ANALYSIS: Negative expectations continue to weigh on the monetary market

<p> Monthly overview of Belarus’ monetary market, Jan-Nov 2020 </p> <p>   </p> <p> MINSK, Jan 28 – PrimePress. The negative expectations of citizens and economic entities concerning the future of the Belarusian economy, which have increased amid the current political crisis, continue to exert pressure on the country’s monetary market. Increased demand for foreign currency, as well as the ongoing outflow of time deposits of private households, indicates the lack of confidence in the system. </p> <p>   </p> <p> The National Bank maintains restrictions on the lending market, preferring spot injections of liquidity to maintain control over money supply. At the same time, the regulator has so far succeeded in resisting the government’s calls for more financial injections into the economy. However, even despite the actions of the National Bank, inflation in Belarus continues to accelerate, stimulating negative expectations of economic agents. </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 Jan 1, 2021 </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"> 2.5789 </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"> 7.4 (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"> 7.469 </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"> 5.4 (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> State-owned cos account for the bulk of loans at year end amid liquidity shortages </p> <p>   </p> <p> In January 2021, the National Bank of Belarus extended until May 18, 2021, inclusive, the suspension of permanently available operations to support and withdraw liquidity. </p> <p>   </p> <p> "The banks’ liquidity will be supported through monthly loan auctions to be held on the first day of the reserve requirement period. The loans will be provided for a period of 6 months. In addition, if necessary, based on the emerging liquidity situation in the banking system, seven-day credit auctions will be held," the regulator said in a statement. </p> <p>   </p> <p> Initially the decision was made in August 2020 amid a sharp increase in negative expectations after the presidential elections and a landslide increase in demand for ruble resources for the purpose of their conversion, which created excessive pressure on the foreign exchange market and the Belarusian ruble. Later, the decision was repeatedly prolonged, indicating a continued negative outlook on the possible developments in the financial market. </p> <p>   </p> <p> Restrictions imposed by the National Bank on the liquidity market, as well as uncertainty about the situation in the economy, are restraining the growth of loan portfolios of Belarusian banks. At the same time, the bulk of the resources allocated under the current conditions was directed to state-owned enterprises at the end of the year. According to the regulator, the portfolio of loans issued by banks to corporate customers, as well as the corporate debt on loans purchased by banks in the framework of claim assignment deals, increased by 0.7% in December 2020 to Br58.747 billion as of January 1, 2021 (up 21% year on year). </p> <p>   </p> <p> This includes the debt in Belarusian rubles, which increased by 2.2% to Br30.962 billion (+19.3% YTD) in December, while the foreign currency debt decreased by 0.7% to $10.774 billion (+0.3%). </p> <p>   </p> <p> At the same time, in spite of the outstripping growth rate of lending in Belarusian rubles, almost half of the banks' loan portfolio is still formed in foreign currency. This is especially true for state-owned enterprises, where foreign currency accounts for more than 65% of loans. </p> <p>   </p> <p> The high share of foreign exchange in the loan portfolios of public sector enterprises poses increased risks for both borrowers and banks. This is especially true in the context of the economic crisis and the resulting high volatility of the Belarusian ruble exchange rate and uncertainty in the economy. </p> <p>   </p> <p> Under these difficult conditions, banks are forced to lend to state-owned enterprises not only under administrative pressure “from upstairs”, but also in their own interests: the cessation of lending to large enterprises under conditions of declining business activity and shortage of working capital will inevitably provoke an increase in non-payments and deterioration of the situation of related smaller companies, and consequently an increase in overdue debts in the loan portfolios of the banks themselves. </p> <p>   </p> <p> According to the National Bank, state-owned commercial enterprises owed banks Br21.759 billion as of January 1, 2021, up 27.6% year on year (+1.1% for December). This includes the debt in Belarusian rubles, which amounted to Br7.515 billion, up 36.4% year on year (+6.4% or +Br453.4 million in December), foreign currency - $5.524 billion, up 0.6% (minus 1.3% or minus $74.4 million). </p> <p>   </p> <p> The private sector’s credit debt amounted to Br18.618 billion as of Jan 1, 2021, up 24.3% year on year (+0.1% in December). This includes loans in Belarusian rubles -Br7.444 billion (+22.1% YTD and +0.8% or +Br60.8 million in December), foreign currency loans - $4.333 billion (+2.6% and minus 0.2% or minus $10.6 million, respectively). </p> <p>   </p> <p> Thus, we can state that in December 2020, the bulk of lending came to state-owned commercial enterprises. In the context of the economic crisis and liquidity shortages, the authorities tried to support state-owned enterprises in this way, while private companies were essentially experiencing a credit crunch. Given the poor performance of many state-owned companies, this support could be a major headache for banks in the future, as it will be very difficult to get their loans repaid during the crisis. </p> <p>   </p> <p> In late August and early September, almost all banks curtailed lending to private households due to liquidity shortages or substantially increased interest rates on new loans. At the same time, in August, against the background of post-election uncertainty, households showed an increased interest in bank credits. In September, the interest persisted, but was substantially limited by the banks. A similar situation was observed in the following months, which led to a significant slowdown in consumer lending at the end of the year. </p> <p>   </p> <p> According to the regulator, the debt on consumer loans as amounted to Br5.552 billion of January 1, 2021, down 0.7% month on month. In 2020, consumer lending increased by less than 1.3% year on year compared to almost 25% in 2019. The total amount of private households’ credit debt to banks amounted to Br15.703 billion as of January 1, 2021, up 0.7% in December. To compare, in 2019 this indicator grew by 10.9% year on year, mainly due to real estate lending. </p> <p>   </p> <p> Overall, we can note the persistently high level of credit risks in the Belarusian economy, which are caused by the excessively high share of foreign currency in banks’ loan portfolios, deterioration of financial position of legal entities and individuals amid the economic crisis, as well as the authorities' return to administrative levers of credit management. </p> <p>   </p> <p> Outflow of time deposits slows down, but fails to stop </p> <p>   </p> <p> The banking system’s liquidity in 2020 was affected by the outflow of personal deposits, both in Belarusian rubles and in foreign currency. Depositor flight peaked in August, and a total collapse of the system could be avoided thanks to the irrevocable deposits introduced several years ago, and sharply increased rates on Br deposits. By the end of 2020, the outflow of funds from fixed-term personal deposits from banks has slowed down substantially, but has not stopped completely. </p> <p>   </p> <p> According to the National Bank, the balances of citizens’ fixed-term and conditional deposits in Belarusian rubles decreased by 0.1% in December 2020, amounting to Br4.533 billion as of January 1, 2021 (minus 11.7% year on year). Balance of transferable deposits (mainly salary card accounts) amounted to Br2.846bn as of Jan 1, 2021, up 7.8% in month on month largely due to pre-New Year bonus payments (minus 6.1% year on year). </p> <p>   </p> <p> Personal fixed-term and conditional deposits in foreign currency amounted to $4.64bn as of January 1, 2021, down 0.6% month on month, down 25.4% year on year. In absolute terms, the outflow of fixed-term FX deposits from banks over the past year amounted to $1.577bn. </p> <p>   </p> <p> The balances of transferable foreign currency accounts of individuals increased in December 2020, which may be due to the fact that many use them for non-cash exchange transactions, and in December citizens’ demand for foreign exchange increased significantly. Dec 2020 saw an increase of 3.1% to $1.21bn. At the same time, this indicator for on-demand deposits in foreign currency accounts decreased by 8.4% year on year. </p> <p>   </p> <p> Fixed-term deposits, both in Br and FX, remain unattractive despite a significant increase in rates. According to the regulator, average interest rates on banks’ new fixed-term deposits in Belarusian robles were 17.48% per annum in December 2020 against 9.72% in December 2019, irrevocable deposits - 18.34% and 10.08%, respectively. </p> <p>   </p> <p> Interest rates also rose on the foreign currency deposit market. Statistics from the National Bank show that the average rates on banks’ new fixed-term deposits in hard currency amounted to 1.27% per annum in December 2020 against 0.69% a year earlier; irrevocable deposits - 1.54% and 1.06%, respectively. </p> <p>   </p> <p> Thus, it can be stated that high inflation and devaluation expectations, which persist not only among individuals but also in the economy as a whole, have a negative impact on the banks' funding base. In the coming months the situation is unlikely to improve, not only because of the existing uncertainty, but also because of the worsening financial situation of many private households due to the crisis in the economy. In the emerging context, many will be forced to spend their savings to sustain their customary standard of living. </p> <p>   </p> <p> Year-end sees traditional seasonal surge in demand for foreign cash </p> <p>   </p> <p> Belarus traditionally experiences a seasonal surge in the domestic FX market at the end of the year. In 2020, the situation was exacerbated by increased inflation and devaluation expectations due to the political crisis. As a result, FX purchases from banks by individuals and companies exceeded their FX sales to banks by $179.1m in Dec 2020, while in Nov 2020 the situation was the opposite: FX sales to banks exceeded FX purchases by $149.3m. </p> <p>   </p> <p> In 2020, FX purchases in Belarus exceeded FX sales by $1.6 billion. </p> <p>   </p> <p> Despite the restrictions imposed by the National Bank on the market of ruble liquidity, in December, both individuals and companies followed the same trend: they would tend to purchase more foreign currency from banks than sell to banks. FX purchases by individuals exceeded FX sales by $230.9 million in December 2020, while Nov 2020 witnessed the reversed situation with FX sales exceeding $98.9 million. In total, individuals bought almost $2 billion more than they sold last year. </p> <p>   </p> <p> FX purchases by resident legal entities exceeded FX sales by $31.6m in Dec 2020, while in Nov 2020 FX sales exceeded FX purchases by $171.2m. Overall, in 2020 resident legal entities bought nearly $1 billion more than they sold to banks. </p> <p>   </p> <p> FX purchases by non-resident legal entities exceeded FX sales by $50.5 million in December, while in Nov 2020 FX sales exceeded FX purchases by $62.7 million. </p> <p>   </p> <p> All in all, in 2020 FX sales by non-resident legal entities exceeded FX purchases by $596.7 million. FX sales by Belarusian banks exceed their FX purchases by $32.9 million in Dec 2020 ($14.3 million in Nov 2020). All in all, in 2020 FX sales by Belarusian banks exceed their FX purchases by $714.4 million. </p> <p>   </p> <p> Increased demand for foreign currency, the need to maintain the exchange rate of the Belarusian ruble, as well as significant payments on foreign currency debts of the government and the National Bank contributed to the negative dynamics of Belarus' international reserves last year. According to the regulator, Belarus’ international reserve assets shrank by $1.9bn, or 20.5% in 2020. </p> <p>   </p> <p> According to the National Bank, repayment of foreign and domestic liabilities in foreign currency last year amounted to about $3.9bn. In addition, the National Bank had to sell foreign currency at the BCSE auction. </p> <p>   </p> <p> “The level of foreign exchange reserves in 2020 was sustained thanks to the Finance Ministry’s placement of foreign currency-denominated bonds in the foreign and domestic markets, external government borrowings, other foreign currency inflows to the budget, as well as an increase in the value of monetary gold,” the regulator said in its commentary. </p> <p>   </p> <p> For 2021, the National Bank maintains negative expectations for gold reserves. International reserve assets are projected to reach at least $6bn by January 1, 2022. The downward forecast is most likely due to the unfavourable situation in the international credit 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> Belarus sinking into financial vulnerability </p> <p>   </p> <p> According to BEROC Senior Researcher Dmitriy Kruk, the level of financial problems that has been accumulated in the Belarusian economy creates a shaky ground for financial stability, and Belarus is sinking into a situation of financial vulnerability in 2021. </p> <p>   </p> <p> According to his assessment, there are many potential threats leading to financial instability. These are aggravation of the domestic political situation, relations with Russia, the health of the global financial system, global "aftershocks" related to COVID-19, the threat of new Western sanctions, rate dynamics in the global market and migration. </p> <p>   </p> <p> Growing distrust of the financial system, outflow of deposits from banks, increased demand for foreign currency and the flight from the Belarusian ruble, shortage of external financial sources represent only a small part of the issues that need to be addressed in the near future. </p> <p>   </p> <p> Speaking about economic policy and the authorities’ reaction to shocks, the expert noted that this reaction remains uncertain. The room for manoeuvre is very limited and, if the situation worsens, it is difficult to speculate on what steps can be taken. At the same time, the authorities continue to reinforce command-and-control methods of governance after the elections. </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-01-30

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