ANALYSIS: Belarus sees growing pressure on monetary market

<p> Monthly overview of Belarus’ monetary market, Jan-Sep 2020 </p> <p>   </p> <p> MINSK, Nov 2 – PrimePress. Constricted domestic demand, the depreciation of the Russian ruble against world currencies and growing uncertainty in the Belarusian economy create an unfavourable environment for maintaining price consistency and financial stability in Belarus. </p> <p>   </p> <p> An additional risk factor for the National Bank is increasing pressure fr om the government to relax monetary policy. </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 Oct 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"> 2.6236 </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"> 7.75** </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"> 6.1 (Sep 2020 on Sep 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"> 7.321 </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"> 11.8 (Sep 2020 on Sep 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 0.25 percentage points on July 1, 2020 </p> <p>   </p> <p> Belarus’ reserves come close to critical point </p> <p>   </p> <p> In September, the situation in Belarus’ foreign exchange market became relatively stable. The decline in reserves slowed down to $136.4 million from an unprecedented $1.4 billion in August this year. Thus, as of 1 October, the level of gold and foreign exchange reserves stood at $7.321 billion against the official forecast, which says that Belarus’ gold and foreign exchange reserves are supposed to reach at least $7.3 billion as of Jan 1, 2021. </p> <p>   </p> <p> Overall, since the beginning of this year the country's gold and foreign exchange reserves have decreased by 22.1% or $2.072 billion. </p> <p>   </p> <p> The decrease in reserves in September was due to the government’ repaying $299.7 million in external and domestic foreign currency liabilities, as well as a decrease in the value of monetary gold. A month earlier, the main reason for the decrease in reserves was the sale of foreign currency on the back of a speculative demand from businesses and private households. In September, by contrast, the foreign exchange market was the main source for replenishing foreign exchange reserves. </p> <p>   </p> <p> The National Bank says September’s FX sales by individuals, resident legal entities (including banks) and non-residents exceeded FX purchases by $279.7 million, while in Aug 2020 it was a reverse trend, with FX purchases exceeding FX sales by $1.278 billion. </p> <p>   </p> <p> In fact, in September FX sales exceeded FX purchases only with individuals (by $54.5 million). In August, this figure was $622.1 million. Thus, private households still have negative expectations about the prospects of the country’s financial market. At the same time, the reduced income and irrevocable deposits introduced by the National Bank several years ago do not let Belarusians increase their demand for foreign currency. </p> <p>   </p> <p> As for other segments of the FX market, FX sales by resident legal entities exceeded their FX purchases by $49 million, while in August their FX purchases exceeded FX sales by $651.5 million. With non-resident legal entities, FX sales exceeded FX purchases by $51.7 million after $26.9 million in August. In September, FX sales by Belarusian banks exceeded their FX purchases by $233.5 million, while in August, on the contrary, their FX purchases exceeded FX sales by $30.9 million. </p> <p>   </p> <p> Such "generosity" on the part of banks is explained by the regulator’s actions in the ruble liquidity market - banks had to sell foreign currency to meet their customers’ urgent need in financial resources. </p> <p>   </p> <p> In October, the situation with gold and foreign currency reserves hardly showed any significant deterioration - the National Bank continued to lim it liquidity, while businesses had to pay quarterly taxes. However, at the end of the month (after taxes) the Belarusian ruble resumed its decline following in the footsteps of the Russian ruble, which may encourage economic agents to flee the ruble and replenish their foreign currency savings. </p> <p>   </p> <p> Thus, taking into account the uncertainty in the economy, instability of the foreign exchange market, reduction in foreign currency revenues and forthcoming payments on foreign currency liabilities (approximately $1 billion in the fourth quarter), it is not possible to maintain the level of gold and foreign currency reserves within the limits of the forecast ($7.3 billion) without increasing external liabilities. </p> <p>   </p> <p> Bank deposits: inflow cannot compensate for outflow </p> <p>   </p> <p> Belarus has been witnessing sustained outflow of personal fixed-term ruble and foreign currency deposits from the banks. However, the situation in September could not be changed either by the strengthening of the Belarusian ruble or by the increase in rates on the deposit market. </p> <p>   </p> <p> According to the National Bank, the balances of time deposits and deposits in escrow in Belarusian rubles, after a 5.5% decline in August, decreased by another 1.7% in September to Br4.576 billion as of October 1, 2020 (minus 10.8% YTD). The negative dynamics of deposits could have been even more active but for irrevocable deposits, which are almost impossible to withdraw before the contract expires. </p> <p>   </p> <p> Nevertheless, the increase in rates has slightly increased the appeal of bank deposits. This has led to a month-on-month increase in the volume of new fixed-term deposits placed with banks from Br638.6m in August to Br720.8m in September, against the background of an increase in the average interest rate on these deposits from 11.7% to 14.6% per annum. </p> <p>   </p> <p> In turn, fixed-term and contingent personal deposits in foreign currency amounted to $4.844 billion as of October 1, 2020, down by another 5.9% month on month in September after a decline of 7.5% in August. Since early 2020, the balance of these deposits with Belarusian banks has decreased by 22.1%. In absolute terms, the withdrawal of foreign currency deposits from the country’s banks in September this year was $303.1 million after $624.2 million in August. Since early 2020, individuals have reduced their foreign currency savings in banks by $1.373 billion. </p> <p>   </p> <p> Despite the increase in interest rates not only for ruble deposits but also for new fixed-term deposits in foreign currency, the September volume of the latter has changed slightly in month-on-month terms. Individuals brought $325.1 million in new fixed-term deposits to banks in Sep 2020, compared to $320.6 million in August, while the average interest rate on new fixed-term deposits in foreign currency was 1.1% per annum in September compared to 0.9% in Aug 2020. </p> <p>   </p> <p> Thus, the inflow of new deposits does not compensate for the outflow of old ones, which affects the resource base of Belarusian banks. </p> <p>   </p> <p> This creates risks for the launch of the "new investment cycle" in 2021, announced in October by Belarusian Prime Minister Roman Golovchenko. It is possible that, according to the government, Belarusian banks should become the main source of investment for the real sector against the backdrop of a deteriorating investment image of Belarus in the eyes of foreign investors. At the same time, the shrinking resource base of the banking sector puts this scenario at risk, increasing the likelihood of emission lending to the economy. </p> <p>   </p> <p> At a meeting of the Presidium of the Council of Ministers on October 1, Roman Golovchenko noted that the draft ordinance to approve the main guidelines for Belarus’ monetary policy for 2021 does not contain “monetary policy parameters - the growth of banks’ lending to the economy, the refinancing rate, the rate on new ruble loans, the ruble rate, the cost of a basket of foreign currencies.” </p> <p>   </p> <p> The last time such indicators were directly specified in the monetary policy guidelines was at the time of Nadezhda Yermakova’s presidency at the National Bank (before 2015). If the government manages to press for a return to old-time practices, it will be a blow to financial stability. </p> <p>   </p> <p> It is possible that it was under the pressure from the government that the regulator decided to leave the refinancing rate and the rates on liquidity control operations at the current level at the additional meeting of the National Bank's Monetary Policy Board on October 14. The decision was made despite a noticeable acceleration of inflationary processes and a sharp increase in the cost of ruble resources in the market. </p> <p>   </p> <p> Liquidity deficits hold back lending </p> <p>   </p> <p> Restrictions imposed by the National Bank on the liquidity market hinder the growth of credit portfolios of Belarusian banks. At the same time, banks maintain a cautious credit policy, which is associated with the uncertainty of the situation in the economy and the outflow of deposits, i.e. a reduction in the resources of the banking system. </p> <p>   </p> <p> According to the National Bank, the debt on loans issued by banks to different sectors of the economy and the debt of sectors of the economy on loans purchased by banks under the right of claim decreased by 1.8% in September 2020 to Br57.527 billion as of October 1, 2020. Since early 2020, the debt has increased by 18.5%. At the same time, the debt in Belarusian rubles decreased in September by 0.4% to Br29.984 billion (+15.5% since the beginning of the year), in foreign currency - by 2.4% to $10.432 billion (minus 2.9%). </p> <p>   </p> <p> Almost half of the banks’ loan portfolio is in foreign currency. High volatility in the exchange rate of the Belarusian ruble increases the risks of both borrowers and banks. </p> <p>   </p> <p> State-owned commercial enterprises owed banks Br20.615 billion as of October 1, up 20.9% year to date (minus 3.1% month on month in September). In particular, the debt in Belarusian rubles amounted to Br6.689 billion, up 21.4% since January 1, 2020 (+1.9 month on month in September), in foreign currency - $5.274 billion, up 3.9% (minus 4.5%). </p> <p>   </p> <p> As of October 1, the credit debt of private companies to banks stood at Br18.607bn, up 24.2% YTD (minus 2.2% month on month in September). This included Br7.472 billion in ruble loans (+22.6% YTD and minus 4.1% month on month in September) and Br4.217 billion in foreign currency loans (minus 0.13% and minus 0.10%, respectively). </p> <p>   </p> <p> In late August and early September, almost all banks curtailed lending to the public due to liquidity shortages or significantly increased interest rates on new loans. However, in August, against the backdrop of post-election uncertainty, people showed increased interest in lending. In September, the interest remained, but was significantly limited by the banks. </p> <p>   </p> <p> According to the regulator, debt on consumer loans amounted to Br5.789 billion as of October 1, 2020, down 1.6% month on month after an increase of 2.4% in August 2020. Consumer lending has increased by only 5.6% since the beginning of the year. The total debt on household loans to banks amounted to Br15.605bn as of October 1, 2020, up 0.5% month on month in September after an increase of 1.8% in August. This figure has increased by 10.3% since the beginning of the year. </p> <p>   </p> <p> The recent months has seen an increase in physical persons overdue debt to banks. After an increase of 8.1% in August, the growth in arrears of individuals in September was 3.7%. At the same time, since the beginning of the year the volume of overdue debt of private households to banks has increased by almost 60%, amounting to Br52.7m as of October 1, 2020. </p> <p>   </p> <p> The outpacing growth of overdue debts compared to the overall rate of lending to individuals may indicate both the low level of financial literacy of the population and the worsening financial situation of individuals in the current year against the background of the economic crisis. </p> <p>   </p> <p> In general, it can be noted that banks are not willing to and have no possibilities to expand lending to the economy, which may be associated with a liquidity deficit, as well as the deteriorating financial situation of potential borrowers. In addition, a high level of foreign exchange risks remains on the credit market, which is due to the significant share of foreign currency in banks’ loan portfolios. </p> <p>   </p> <p> Growing risks of administrative interference in monetary policy </p> <p>   </p> <p> Hence, the main risks for the monetary sector in the near term are the increasing political and economic isolation of Belarus, as well as attempts to put financial sector management back on the command-and-control track. Belarus is increasingly at risk of facing a shortage of external sources of public debt financing while domestic foreign exchange sources remain very limited. </p> <p>   </p> <p> The National Bank does not abandon attempts to slow down negative processes, including through a temporary ban on overnight loans to commercial banks, which was extended until January 19, 2021. Moreover, there has recently been increased pressure on the National Bank to expand credit injections into the economy, which could put an end to the regulator’s efforts. </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2020-11-03

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