ANALYSIS: Negative sentiment continues to weigh on monetary market

<p> Monthly overview of Belarus’ monetary market, Jan-Apr 2021 </p> <p>   </p> <p> MINSK, May 31 - PrimePress. The lack of positive dynamics in the settlement of the political crisis after the 2020 presidential election produces a negative effect on the monetary sector and the country’s credit market. Vague prospects for the Belarusian economy and increasing sanctions pressure on the country stimulate negative expectations of economic entities. </p> <p>   </p> <p> In order to restrain inflation and devaluation processes, the National Bank had to limit lending by tightening the conditions for providing liquidity to banks, as well as to increase the refinancing rate, which, nevertheless, in April remained below the rate of inflation. Against this background, private households remain distrustful of the Belarusian ruble, which is expressed, among other things, in reluctance to keep savings in banks, especially in foreign currency. </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 May 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"> 2.5981* </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"> 8.5*** </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"> 8.5 (Mar 2021 on Mar 2020) </p> </td> <td> <p align="center"> not more than 5 (Dec 2021 on Dec 2020) National Bank’s adjusted forecast – around 7%) </p> </td> </tr> <tr> <td> <p> Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars </p> </td> <td> <p align="center"> 7.278 </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"> 0.3 (Apr 2021 on Apr 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-Apr 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 8.5% on Apr 21, 2021 </p> <p>   </p> <p> Companies support gold/FX reserves in April </p> <p>   </p> <p> In April, after three months of decline, Belarus’ gold and foreign exchange reserves demonstrated growth. This was due to the purchase of foreign currency by the National Bank at the auction of the Belarusian Currency and Stock Exchange (BCSE), an increase in the value of monetary gold, as well as thanks to the state budget’s foreign currency revenues. </p> <p>   </p> <p> According to the regulator, in April 2021, foreign exchange reserves increased by $337.9 million, or 4.9%, after decreasing in March by $174.5 million, or 2.5%. Since early 2021, Belarus' international reserve assets have been showing negative dynamics, falling by $190.6 million, or 2.6%. As of May 1, they stood at $7.278 billion and so far remain above the approved forecast level - on January 1, 2022, the country’s international reserve assets are supposed to amount to at least $6 billion. </p> <p>   </p> <p> The net supply of foreign currency at the exchange market in April can be explained not so much by the growth of confidence in the Belarusian ruble against its strengthening against the U.S. dollar, as by the necessity to pay quarterly taxes. In April 2021, FX sales by resident legal entities exceeded their FX purchases by $411.8 million (net sale), while in March FX purchases exceeded FX sales by $69.3 million (net purchase). At the same time, FX sales by legal entities in April increased by 7.6% month on month to $2.441 billion, while purchases fell by 13.2% to $2.029 billion. </p> <p>   </p> <p> The behaviour of legal entities provided a total net supply of foreign exchange on the domestic market in April in the amount of $398.2 million against $29.9 million a month earlier and $377.9 million in April 2020. In the course of January-April 2021 the total net supply of foreign currency at BCSE auctions amounted to $71.7 million against a net demand of $715.7 million in January-April 2020. </p> <p>   </p> <p> A considerable discrepancy between the volumes of net demand for foreign exchange this year and last year is due to a rush in demand for foreign exchange in March 2020 as a result of a sharp depreciation of the Belarusian ruble against major world currencies following the Russian ruble. </p> <p>   </p> <p> In contrast to legal entities, Belarusian natural persons in April only increased the volume of net purchases of foreign currency in the domestic market. Private households have been a net buyer of foreign currency for 17 months in a row. According to the National Bank, individuals bought $123.1 million on a net basis in April compared to $24.5 million a month earlier, and $69.5 million in April 2020. </p> <p>   </p> <p> Belarusian ruble’s exchange rate under pressure of political risks </p> <p>   </p> <p> The total net supply of the foreign currency on the exchange market, as well as the decline of the US dollar against other world currencies, has favourably influenced the dynamics of the Belarusian ruble in April and partially in May 2021. As of April 2021, the official exchange rate of the Belarusian ruble appreciated by 2.4% against the US dollar, by 1.5% against the Russian ruble and by 0.6% against the euro. </p> <p>   </p> <p> In May, this dynamics continued until the incident with the Ryanair airplane on May 23, 2021. Since the beginning of the month till the specified date the Belarusian ruble appreciated against the US dollar by 2%, against the Russian ruble - by 0.3% and against the euro - by 1%. The harsh reaction of the international community, which followed on May 23, led to the depreciation of the Belarusian ruble. </p> <p>   </p> <p> Fr om 23 to 31 May, the Belarusian currency fell by 1% against the U.S. dollar, by 0.8% against the euro and by 1.1% against the Russian ruble. </p> <p>   </p> <p> Additional negative expectations for the FX market are formed by the authorities themselves. For instance, on July 9, 2021 the new edition of the law “On foreign exchange regulation and currency control” will come into effect. The law secures the already taken measures to liberalize the currency legislation and defines new approaches by actually abolishing the existing restrictions and limits associated with FX operations by legal entities and individuals. </p> <p>   </p> <p> However, insufficient efforts to raise public awareness has led to the fact that economic actors are waiting tensely for the specified date, focusing on possible restrictive actions of the National Bank and the Council of Ministers. At the same time not many people pay attention to the fact that the National Bank previously had the possibility of imposing restrictions on the currency market. </p> <p>   </p> <p> In addition, President of Belarus Alexander Lukashenko touched upon the issue of foreign currency in his speech on May 26, 2021. “The National Bank should develop measures to prevent the outflow of hard-earned foreign currency,” he said. </p> <p>   </p> <p> Thus, despite the measures taken, FX liberalization of the National Bank is still questionable, especially given the increased attention to this topic by Lukashenko. Given the ongoing economic uncertainty, we can assume that Belarus’ private households will continue to buy foreign currency as a tool to hedge their financial risks, just as in the old days, maintaining a high demand for it. </p> <p>   </p> <p> International isolation of the country and new sanctions, which have been intensified after 23 May, will also have a negative impact on Belarus’ foreign exchange market. </p> <p>   </p> <p> Refinancing rate below inflation level in April </p> <p>   </p> <p> On April 14, 2021 the National Bank decided to increase the refinancing rate from April 21 by 0.75 percentage points to 8.5% per annum, which corresponded to the annual inflation rate in March. However, in April inflation accelerated to 8.6% per annum, while the average refinancing rate even with the increase made only 8.0% per annum. </p> <p>   </p> <p> Thus, the decision to raise the key rate was not only belated, but also had little effect on the market situation. The regulator continues to distribute resources between banks in a manual mode. Banks’ demand for ruble funds at relatively adequate rates remains high. </p> <p>   </p> <p> According to the regulator, May 19, 2021, credit auction #749 was held in the form of an auction at the declared interest rate of 10.5% per annum for a period of 180 days. 14 bids from 11 banks worth a total of Br924.5 million were accepted. It was decided to set the volume of credits in the amount of 50.0 million Belarusian rubles. </p> <p>   </p> <p> Some idea of the cost of borrowing can be obtained from the interest rates in the credit and deposit market of the country. Thus, the average rate on new fixed-term deposits of individuals and legal entities in Belarusian rubles in April this year amounted to 11.08% per annum against 11.90% in March 2021 and 8.90% in April 2020. The rates on new loans (without interbank credits) - 11.78%, 11.17% and 10.67% per annum respectively. </p> <p>   </p> <p> The National Bank restrains the inflationary pressure in the current environment by restricting money supply. The tough policy in this area has led to the fact that April’s average broad money supply increased year on year by only 0.3%, with the end-of-year target range set at 7-10%. </p> <p>   </p> <p> Thus, it may be noted that the liquidity situation in Belarus remains complicated. The National Bank seeks to maintain stability in the market, while commercial banks are forced to rely only on their own forces, as well as on relatively expensive customer funds, when planning their loan portfolios. In the emerging conditions it seems quite logical to restrain the pace of lending to the economy. </p> <p>   </p> <p> Corporate lending remains low </p> <p>   </p> <p> According to the regulator, the debt on loans granted by banks to different sectors of the economy and their debt on loans acquired by banks on claims decreased by 1.7% in January-April 2021 to Br57.756 billion as of May 1, 2021 (+1.2% month on month in April). </p> <p>   </p> <p> The Br debt has decreased by a modest 0.1% to Br30.940 billion for the first four months of the year, while the FX debt - by 2.8% to $10.469 billion (+3.9% in April). </p> <p>   </p> <p> Thus, 46.4% of banks’ total credit portfolio is formed in foreign currency, which is a significant risk for both the borrowers and the banks. This is especially true for the public sector, wh ere 62.4% of loans were in foreign currency as of May 1, 2021. At the same time, it is worth noting the positive dynamics in the currency structure of the loan portfolios: as of 1 January this year these indicators were 47.3% and 65.5%, respectively. </p> <p>   </p> <p> The hostage of the high share of foreign currency component in loan portfolios is also the National Bank. It has to intervene in the exchange rate process to prevent the national currency devaluation and not to increase the credit burden for public sector enterprises. </p> <p>   </p> <p> According to the National Bank, state-owned commercial enterprises owed banks Br21.001 billion as of May 1, 2021, which is 3.5% less than on January 1 of this year (+1.7% month on month in April). Of which the debt in Belarusian rubles amounted to Br7.887 billion, up by almost 5% (+1.3%) YTD, in foreign currency - $5.120 billion, down 7.3% (+4.4%). </p> <p>   </p> <p> The private sector’s credit debt amounted to Br18.475 billion as of 1 May 2021, down 0.8% year to date (+1.6% month on month in April). This includes Br loans, which stood at Br7.062 billion as of May 1 (minus 5.1% year to date, +1.6% month on month in April), foreign currency loans - $4.455 billion (+2.8% and +4.2%, respectively). </p> <p>   </p> <p> In late August - early September 2020, almost all banks curtailed lending to private households due to the lack of liquidity or significantly increased interest rates on new loans. Subsequently, personal lending gradually resumed, but given the continuing uncertainty in the economy and the lack of liquidity at the market, the credit rates offered by banks are still significantly higher than reasonable levels, which contributes to the decline in private households’ credit debt to banks. </p> <p>   </p> <p> According to the regulator, the amount of debt on consumer loans amounted to Br5.288 billion as of May 1, 2021, down by 4.7% year to date (minus 0.5% month on month in April). The total amount of credit debt owed to banks by private households amounted to Br15.689 billion as of May 1, 2021, down 0.1% YTD (+0.5% month on month in April). </p> <p>   </p> <p> On the whole, we can note the persisting high level of credit risks in the Belarusian economy, which are caused by the excessively high share of foreign currency in banks’ loan portfolios, the deterioration of the financial situation of legal entities and individuals amid the economic crisis, as well as the authorities’ return to the administrative levers of credit management. </p> <p>   </p> <p> Political crisis poses risks to macroeconomic and financial stability </p> <p>   </p> <p> In the first half of May 2021, Fitch Ratings affirmed Belarus’ rating at "B," with a negative outlook. The Fitch commentary says: “Belarus’ ratings balance high income per capita, an improved economic policy framework and a clean debt repayment record against low foreign exchange reserves, subdued growth prospects, government debt highly exposed to foreign currency risks, a weak banking sector, high external indebtedness and weak governance indicators relative to rating peers. The negative outlook takes into account the vulnerability that has intensified due to the political crisis in the post-election period, which poses risks to macroeconomic and financial stability. At the same time, the standoff between the government and opposition following the Aug 2020 contested elections remains unresolved.” </p> <p>   </p> <p> Fitch assumes that the authorities will maintain the pre-pandemic economic policy stance that prioritised macroeconomic stability. However, there has been some uncertainty over the direction of policy, with SOEs and regulation playing an important role in the response to the shocks of 2020 and political pressure placed publicly on the central bank. </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-06-01

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