence of external negative factors that affected the dynamics of the Belarusian ruble’s exchange rate. The National Bank was forced to actively interfere in the processes of exchange rate formation, which led to a total decline in reserves in Q1 2020 by 17.1% (or $1.607 billion). </p> <p> </p> <p> In the following months, the situation somewhat stabilized. As a result, in January-May 2020 gold and foreign exchange reserves decreased by 16.1%, or by $1.514 billion. </p> <p> </p> <p> In accordance with the 2020 Guidelines for Belarus’ monetary management policy, Belarus’ gold and foreign exchange reserves are supposed to reach at least $7.3 billion as of Jan 1, 2021. At the same time by the end of 2020 the government and the National Bank will have to repay about $2.5 billion to take of the country’s external and internal liabilities in foreign currency. </p> <p> </p> <p> At present the reserves exceed the forecasted level and the National Bank confidently declares, with reference to the successful placement of Eurobonds by the Ministry of Finance in June, that it is real to fulfil or even overfulfil the forecast. At the same time, the continuing uncertainty in the economy, as well as the upcoming debt payments, give rise to certain concerns about the dynamics of the country’s foreign exchange reserves. </p> <p> </p> <p> Besides, another cause for concern is the statements made by President Lukashenko at the meeting on June 19 about the necessity to increase lending to enterprises especially since the country has accumulated significant gold and foreign exchange reserves “for a rainy day”. </p> <p> </p> <p> He said: “Over the last five years we have been pursuing a rigorous monetary and foreign exchange policy. We have accumulated certain gold and foreign exchange reserves and budget leftovers. We have always known these were set aside for a rainy day. I am not saying that day has come. This is a problem because we don't know what will happen to the global economy, on which we (and other countries) depend so much. Everything is globalized, everything is related. It is difficult to understand whether today is a rainy day or will get even rainier just like in other countries.” </p> <p> </p> <p> In other words, the president does not rule out the possibility of “eating away” gold and foreign currency reserves. Taking into account the fact that Belarusian reserves are largely of debt nature, their spending on maintaining an ineffective public sector may have very painful consequences. </p> <p> </p> <p> Lending will be given an administrative boost </p> <p> </p> <p> Lending, and especially directed lending, is highly likely to start growing within the next few months to come. </p> <p> </p> <p> Despite the fact that the authorities planned to completely abandon directed lending as early as 2020, they have so far had little success implementing these plans. Moreover, the initial plans to restrict this time of lending this year have ended up with an administrative increase in the ceiling on directed lending by 70% to Br1.26 billion. </p> <p> </p> <p> This line of behaviour of the authorities is proof that their economic projects are inefficient and, consequently, investors are unwilling to take market risks related to implementing such projects. </p> <p> </p> <p> Meanwhile, so far the pace of lending has been rather restrained due to balanced credit policy of banks, as well as due to limited number of promising projects and solvent borrowers. </p> <p> </p> <p> According to the National Bank, the economy’s debt to banks stood at Br61.013bn as of Jun 1, 2019, up 11.2% since early 2020. The real sector’s debt to banks stood at Br42.221bn as of June 1, 2019, up 13.2% since early 2020. This includes the debt of state-owned non-financial organizations - Br20.933bn, up 10.1% in Jan-May 2020, and on other non-financial organizations - Br21.288bn, up 16.5%. </p> <p> </p> <p> More dynamic lending to the non-financial sector may be indicative of its greater efficiency and, consequently, its attractiveness for financing by banks. </p> <p> </p> <p> Private households’ debt to banks stood at Br15.151bn as of June 1, 2020, up 5.6% since early 2020. A more modest increase in lending to private households compared to other sectors is due to the fact that banks fully meet individuals’ demand for loans; another reason is the tightening of lending conditions by banks. </p> <p> </p> <p> Thus, it can be assumed that the aggravation of credit risks will be very important at least until the end of this year both for banks and for the country’s economy as a whole. </p> <p> </p> <p> Risks will increase if GDP gets artificially pumped up </p> <p> </p> <p> The National Bank has estimated that maintaining moderately soft monetary conditions allows maintaining an acceptable level of price stability and financial stability. </p> <p> </p> <p> At the same time, the economic policy vector voiced by the authorities suggests artificially pumping up the GDP (for example, by means of creating excessive warehouse inventories, further raising of the ceiling on directed lending). </p> <p> </p> <p> The government declares that the crisis will hit the bottom in the second quarter, and the recovery processes will start in the third quarter. Economy Minister Alexander Chervyakov hopes to prevent the economy from contracting in 2020, although over the period of Jan-May 2020 the economy has already declined by 1.8%. If the authorities really intend to reduce the GDP decline to zero, it will reduce the National Bank’s room for manoeuvre in terms of the possibility to reduce interest rates and increase the risks of economic instability. </p> <p> </p> <p> PrimePress Business Analysis Agency </p>
2020-06-27
Primepress
Monthly overview of Belarus’ money-crediting & banking sector, Jan-May 2020
MINSK, Jun 26 – PrimePress. In May, Belarus’ monetary sector continued a smooth recovery from the March shock: inflation returned to the track outlined by the forecast, the Belarusian ruble rate stabilized, the situation in the FX market got back to normal; after a two-month decline, the growth of personal time deposits in Belarusian rubles started growing again, while the growth rate of broad money supply slowed down.
At the same time, in the absence of tangible financial resources the authorities keep making attempts quickly to restore the pace of economic growth in the near future, which increases the pressure on the monetary sector. In June, the authorities have raised the ceiling on directed lending for the third time since early year. And on June 19, during a meeting with the government to discuss support measures the banking system could provide for the real economy sector, President Lukashenko demanded a rapid reduction of the refinancing rate and urged banks to increase credit support to the real sector.
Table. Key performance indicators of the Belarusian monetary sector in 2020
|
Real standing as of June 1, 2020 |
Official forecast, as anticipated on Jan 1, 2021 |
Belarusian ruble’s average exchange rate against US dollar, Br/$1 |
2.41 |
2.2784* |
Refinancing rate, per cent per annum |
8** |
9.5* |
Year-on-year inflation growth, % (key target of monetary policy) |
4.9 (May 2020 on May 2019) |
not more than 5% (Dec 2020 on Dec 2019) |
Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars |
7.879 |
at least 7.3 |
Growth in broad money supply since early 2018, % (intermediary target of monetary policy) |
15.4 (May 2020 on May 2019) |
8–11 (Dec 2020 on Dec 2019) |
*as stated in the government’s medium-term finance programme of Belarus’ republican budget, which covers the 2020-2022 period (govt resolution #3 of Jan 3, 2020)
**reduced by 0.75 percentage points on May 20, 2020
President demands banks should ease their credit policy more vigorously
The decision taken by the National Bank in May in favour of transition from neutral to moderately soft monetary conditions did not suit the renewed team of economists of the presidential administration, as well as the president himself.
During the meeting on June 19, 2020 President Lukashenko demanded to secure sustainable credit support to the real sector. He pointed to the need to use all instruments to replenish the resource base of banks: deposit auctions of the Ministry of Finance, the weakening of reserve requirements to maintain liquidity, the profit of the banking system. Lukashenko also gave guidance for National Bank to reduce the refinancing rate by the end of June. “Also pay attention to the refinancing rate. All countries are actively reducing it in a bid to revive their economies. The consumer price index is within the social and economic development forecast, this is why we should work harder to make bank loans cheaper. I will be waiting for the government and the National Bank to take relevant decisions without delay. Do it till the end of June,” said Lukashenko.
The decisions followed on June 22, when the National Bank announced it will lower the refinancing rate by 0.25 percentage points on July 1, 2020 to 7.75% per annum; overnight loan and deposit rates – by 0.25 pp to 8.75% per annum and 6.75% per annum, respectively. The decision was made following the meeting on monetary policy held on June 22. The previous major meeting was held earlier: at a regular meeting on monetary policy on May 13, when the National Bank ruled to reduce the refinancing rate by 0.75 p.p. to 8% per annum from May 20, 2020.
The regulator explained the motives behind its decisions: “Inflation is slowing faster than expected. In May 2020, consumer prices grew by 4.9% in annual terms against 5.4% in April 2020. The annual core inflation slowed to 3.9% (4.5% in April 2020)”.
Tangibly easing monetary conditions, while inflation risks remain high and the economy needs reforms, may result not only in increased availability of credit resources at the time of crisis. This step also indicates that the authorities have lost hope for the emergence of non-inflationary sources of financing for the economy and decided to resort to the old tried and tested methods - pumping the economy with cheap credit resources, which threatens the preservation of price stability and financial stability in the long term.
At present, the level of interest rates is adequate to the situation in the economy. According to the National Bank, amid current uncertainty, the average interest rate on new time bank deposits in Belarusian rubles has increased to 9.47% per annum in May 2020 against 8.90% April 2020 and 8.65% in May 2019. In turn, the average rate on new Br loans (except for soft loans) in May this year amounted to 10.69% against 10.67% per annum in Apr 2020 and 11.16% per annum in May 2019.
The average rate on overnight loans in the interbank market, which most accurately reflects the cost of borrowing in the economy, stood at 9.27% in May 2020 to compare with 9.16% in Apr 2020 and 10.78% in May 2019.
Further reducing credit interest rates, as demanded by the president, will inevitably lead to cheaper deposits. In the face of growing inflationary expectations, this may become a catalyst for the outflow of personal Br savings from banks, which will end up with having their resource base exhausted. In other words, the administered cheapening of resources may provoke their deficit in the market.
May sees modest growth in personal Br-denominated time deposits
After the negative dynamics of March-April, the market of Br deposits demonstrated a slight increase in personal fixed-term deposits denominated in Belarusian rubles.
At the same time, personal savings in foreign currency continued to decline for five consecutive months. The situation in the deposit market is conditioned by the economic sentiment of Belarusians under the influence of the dynamics of interest rates, the perceived level of inflation, as well as the exchange rate of the Belarusian ruble.
The total balance of fixed-term personal deposits in Belarusian rubles amounted to Br5.038 billion as of June 1, 2020, up 0.3% month on month (or Br14.1m) in May (minus 1.8% or Br93.5m since early 2020). In turn, fixed-term personal deposits in foreign currency decreased by 1.2% (minus 7.2% or by $448.5m) in May, amounting to $5.768 billion as of June 1.
The waning interest in fixed-term foreign currency savings was offset by an increase in on-demand accounts. As of June 1, they stood at $1.503 billion, up 2.9% or $42.4 million in May, up 13.7% or $181.2 million since early 2020.
The main factors of such stratification can be called a small difference in rates between FX fixed-term deposits and card account balances, which make up the bulk of the population's transferable deposits.
The main factor behind Belarusians’ interest in card accounts, which make up the bulk of transferable personal deposits, is low interest rates on fixed-term foreign currency deposits. Amid uncertainty, individuals prefers to have access to their savings in the 24/7 mode rather than to expect the expiration of an irrevocable deposit.
At the same time, the events of June this year, when the regulator unexpectedly introduced an interim administration at Belgazprombank, which had no external financial problems, as well as the subsequent disruption supply of foreign currency in ATMs and bank offices, may significantly affect the desire of Belarusians to keep their savings in banks, even in foreign currency. Given the insignificance of interest rates, it is much safer and less disturbing to keep dollars in a secret place at home.
Reserves get stabilized, with remaining risks of further decline
The relevant stability of the exchange rate of the Belarusian ruble, as well as the waning degree of uncertainty in the global markets has contributed to stabilization of Belarus’ gold and foreign exchange reserves, which currently exceed the level specified in the 2020 end-of-year forecast.
The regulator says Belarus’ gold and FX reserve assets amounted to $7.879 million as of June 1, 2020, down 0.05% (or $3.7 million) month on month.
The situation in the foreign exchange market in 2019 made it possible to accumulate a substantial reserve stock, however, in early 2020 this reserve started melting dangerously fast under the influence of external negative factors that affected the dynamics of the Belarusian ruble’s exchange rate. The National Bank was forced to actively interfere in the processes of exchange rate formation, which led to a total decline in reserves in Q1 2020 by 17.1% (or $1.607 billion).
In the following months, the situation somewhat stabilized. As a result, in January-May 2020 gold and foreign exchange reserves decreased by 16.1%, or by $1.514 billion.
In accordance with the 2020 Guidelines for Belarus’ monetary management policy, Belarus’ gold and foreign exchange reserves are supposed to reach at least $7.3 billion as of Jan 1, 2021. At the same time by the end of 2020 the government and the National Bank will have to repay about $2.5 billion to take of the country’s external and internal liabilities in foreign currency.
At present the reserves exceed the forecasted level and the National Bank confidently declares, with reference to the successful placement of Eurobonds by the Ministry of Finance in June, that it is real to fulfil or even overfulfil the forecast. At the same time, the continuing uncertainty in the economy, as well as the upcoming debt payments, give rise to certain concerns about the dynamics of the country’s foreign exchange reserves.
Besides, another cause for concern is the statements made by President Lukashenko at the meeting on June 19 about the necessity to increase lending to enterprises especially since the country has accumulated significant gold and foreign exchange reserves “for a rainy day”.
He said: “Over the last five years we have been pursuing a rigorous monetary and foreign exchange policy. We have accumulated certain gold and foreign exchange reserves and budget leftovers. We have always known these were set aside for a rainy day. I am not saying that day has come. This is a problem because we don't know what will happen to the global economy, on which we (and other countries) depend so much. Everything is globalized, everything is related. It is difficult to understand whether today is a rainy day or will get even rainier just like in other countries.”
In other words, the president does not rule out the possibility of “eating away” gold and foreign currency reserves. Taking into account the fact that Belarusian reserves are largely of debt nature, their spending on maintaining an ineffective public sector may have very painful consequences.
Lending will be given an administrative boost
Lending, and especially directed lending, is highly likely to start growing within the next few months to come.
Despite the fact that the authorities planned to completely abandon directed lending as early as 2020, they have so far had little success implementing these plans. Moreover, the initial plans to restrict this time of lending this year have ended up with an administrative increase in the ceiling on directed lending by 70% to Br1.26 billion.
This line of behaviour of the authorities is proof that their economic projects are inefficient and, consequently, investors are unwilling to take market risks related to implementing such projects.
Meanwhile, so far the pace of lending has been rather restrained due to balanced credit policy of banks, as well as due to limited number of promising projects and solvent borrowers.
According to the National Bank, the economy’s debt to banks stood at Br61.013bn as of Jun 1, 2019, up 11.2% since early 2020. The real sector’s debt to banks stood at Br42.221bn as of June 1, 2019, up 13.2% since early 2020. This includes the debt of state-owned non-financial organizations - Br20.933bn, up 10.1% in Jan-May 2020, and on other non-financial organizations - Br21.288bn, up 16.5%.
More dynamic lending to the non-financial sector may be indicative of its greater efficiency and, consequently, its attractiveness for financing by banks.
Private households’ debt to banks stood at Br15.151bn as of June 1, 2020, up 5.6% since early 2020. A more modest increase in lending to private households compared to other sectors is due to the fact that banks fully meet individuals’ demand for loans; another reason is the tightening of lending conditions by banks.
Thus, it can be assumed that the aggravation of credit risks will be very important at least until the end of this year both for banks and for the country’s economy as a whole.
Risks will increase if GDP gets artificially pumped up
The National Bank has estimated that maintaining moderately soft monetary conditions allows maintaining an acceptable level of price stability and financial stability.
At the same time, the economic policy vector voiced by the authorities suggests artificially pumping up the GDP (for example, by means of creating excessive warehouse inventories, further raising of the ceiling on directed lending).
The government declares that the crisis will hit the bottom in the second quarter, and the recovery processes will start in the third quarter. Economy Minister Alexander Chervyakov hopes to prevent the economy from contracting in 2020, although over the period of Jan-May 2020 the economy has already declined by 1.8%. If the authorities really intend to reduce the GDP decline to zero, it will reduce the National Bank’s room for manoeuvre in terms of the possibility to reduce interest rates and increase the risks of economic instability.
PrimePress Business Analysis Agency