ANALYSIS: National Bank expects decrease in foreign exchange reserves, keeps changeover to inflation targeting on hold
<p> Monthly overview of Belarus’ monetary market, Jan-Nov 2020 </p> <p> </p> <p> MINSK, Dec 29 – PrimePress. The National Bank of Belarus continues to restrain the onslaught of advocates of easing monetary policy, but it is becoming more and more difficult to do so each time. The debate about resumption of directed lending is getting louder and negative expectations on the part of economic entities are growing stronger. </p> <p> </p> <p> Against the backdrop of unfavourable factors at the end of 2020, there is accelerating inflation, increased pressure on the foreign exchange market and tensions around foreign exchange reserves. At the same time, the outflow of personal deposits from banks continues. The forecasts made by the authorities for the coming year do not inspire optimism either. </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 Dec 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"> 2.5873 </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"> 6.6 (Nov 2020 on Nov 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"> 7.376 </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"> 8.8 (Nov 2020 on Nov 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> Changeover to inflation targeting postponed </p> <p> </p> <p> The Monetary Policy Guidelines for 2021, prepared by the National Bank and approved by the president, among other things provide for a return to using the ruble monetary base as the operational objective of monetary policy. The regulator forecasts a 10-13% increase in ruble money supply in 2021. </p> <p> </p> <p> In 2018 - 2020, the interest rate on interbank loans in Belarusian rubles was the operational target for the monetary targeting regime. In fact, the use of the interest rate as an operational target for monetary policy meant that the National Bank managed the price of money in the economy in order to meet the intermediate target. </p> <p> </p> <p> However, in 2020, in order to preserve stability in the foreign exchange and monetary markets, the regulator has adopted a number of non-standard liquidity measures for this operational target, which de facto led to a return to regulating the price of money via its supply volume, i.e. the monetary base became the operational target as it was in 2015 - 2018. Thus, the switch from monetary targeting to inflation targeting has once again been postponed indefinitely. </p> <p> </p> <p> It is possible that the National Bank would like to use the monetary market rate more actively to regulate liquidity in the market, but the manipulation of the refinancing rate has recently been overly politicised and is under the scrutiny of the government. The indirect evidence of this is the stability of the refinancing rate despite accelerating inflation as well as a sharp rise in the real value of money in the market. </p> <p> </p> <p> However, the stability of interest rates on liquidity support transactions makes little practical sense for banks and the economy today. A temporary ban on overnight loans has been in place since August 24. Funding for the needs of troubled banks has been effected through special loans at the refinancing rate for 3-6 months. </p> <p> </p> <p> Thus, the refinancing rate has again become a nominal value, which reflects little of the real situation in the monetary market. </p> <p> </p> <p> FX reserves drop to minimum forecast level, NBB expects further decline </p> <p> </p> <p> The National Bank has negative expectations for the year 2021 with regard to the level of foreign exchange reserves. The regulator forecasts that on January 1, 2022 they will amount to at least $6bn against $7.3bn in early 2021. It is likely that in its forecasts the regulator took into account the tense situation for Belarus in the international borrowing market due to the political crisis in the country, the need to service old debts, as well as the chronic net demand for hard currency demonstrated by private households in the domestic market. </p> <p> </p> <p> According to the National Bank, in November, the reserves decreased by $109.2 million month on month after an increase of $164.2 million in October. On December 1, foreign exchange reserves totalled $7.376bn. Overall, since the beginning of the year, the reserves have decreased by 21.5%, or $2.017 billion. </p> <p> </p> <p> Based on the commentary made by the National Bank, in November 2020, the government fulfilled its foreign and domestic obligations in foreign currency in the amount of about $388m. The purchase of foreign currency by the National Bank at the BCSE, as well as the inflow of FX revenues into the public budget helped maintain the level of reserves. </p> <p> </p> <p> In November 2020, FX sales exceeded FX purchases on the domestic market by $149.3 million against $257.9 million in October 2020. At the same time, since early 2020, FX purchases from banks exceeded FX sales by almost $1.5bn. </p> <p> </p> <p> In November, net demand for foreign exchange was maintained only by individuals: FX sales exceeded FX purchases by $98.9 million ($89.4 million in October 2020). Cumulatively, since the beginning of the year private individuals have purchased from banks $1.739bn more than they sold to banks over that period. Thus, private households maintain negative expectations regarding the economic prospects of the country. </p> <p> </p> <p> Net supply of foreign currency by resident companies in November amounted to $171.2 million against $231 million a month earlier (net demand of $946.3 million in January-November 2020), while by non-resident legal entities - $62.7 million against $76 million (net supply of $546.2 million). In November 2020, FX sales by Belarusian banks exceeded their FX purchases by $14.3 million against $40.3 million in October 2020 (net supply of $681.5 million in Jan-Nov 2020). </p> <p> </p> <p> The continuing active sales of foreign currency by enterprises and banks is due to the actions of the National Bank in the ruble liquidity market. Banks have to sell foreign currency in order to satisfy their customers' urgent needs for financial resources. In turn, enterprises could not fully meet their borrowing needs and exchanged foreign currency for rubles - to ensure current operations and to pay quarterly taxes. </p> <p> </p> <p> Standstill in lending market </p> <p> </p> <p> Restrictions imposed by the National Bank on the liquidity market, as well as uncertainty in the economy, are holding back the growth of Belarusian banks' loan portfolios. According to the regulator, the debt on loans issued by banks to sectors of the economy and the debt of sectors of the economy on loans acquired by banks on demand rights decreased by 0.4% in November 2020 to Br58.329bn as of December 1, 2020. Since early 2020, the credit debt has grown by 20.1%. </p> <p> </p> <p> Arrears in Belarusian rubles decreased by 0.1% to Br30.299 billion (+16.7% YTD) in November, arrears in foreign currency – up 0.9% to $10.857 billion (+1.1%). </p> <p> </p> <p> Thus, almost half of the banks’ loan portfolio is formed in foreign currency. In this regard, high volatility of the Belarusian ruble exchange rate and uncertainty in the economy increase risks for borrowers and banks alike. </p> <p> </p> <p> As of December 1, state-owned commercial enterprises owed banks Br21.513 billion, a year-to-date increase of 26.1% (minus 0.6% in November). Of which, the debt in Belarusian rubles amounted to Br7.061 billion, up 28.2% YTD (+1.5 in November); in foreign currency - $5.598 billion, up 2% (+0.1%). </p> <p> </p> <p> As of December 1, the credit debt of private enterprises amounted to Br18.597 billion, up 24.2% YTD (down 0.5% in November). Br loans amounted to Br7.384 billion (+21.1% YTD and down 2.4% month on month in November), foreign currency loans - Br4.343 billion (+2.9% and +2.5%, respectively). </p> <p> </p> <p> In late August - early September, almost all banks curtailed lending to households due to liquidity shortage, or significantly increased interest rates on new loans. At the same time, in August, against the background of post-election uncertainty, private households showed an increased interest in borrowing. In September, the interest persisted, but was substantially limited by banks. A similar situation was observed in the following months, which led to a reduction in consumer lending. </p> <p> </p> <p> According to the regulator, the amount of outstanding consumer credits stood at Br5.589 billion as of Dec 1, 2020, down 1.4% month on month in November. Since early 2020 the growth in consumer lending has been less than 2%. The total amount of credit debt to banks amounted to Br15.594 billion as of December 1, 2020, up 0.2% in November. The index has increased by 10.2% YTD. </p> <p> </p> <p> The outstripping growth of overdue debt of individuals is still observed. While the total amount of arrears on personal loans increased by 0.2% in November, the volume of overdue loans increased by 1.1%. In general, since early this year the volume of arrears on personal loans has increased by 59.9% to Br54.2 million as of December 1, 2020. </p> <p> </p> <p> The outstripping growth of overdue debt compared to the overall rate of lending to individuals may indicate both the low level of financial literacy of private households and the deterioration in the financial situation of individuals this year amid the development of the economic crisis. </p> <p> </p> <p> Overall, banks demonstrate unwillingness and limited capacity to expand lending to the economy, which may be linked to liquidity shortages, as well as to the deteriorating financial position of potential borrowers. In addition, there is still a high level of FX risks in the credit market, which is due to the significant share of foreign exchange in banks’ loan portfolios. </p> <p> </p> <p> Financial stability depends on National Bank’s resilience </p> <p> </p> <p> Thus, the main risks for the monetary sector in Belarus are the country's political and economic isolation, as well as attempts to bring financial sector management back to the command-and-control track. At the same time, the National Bank is trying to maintain a balance between the instructions “from upstairs” and the need to maintain stability in the monetary market. </p> <p> </p> <p> “In Belarus, there is a dangerous discussion, from the economic point of view, about deploying directed emission lending to state enterprises. Such a policy may repeat the events of 2011-2012, when the sharp growth in money supply led to hyperinflation and weakening of the Belarusian ruble," reads the latest review of Sberbank’s Centre for Macroeconomic Research. </p> <p> </p> <p> In addition, unpredictable actions by the Belarusian authorities form the risks of a shortage of external sources of public debt financing, while domestic sources of foreign exchange remain very limited. </p> <p> </p> <p> PrimePress Business Analysis Agency </p>
2020-12-30
Primepress
Monthly overview of Belarus’ monetary market, Jan-Nov 2020
MINSK, Dec 29 – PrimePress. The National Bank of Belarus continues to restrain the onslaught of advocates of easing monetary policy, but it is becoming more and more difficult to do so each time. The debate about resumption of directed lending is getting louder and negative expectations on the part of economic entities are growing stronger.
Against the backdrop of unfavourable factors at the end of 2020, there is accelerating inflation, increased pressure on the foreign exchange market and tensions around foreign exchange reserves. At the same time, the outflow of personal deposits from banks continues. The forecasts made by the authorities for the coming year do not inspire optimism either.
Table. Key performance indicators of Belarus’ monetary sector in 2020
|
Real standing as of Dec 1, 2020 |
Official forecast, as anticipated on Jan 1, 2021 |
Belarusian ruble’s average exchange rate against US dollar, Br/$1 |
2.5873 |
2.2784* |
Refinancing rate, per cent per annum |
7.75** |
9.5* |
Year-on-year inflation growth, % (key target of monetary policy) |
6.6 (Nov 2020 on Nov 2019) |
not more than 5% (Dec 2020 on Dec 2019) |
Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars |
7.376 |
at least 7.3 |
Growth in broad money supply since early 2018, % (intermediary target of monetary policy) |
8.8 (Nov 2020 on Nov 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 0.25 percentage points on July 1, 2020
Changeover to inflation targeting postponed
The Monetary Policy Guidelines for 2021, prepared by the National Bank and approved by the president, among other things provide for a return to using the ruble monetary base as the operational objective of monetary policy. The regulator forecasts a 10-13% increase in ruble money supply in 2021.
In 2018 - 2020, the interest rate on interbank loans in Belarusian rubles was the operational target for the monetary targeting regime. In fact, the use of the interest rate as an operational target for monetary policy meant that the National Bank managed the price of money in the economy in order to meet the intermediate target.
However, in 2020, in order to preserve stability in the foreign exchange and monetary markets, the regulator has adopted a number of non-standard liquidity measures for this operational target, which de facto led to a return to regulating the price of money via its supply volume, i.e. the monetary base became the operational target as it was in 2015 - 2018. Thus, the switch from monetary targeting to inflation targeting has once again been postponed indefinitely.
It is possible that the National Bank would like to use the monetary market rate more actively to regulate liquidity in the market, but the manipulation of the refinancing rate has recently been overly politicised and is under the scrutiny of the government. The indirect evidence of this is the stability of the refinancing rate despite accelerating inflation as well as a sharp rise in the real value of money in the market.
However, the stability of interest rates on liquidity support transactions makes little practical sense for banks and the economy today. A temporary ban on overnight loans has been in place since August 24. Funding for the needs of troubled banks has been effected through special loans at the refinancing rate for 3-6 months.
Thus, the refinancing rate has again become a nominal value, which reflects little of the real situation in the monetary market.
FX reserves drop to minimum forecast level, NBB expects further decline
The National Bank has negative expectations for the year 2021 with regard to the level of foreign exchange reserves. The regulator forecasts that on January 1, 2022 they will amount to at least $6bn against $7.3bn in early 2021. It is likely that in its forecasts the regulator took into account the tense situation for Belarus in the international borrowing market due to the political crisis in the country, the need to service old debts, as well as the chronic net demand for hard currency demonstrated by private households in the domestic market.
According to the National Bank, in November, the reserves decreased by $109.2 million month on month after an increase of $164.2 million in October. On December 1, foreign exchange reserves totalled $7.376bn. Overall, since the beginning of the year, the reserves have decreased by 21.5%, or $2.017 billion.
Based on the commentary made by the National Bank, in November 2020, the government fulfilled its foreign and domestic obligations in foreign currency in the amount of about $388m. The purchase of foreign currency by the National Bank at the BCSE, as well as the inflow of FX revenues into the public budget helped maintain the level of reserves.
In November 2020, FX sales exceeded FX purchases on the domestic market by $149.3 million against $257.9 million in October 2020. At the same time, since early 2020, FX purchases from banks exceeded FX sales by almost $1.5bn.
In November, net demand for foreign exchange was maintained only by individuals: FX sales exceeded FX purchases by $98.9 million ($89.4 million in October 2020). Cumulatively, since the beginning of the year private individuals have purchased from banks $1.739bn more than they sold to banks over that period. Thus, private households maintain negative expectations regarding the economic prospects of the country.
Net supply of foreign currency by resident companies in November amounted to $171.2 million against $231 million a month earlier (net demand of $946.3 million in January-November 2020), while by non-resident legal entities - $62.7 million against $76 million (net supply of $546.2 million). In November 2020, FX sales by Belarusian banks exceeded their FX purchases by $14.3 million against $40.3 million in October 2020 (net supply of $681.5 million in Jan-Nov 2020).
The continuing active sales of foreign currency by enterprises and banks is due to the actions of the National Bank in the ruble liquidity market. Banks have to sell foreign currency in order to satisfy their customers' urgent needs for financial resources. In turn, enterprises could not fully meet their borrowing needs and exchanged foreign currency for rubles - to ensure current operations and to pay quarterly taxes.
Standstill in lending market
Restrictions imposed by the National Bank on the liquidity market, as well as uncertainty in the economy, are holding back the growth of Belarusian banks' loan portfolios. According to the regulator, the debt on loans issued by banks to sectors of the economy and the debt of sectors of the economy on loans acquired by banks on demand rights decreased by 0.4% in November 2020 to Br58.329bn as of December 1, 2020. Since early 2020, the credit debt has grown by 20.1%.
Arrears in Belarusian rubles decreased by 0.1% to Br30.299 billion (+16.7% YTD) in November, arrears in foreign currency – up 0.9% to $10.857 billion (+1.1%).
Thus, almost half of the banks’ loan portfolio is formed in foreign currency. In this regard, high volatility of the Belarusian ruble exchange rate and uncertainty in the economy increase risks for borrowers and banks alike.
As of December 1, state-owned commercial enterprises owed banks Br21.513 billion, a year-to-date increase of 26.1% (minus 0.6% in November). Of which, the debt in Belarusian rubles amounted to Br7.061 billion, up 28.2% YTD (+1.5 in November); in foreign currency - $5.598 billion, up 2% (+0.1%).
As of December 1, the credit debt of private enterprises amounted to Br18.597 billion, up 24.2% YTD (down 0.5% in November). Br loans amounted to Br7.384 billion (+21.1% YTD and down 2.4% month on month in November), foreign currency loans - Br4.343 billion (+2.9% and +2.5%, respectively).
In late August - early September, almost all banks curtailed lending to households due to liquidity shortage, or significantly increased interest rates on new loans. At the same time, in August, against the background of post-election uncertainty, private households showed an increased interest in borrowing. In September, the interest persisted, but was substantially limited by banks. A similar situation was observed in the following months, which led to a reduction in consumer lending.
According to the regulator, the amount of outstanding consumer credits stood at Br5.589 billion as of Dec 1, 2020, down 1.4% month on month in November. Since early 2020 the growth in consumer lending has been less than 2%. The total amount of credit debt to banks amounted to Br15.594 billion as of December 1, 2020, up 0.2% in November. The index has increased by 10.2% YTD.
The outstripping growth of overdue debt of individuals is still observed. While the total amount of arrears on personal loans increased by 0.2% in November, the volume of overdue loans increased by 1.1%. In general, since early this year the volume of arrears on personal loans has increased by 59.9% to Br54.2 million as of December 1, 2020.
The outstripping growth of overdue debt compared to the overall rate of lending to individuals may indicate both the low level of financial literacy of private households and the deterioration in the financial situation of individuals this year amid the development of the economic crisis.
Overall, banks demonstrate unwillingness and limited capacity to expand lending to the economy, which may be linked to liquidity shortages, as well as to the deteriorating financial position of potential borrowers. In addition, there is still a high level of FX risks in the credit market, which is due to the significant share of foreign exchange in banks’ loan portfolios.
Financial stability depends on National Bank’s resilience
Thus, the main risks for the monetary sector in Belarus are the country's political and economic isolation, as well as attempts to bring financial sector management back to the command-and-control track. At the same time, the National Bank is trying to maintain a balance between the instructions “from upstairs” and the need to maintain stability in the monetary market.
“In Belarus, there is a dangerous discussion, from the economic point of view, about deploying directed emission lending to state enterprises. Such a policy may repeat the events of 2011-2012, when the sharp growth in money supply led to hyperinflation and weakening of the Belarusian ruble," reads the latest review of Sberbank’s Centre for Macroeconomic Research.
In addition, unpredictable actions by the Belarusian authorities form the risks of a shortage of external sources of public debt financing, while domestic sources of foreign exchange remain very limited.
PrimePress Business Analysis Agency