ANALYSIS: Belarus yielding to real sector’s pressure for softer monetary policy

<p> Monthly overview of Belarus’ monetary market, Jan 2021 </p> <p>   </p> <p> MINSK, Feb 26 - PrimePress. Belarus’ monetary policy is softening under the influence of the real sector lobby. February’s increase in the money market rates required by the market situation did not take place and the refinancing rate does not reflect the cost of money in the economy. The market is distorted by massive decisions to support the real economy, some of which are taken non-publicly. </p> <p>   </p> <p> Table. Key performance indicators of Belarus’ 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 Feb 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="right"> 2.5697* </p> </td> <td> <p align="right"> 2.5678** (average annual exchange rate) </p> </td> </tr> <tr> <td> <p> Refinancing rate, per cent per annum </p> </td> <td> <p align="right"> 7.75*** </p> </td> <td> <p align="right"> 7.75-8.0** </p> </td> </tr> <tr> <td> <p> Year-on-year inflation growth, % (key target of monetary policy) </p> </td> <td> <p align="right"> 7.7 (Jan 2021 on Jan 2020) </p> </td> <td> <p align="right"> 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="right"> 7.203 </p> </td> <td> <p align="right"> 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="right"> 5.1 (Jan 2021 on Jan 2020) </p> </td> <td> <p align="right"> 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, January 2021 </p> <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> National Bank fails to decide on refinancing rate increase </p> <p>   </p> <p> Following the meeting of the Board on monetary policy held on 17 Feb 2021, the National Bank of Belarus (NBB) kept unchanged the refinancing rate and the rates on permanently available liquidity regulation operations. However, in its statement on the matter, the regulator for some reason refused to acknowledge this fact, saying that the board postponed its decision. </p> <p>   </p> <p> “In view of the need for additional analysis of the forecast dynamics of consumer prices and assessment of the duration of the impact of key factors that led to the acceleration of consumer prices, it was decided to consider the relevant issues on monetary policy at the board meeting on March 12, 2021,” the National Bank said in a statement. </p> <p>   </p> <p> Obviously, taking into account the annual inflation of 7.7% in January 2021 and the lack of prospects for its slowdown in the coming months, the National Bank was supposed to have increased the refinancing rate, which currently stands at 7.75% per annum, and along with it the rates on permanently available liquidity transactions. </p> <p>   </p> <p> At the same time, it can be assumed that the National Bank was forced to take a non-market and illogical decision under pressure from the real sector lobby represented by the government. For state-owned enterprises, an increase in the refinancing rate would mean further deterioration of their financial position due to a high level of debt overburden. </p> <p>   </p> <p> Meanwhile, maintaining the refinancing rate and liquidity regulation rates makes little practical sense for banks and the economy today because there is a temporary ban on overnight loans from August 24, 2020. The banks' liquidity support in fact is provided manually. </p> <p>   </p> <p> Thus, the refinancing rate has become a nominal value that reflects little of the real situation in the monetary market. Due to the manual allocation of resources by the National Bank, the rate on overnight loans in the interbank market has also become uninformative in recent months. </p> <p>   </p> <p> In order to understand the situation in the market, one can look at the rates, at which banks are ready to attract funds from private households. Thus, the average rate on new fixed-term deposits in Belarusian rubles amounted to 17.68% per annum in January this year against 17.48% a month earlier and 9.63% in January 2020. For comparison, the refinancing rate was 9% per annum in January 2020. </p> <p>   </p> <p> Fixed-term deposits remain unpopular </p> <p>   </p> <p> Uncertainty in the Belarusian economy and growing negative expectations, caused not only by the political crisis, but also by the unpredictable decisions of the authorities, reduce trust in the national currency and the banking system. </p> <p>   </p> <p> According to the National Bank, the balances of fixed-term and conditional deposits of population in Belarusian rubles increased by 1.5% in January 2021, amounting to Br4.599 billion on February 1, 2021. Balances of transferable deposits (mainly salary card accounts) amounted to Br2.901 billion in early February, up 1.9% month on month in January. </p> <p>   </p> <p> The increase in balances of personal Br accounts in January can be regarded as insignificant. As for the wage accounts, growth could be attributed to the year-end payments to certain categories of workers. The increase in term deposits has only slightly exceeded the amount of interest capitalisation. </p> <p>   </p> <p> In turn, personal fixed-term and conditional deposits in foreign currency amounted to $4.575bn as of February 1, 2021, down 1.4% month on month in January. The withdrawal of those deposits from Belarusian banks continued throughout last year and has not yet stopped. </p> <p>   </p> <p> Given the fact that personal funds constitute more than a quarter of Belarusian banks' liabilities, we can say that the banking sector risks have increased, especially with regard to the formation of the resource base in foreign currency. In the coming months, the situation is unlikely to improve, not only because of uncertainty, but also because of worsening financial situation of many households. Belarusians will have to spend their savings to maintain their standard of living. </p> <p>   </p> <p> Balances in foreign currency transfer accounts of individuals (in fact, card accounts) increased by 4.4% to Br1.263 billion in January 2021. Interest in this type of savings is due to the fact that a lot of people use cards in foreign currency for non-cash exchange transactions. According to the National Bank, in January 2021, non-cash purchases of foreign currency by individuals amounted to 42.5% of the total volume of FX purchases by individuals, compared with 32.2% in January 2020 and 29.0% in January 2019. </p> <p>   </p> <p> It may be noted here that Belarusians' interest in non-cash payments is growing, not only due to the simplification of foreign currency purchase procedures, but also in general. At the same time, an important factor in the popularity of bankcards is not only their convenience, but also their greater security compared to paper money during the pandemic. </p> <p>   </p> <p> According to the annual statistics published by the National Bank, the share of non-cash transactions with the use of bank payment cards in the total number of transactions with cards in 2020 was 60.2% against 54.9% a year earlier. At the same time, Belstat data shows that the share of non-cash transactions in the retail turnover of trade and catering organizations at the end of last year was 48.3% against 44.9% a year earlier. </p> <p>   </p> <p> FX purchases stay high, reserves declining </p> <p>   </p> <p> FX purchases by private households has been traditionally higher than their FX sales to banks for 14 months in a row. At the same time, FX supply from traditional sellers is unstable, which forces the National Bank to intervene periodically and spend reserves. </p> <p>   </p> <p> All in all, FX purchases exceeded in January 2021 by $50.7 million against $179.1 million in Dec 2020, while January 2020 saw FX sales exceed FX purchases by $83.3 million. At the same time, with individuals, FX purchases exceeded FX sales by $154.2 million in January 2021 compared to $230.9 million in Dec 2020 and $44.8 million in January 2020. </p> <p>   </p> <p> FX sales by resident legal entities in January exceeded their FX purchases by $48.9m, while in Dec 2020 FX purchases exceeded FX sales by $31.6m. FX sales by non-resident legal entities exceeded FX purchases by $68.9 million in January against $50.5 million in December 2020. FX purchases by Belarusian banks exceeded FX sales by $14.3 million in January, while in Dec 2020 FX sales exceeded FX purchases by $32.9 million. </p> <p>   </p> <p> Increased demand for foreign currency, the need to maintain the exchange rate of the Belarusian ruble, as well as the significant payments on foreign currency debts of the government and the National Bank contribute to the negative dynamics of the Belarusian foreign exchange reserves. According to the regulator, Belarus' international reserve assets fell by $265 million, or 3.5%, in January 2021. </p> <p>   </p> <p> According to the regulator, repayment of internal and external liabilities of the government and the National Bank in foreign currency amounted to $410.6 million in January. "Foreign currency inflows to the budget, including from the sale of foreign currency-denominated bonds by the Ministry of Finance, contributed to maintaining the level of foreign exchange reserves in January," the National Bank said in a commentary. </p> <p>   </p> <p> International reserve assets are projected to reach at least $6 billion by January 1, 2022. The lowered forecast is likely due to the unfavorable situation in the international debt market for Belarus because of the political crisis in the country, the need to service existing debts, as well as the unpredictable situation in the domestic market. </p> <p>   </p> <p> Support to real sector poses risks to financial stability </p> <p>   </p> <p> Non-public decisions to support some real-sector enterprises by transferring their debts to the banking sector and the state budget form a wide field of risks for financial stability. </p> <p>   </p> <p> Case in point: the rescue of the Belarusian Steel Works (BMZ) in Zhlobin. The state support alone in the form of a bond issue by the Ministry of Finance exceeded $600 million. The creditor banks were forced to write off part of the debt using special reserves to cover losses. According to the online media, the total amount spent by the budget and the banks to clear the debt of the BMZ and its recapitalization exceeded the equivalent of Br3 billion. The resource support for the BMZ was spent, including the remainder of the national budget funds accumulated in previous years. </p> <p>   </p> <p> Simultaneously, state support is provided to smaller state-owned enterprises - state guarantees are provided for loan repayments and some bad debts are written off via state-owned banks. This leads to a gradual replacement of corporate debt by state debt, and also reduces the financial stability of the banking sector. </p> <p>   </p> <p> According to Deputy Chairman of the National Bank Dmitry Kalechits, a number of state companies have limited capacity to service their debts. In early 2021, the amount of debt of such enterprises was estimated by the National Bank at about 14% of GDP. In terms of Belarusian rubles, the size of bad loans in the public sector can be estimated at Br20-21 billion. </p> <p>   </p> <p> On February 23, Prime Minister Golovchenko said that one of the serious problems is the high debt burden on the real economy and that “in order to eliminate the so-called debt overhang, the government has brought to execution a coherent action plan”. </p> <p>   </p> <p> The details of the government action plan were not disclosed. If the Council of Ministers continues to shift the problems of the public sector to the budget and banks (along the lines of the BMZ bailout), such methods are fraught with the development of a major economic crisis. End </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-02-27

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