ANALYSIS: Belarus’ deposit market seeing tangible increase in interest rates

<p> Monthly overview of Belarus’ monetary market, Jan-Jul 2021 </p> <p>   </p> <p> MINSK, Sep 1 - PrimePress. Belarus’ monetary market remains in a state of fragile equilibrium, threatened both internally - by negative expectations of economic agents and attempts at administrative intervention in economic processes, and externally - by sanctions threats fr om Western countries. </p> <p>   </p> <p> The National Bank of Belarus (NBB) so far stays in control of the situation. Despite growing risks, the main financial indicators show positive dynamics: foreign exchange reserves are increasing, the pace of inflation growth is starting to slow down, private households have again become net sellers of foreign currency (i.e. their FX sales to banks exceed their FX purchases fr om banks), and the Belarusian ruble exchange rate is relatively stable, despite many unresolved problems in the country’s economy. </p> <p>   </p> <p> Table. Key performance indicators of Belarus’ monetary sector in 2021 </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 Aug 1, 2021 </p> </td> <td> <p> Official forecast, as anticipated on Jan 1, 2022 </p> </td> </tr> <tr> <td> <p> Belarusian ruble’s average exchange rate against US dollar, Br/$1 </p> </td> <td> <p align="center"> 2.5685* </p> </td> <td> <p align="center"> 2.5678** (annual average rate) </p> </td> </tr> <tr> <td> <p> Refinancing rate, per cent per annum </p> </td> <td> <p align="center"> 9.25*** </p> </td> <td> <p align="center"> 7.75-8.25** </p> </td> </tr> <tr> <td> <p> Year-on-year inflation growth, % (key target of monetary policy) </p> </td> <td> <p align="center"> 9.8 (Jul 2021 on Jul 2020) </p> </td> <td> <p align="center"> not more than 5 (Dec 2021 on Dec 2020) </p> </td> </tr> <tr> <td> <p> Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars </p> </td> <td> <p align="center"> 7.442 </p> </td> <td> <p align="center"> at least 6 </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"> minus 2.7 (Jul 2021 on Jul 2020) </p> </td> <td> <p align="center"> 7-10 (Dec 2021 on Dec 2020) </p> </td> </tr> </tbody> </table> <p> * Average official exchange rate of the Belarusian ruble to foreign currencies, calculated as arithmetic average, Jan-Jul 2021 </p> <p> ** 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) </p> <p> *** raised by 0.75 percentage points to 9.25% on Jul 21, 2021 </p> <p>   </p> <p> Net supply of foreign exchange helps Belarus sustain FX reserves in July </p> <p>   </p> <p> Belarus’ gold and foreign exchange reserves (FX reserves) resumed growth in July 2021 after a decline in June. According to the National Bank, FX reserves rose by $33m in July 2021 (or 0.4% month on month), following a $353.7m decrease in June 2021 (or 4.6% month on month). </p> <p>   </p> <p> July’s increase in FX reserves was mainly due to the purchase of foreign currency by the National Bank on the Belarusian Currency and Stock Exchange (BCSE), foreign currency revenues of the state budget, as well as an increase in the value of monetary gold. In July the government and the National Bank have executed foreign and domestic liabilities in foreign currency in the amount of $427 million. </p> <p>   </p> <p> Thus, Belarus’ international reserve assets decreased by $26.1 million since early this year, or 0.3%. As of 1 August 2021, they stood at $7.442 billion. According to the approved forecast, the level of FX reserves should be no less than $6 billion as of 1 January 2022. </p> <p>   </p> <p> We can expect that the government’s report on FX reserves as of 1 September 2021 will be even more optimistic: the general allocation of Special Drawing Rights (SDRs) of the International Monetary Fund (IMF) in the amount of $650 billion took effect on 23 Aug 2021. The quota for Belarus is 0.14%, which means Belarus may count on receiving an SDR equivalent of about $920 million. </p> <p>   </p> <p> Despite the absence of official statements on the matter by the Belarusian authorities, it can be assumed that the SDR amount has been transferred to the country and has been credited to the foreign exchange reserves. However, given the negative information background that accompanied the allocation of those resources, it can also be assumed that the authorities will not try to exchange the SDRs received for real currency and their main role will be to ensure positive reporting. </p> <p>   </p> <p> In July, in contrast to June, the situation on the domestic foreign exchange market was favourable for foreign reserves. The total net supply of foreign exchange in July amounted to $480.5m to compare with a net demand of $81.5m a month earlier. July’s net supply of foreign exchange was the highest in the last 24 months. </p> <p>   </p> <p> In January-July 2021, FX sales in all segments of the domestic foreign exchange market exceeded FX purchases by $707.4m. In January-July 2020, net demand for foreign currency due to the March collapse of the Russian ruble, followed by the Belarusian ruble, amounted to $866.7 million. </p> <p>   </p> <p> In July, Belarusian individuals interrupted a 19-month streak when they continuously acted as net buyers of foreign exchange and sold $47.1 million on a net basis. </p> <p>   </p> <p> It is difficult to say whether the July situation will develop into a long-term trend. Most likely, the July statistics were influenced by a complex of factors: the relative stability of the Belarusian ruble exchange rate, growth of interest rates in the deposit market, the holiday season (a lot of citizens decided to use the services of travel agencies), as well as the ongoing growth in consumer prices (people are forced to exchange their foreign currency savings for rubles). </p> <p>   </p> <p> Deposit market witnessing tangible increase in FX rates </p> <p>   </p> <p> In July 2021, the National Bank raised the refinancing rate for the second time this year. This was done somewhat belatedly, as even a slight increase in the refinancing rate worsens the already difficult financial situation of debt-laden real sector enterprises. </p> <p>   </p> <p> Belarus’ annual consumer inflation has been accelerating for the third month in a row, being much higher than the authorities’ forecasts for about a year already: in May - 9.4% per annum, in June - 9.9%, in July - 9.8%, while the official forecast for 2021 is 5%. </p> <p>   </p> <p> The move to increase the refinancing rate and the National Bank’s decision to limit the ceiling on FX deposit interest rates sent a positive signal to the market and affected the dynamics of the interest rates. </p> <p>   </p> <p> According to the regulator, the average rate on new fixed-term deposits of individuals and legal entities in Belarusian rubles in July 2021 amounted to 12.70% per annum against 12.30% a month earlier, and 7.74% in July 2020. For new loans (excluding soft loans and interbank loans) it was 12.88%, 12.62% and 10.93% per annum, respectively. </p> <p>   </p> <p> As to irrevocable deposits of individuals, which traditionally generate the most attractive yield, average interest rates in July 2021 stood at 17.70% per annum against 17.13% a month earlier, and 12.09% in July 2020. </p> <p>   </p> <p> In contrast to the general trend on the ruble market, the average rate for overnight loans on the interbank market decreased in July 2021. According to the National Bank, it stood at 5.70% per annum against 6.60% a month earlier and 3.52% in July 2020, which once again confirms the regulator’s manual regulation of liquidity provision. </p> <p>   </p> <p> According to the National Bank, on 18 August 2021, credit auction #752 was held in the form of an auction with the declared interest rate of 11.25% per annum (10.50% per annum at the previous auction on July 14, 2021) for a period of 180 days. Thirteen bids (17 bids at the previous auction) from 11 banks (13 banks) were admitted to the auction for a total amount of Br478.6 million (Br659.1 million). It was decided to lim it the credit volume to Br80.0m (Br100m). Thus, the deficit of ruble liquidity persists. </p> <p>   </p> <p> In July, there was a sharp increase in interest rates on foreign currency deposits. Based on the official statistics, the average interest rates on new fixed-term deposits of individuals and legal entities in July amounted to 2.35% per annum against 1.49% a month earlier, while in July - 1.34%. Banks raised average interest rates on irrevocable deposits of individuals to 2.76% per annum against 1.75% a month earlier and 1.67% in July 2020. </p> <p>   </p> <p> By removing the interest rate caps on foreign currency deposits, the National Bank has tried to reverse the negative savings trends in Belarus amid persisting uncertainty and to create preconditions for banks to improve their FX liquidity position. However, so far the statistics are not satisfactory. </p> <p>   </p> <p> Outflow of fixed-term FX deposits continues despite increase in interest rates </p> <p>   </p> <p> The data on broad money aggregates shows that private households have little trust in the banking system and gradually convert their savings from banks to cash, even though interest rates are rising. This is especially noticeable with regard to FX deposits. </p> <p>   </p> <p> According to the National Bank, the balance of fixed-term FX deposits of natural persons has been declining for 19 months in a row. During this time, private households have withdrawn about $2.3bn from banks. Fixed-term and conditional FX deposits of individuals amounted to $3.922 billion as of August 1, 2021, and decreased by 2.4% in July after a 5% decline a month earlier. </p> <p>   </p> <p> July’s growth in retail deposits due to increased interest rates does not make the situation any better. According to the National Bank, the volume of new FX deposits at banks in July 2021 amounted to $469.6 million compared to $421.4 million a month earlier and $453.2 million in July 2020. Rates on these types of deposits amounted to 2.44%, 1.48% and 1.17% per annum, respectively. </p> <p>   </p> <p> In contrast, the inflow of new fixed-term deposits in Belarusian rubles has declined. In July 2021, it amounted to Br1.107 billion against Br1.179 billion a month earlier and Br724.5 million in July 2020. The rates on these deposits amounted to 17.22%, 16.69% and 11.59% per annum, respectively. </p> <p>   </p> <p> Despite the slowdown in the inflow of new Br deposits, the balances on time accounts and conditional deposits in Belarusian rubles in July increased by 1% and amounted to Br4.652 billion as of August 1. Thus, despite the outflow of foreign currency savings from banks, they still exceed deposits in Belarusian rubles. </p> <p>   </p> <p> The high level of inflation and devaluation expectations continues to have a negative impact on savings. The situation is unlikely to improve in the near term, as the determining factor for most economic actors is still the uncertainty associated with the crisis after the 2020 presidential election. </p> <p>   </p> <p> Lending to corporate sector remains subdued </p> <p>   </p> <p> Amid persisting liquidity shortages and high indebtedness of many public sector enterprises, Belarusian banks remain cautious in shaping their lending strategies. </p> <p>   </p> <p> According to the National Bank, the debt on loans issued by banks to different economic sectors, and the debt of economic sectors on loans acquired by banks on claims, declined in January-July 2021 by 1.1% to 58.129 billion Belarusian rubles as of 1 August 2021 (including +0.7% month on month in July). Herewith, the debt in Belarusian rubles increased by 1.4% to Br31.389 billion (+1.4% in July), while the FX debt decreased by 1.1% to $10.651 billion (+0.7% in July). </p> <p>   </p> <p> Thus, 46% of banks’ loan portfolio as of August 1 was formed in foreign currency, which is a significant risk for both the borrowers and the banks themselves. This is especially true for public sector enterprises, wh ere foreign currency accounted for 62.8% of loans on that date. At the same time, there is positive dynamics in the currency structure of the loan portfolios: as of 1 January 2021 they accounted for 47.3% and 65.5%, respectively. </p> <p>   </p> <p> The hostage of the high share of foreign currency component in the loan portfolios is also the National Bank itself. The regulator has to conduct a cautious policy when raising the refinancing rate, as well as to control the exchange rate process quite actively in order not to allow the national currency to fall and not to increase the credit burden of public sector enterprises. </p> <p>   </p> <p> According to the National Bank, state-owned commercial enterprises owed banks Br20.910 billion as of 1 August 2021, down 3.9% year to date (+0.2% in July). Of which the Br debt amounted to Br7.788 billion, up 3.6% year to date (+3.1%), the FX debt - Br5.227 billion, down 5.4% YTD (minus 0.6%). </p> <p>   </p> <p> The private sector’s credit debt amounted to Br18.778 billion as of 1 Aug 2021, up 0.9% year to date (+1.7% in July). The Br loan balance amounted to Br7.376 billion as of 1 August 2021 (down 0.9% YTD, +1.5% in July), FX loans - $4.542 billion (+4.8% and +2.6%, respectively). </p> <p>   </p> <p> As far as lending to individuals is concerned, there is a downward trend in consumer lending amid high interest rates and an increase in real estate lending. The latter is due to the very fact that banks have restored this area of lending after last year's liquidity squeeze. </p> <p>   </p> <p> According to the National Bank, as of 1 August 2021, outstanding consumer loans amounted to Br5.209bn, down 6.2% year to date (minus 0.6% in July). The total credit debt to banks as of 1 Aug 2021 amounted to Br15.897 billion, having up 1.2% year to date (+0.7% in July). </p> <p>   </p> <p> On the whole, it should be noted that there is a persistently high level of credit risks in the Belarusian economy caused by excessively high share of foreign exchange in banks’ loan portfolios, worsening financial position of legal entities and individuals amid the economic crisis, as well as a return of the authorities to the administrative levers of credit management, may be noted as a whole. </p> <p>   </p> <p> Negative expectations cause tension in monetary sector </p> <p>   </p> <p> The large-scale negative expectations that increased sharply after the 2020 presidential elections continue to cause tension in the monetary sector of the Belarusian economy. These expectations are fuelled both by actions of the authorities themselves in the area of economic policy and external factors, the main one being sanctions imposed by Western countries. </p> <p>   </p> <p> Negative expectations include inflation and currency devaluation expectations, which form risks for macroeconomic and financial stability in the medium term. At the same time, there is sustained administrative pressure on the National Bank, which has to manoeuvre between maintaining price and financial stability and the interests of the government, which favours credit incentives for economic growth. </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-09-02

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