ANALYSIS: Refinancing rate irresponsive to inflation, banks admit tighter lending conditions for businesses

<p> Monthly overview of Belarus’ monetary market, Jan-Oct 2021 </p> <p>   </p> <p> MINSK, Dec 1 - PrimePress. The monetary sector in Belarus has so far avoided any major shocks. Due to external demand, the official statistical data for Jan-Oct 2021 shows stability in the domestic foreign exchange market, positive developments in the savings process, and relative stability in foreign exchange reserves. </p> <p>   </p> <p> In late November, there was some turbulence in the Belarusian FX market, but so far the fluctuations of the national currency have not been reflected in the monetary statistics. Among the worrying developments are the lack of reaction to accelerating inflation on the part of the refinancing rate and the tightening of business lending conditions. </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 Nov 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"> 2.5451* </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"> 9.25*** </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"> 10.5 (Oct 2021 on Oct 2020) </p> </td> <td> <p align="center"> 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="center"> 8.55 </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"> +1.7 (Oct 2021 on Oct 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-Oct 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 9.25% on Jul 21, 2021 </p> <p>   </p> <p> Inflation accelerates, National Bank in no hurry to raise rates </p> <p>   </p> <p> Consumer inflation in Belarus has already exceeded the authorities’ initial forecasts more than twice and is still accelerating. In September, annual inflation amounted to 10.2%, in October - already 10.5%, while the initial official annual forecast was 5%. </p> <p>   </p> <p> On 24 November, head of research and strategic development at the National Bank of Belarus (NBB) Natalia Mironchik made the following statement during a roundtable: “The National Bank’s policy will aim to stabilise inflation with minimal cost to the economy. 6% is the inflation target for 2022. The main thing is to keep interest rates in the economy in real terms at a positive level. (If it is necessary to increase the refinancing rate, we will do it. The most important thing is to keep the interest rates in the economy and the savers’ incomes positive in real terms so that the lending isn’t free. If inflation goes up, we will have to raise the rates.” </p> <p>   </p> <p> However, so far the regulator has been in no hurry to react to what is happening. The refinancing rate was last increased by 0.75 p.p. to 9.25% per annum from 21 July 2021. </p> <p>   </p> <p> “The National Bank does not have sufficient operational independence. The practice of directed lending in the economy persists, which reinforces non-market mechanisms for doing business. Recently, there has been increased government interference in the price formation process, which is not conducive to the development of market mechanisms for the allocation of resources in the economy. The economy remains highly monetised and the infrastructure and instruments of the stock market are underdeveloped, which limits the work of the interest rate channel and the effectiveness of monetary policy,” said Natalia Mironchik. </p> <p>   </p> <p> She said that she sees the main challenge as reaching a consensus that low inflation is a public policy priority and a basic condition for sustainable economic growth. </p> <p>   </p> <p> Despite the difficult position of the regulator, which has to balance the desire to increase the refinancing rate with the desire to prevent the credit burden on the real sector, interest rates on new loans and deposits have so far remained positive relative to inflation. </p> <p>   </p> <p> According to the National Bank, the average rate on new fixed-term deposits of individuals and legal entities in Belarusian rubles in October 2021 was 10.69% per annum against 12.19% in Sep 2021 and 13.86% in October 2020. As for the new Br-denominated loans (excluding soft loans and interbank loans), they amounted to 13.46%, 13.31% and 11% per annum, respectively. </p> <p>   </p> <p> The decline in the average rate on new deposits could be due to a reduction in the severity of the Br liquidity problem in the market, both due to a tightening of commercial banks' credit policies and spot operations by the National Bank, which continues to regulate the amount of money in the market in a manual mode. </p> <p>   </p> <p> The average rate on overnight loans in the interbank market continued to decline in October 2021, remaining significantly below the rate of inflation. According to the National Bank, it stood at 2.17% per annum in October compared to 3.06% in September and 13.73% in October 2020. </p> <p>   </p> <p> The National Bank’s manipulation of liquidity is helping to curb money supply growth, which should be a limiting factor for inflation. According to the regulator, the average broad money supply increased by only 1.7% year-on-year in October, with the projected range for the year end being 7-10%. </p> <p>   </p> <p> Credit support to the economy remains subdued </p> <p>   </p> <p> High uncertainty in the business environment and the unstable financial position of real sector enterprises contribute to a decline in commercial banks’ interest in lending to the corporate sector. According to the National Bank, other economic sectors’ debt to commercial banks amounted to Br67.03bn as of 1 November 2021, up 0.02% year to date. </p> <p>   </p> <p> The real sector’s total debt to banks amounted to Br46.787 billion as of 1 November 2021, down 1.1% year to date. This includes the debt of public non-financial institutions in the amount of Br22.466 billion, down 6.8% in Jan-Oct 2021, while the debt of private institutions totalled Br24.321 billion, up 4.8%. </p> <p>   </p> <p> The positive trend demonstrated by the private sector’s debt to banks may indicate that it is more efficient and thus more attractive for banks to finance. </p> <p>   </p> <p> Individuals’ credit debt to banks amounted to Br16.539 billion as of 1 November 2021, up by almost 4% year to date. Banks’ claims on other financial institutions decreased by 2.8% in January-October 2021 to Br3.704 billion as of 1 November 2021. </p> <p>   </p> <p> The National Bank’s analytical review of bank lending conditions, published in November, notes that in Q3 2021 there was a tightening of conditions for lending in Belarusian rubles to representatives of the private business. For individuals, the level of softening of lending conditions for consumer needs has decreased, while lending conditions for real estate financing have not changed. </p> <p>   </p> <p> The banks forecast that in Q4 2021 the pace of tightening of lending conditions for businesses will decrease, while lending conditions for individuals will soften. In Q1 2022, lending conditions for all categories of borrowers are expected to soften. </p> <p>   </p> <p> Thus, there is a persistently high level of credit risks in the Belarusian economy, which is primarily due to the deteriorating financial situation of legal entities and individuals in the context of the economic crisis, as well as the persisting exchange rate risks and the expansion of directed lending. </p> <p>   </p> <p> Private households remain net sellers of FX for four consecutive months </p> <p>   </p> <p> Belarus FX market has maintained a net supply of foreign currency for the fourth month in a row. The main volume of net sales of foreign currency in October was provided by legal entities, which, among other things, had to pay quarterly taxes. At the same time, it is noteworthy that private households have been a net seller of foreign currency for four months in a row against the background of the stable exchange rate of the Belarusian currency (until recently), as well as other factors. </p> <p>   </p> <p> According to the National Bank, in October 2021, the total net supply of foreign currency amounted to $550.6m against $74.8m in September. Overall, in Jan-Oct 2021, in all segments of the domestic foreign exchange market FX sales to bank exceeded FX purchases from banks by $1.492 billion. In January-October 2020, net demand for foreign currency due to the March collapse of the Russian ruble, followed by the Belarusian ruble, as well as the August events in the country, triggered by the presidential election, amounted to $1.607bn. </p> <p>   </p> <p> Going back to the individual segments of the Belarusian FX market, after the 19-month period when Belarusian individuals continuously acted as net buyers of foreign currency was interrupted in July, they continue to act as net sellers of foreign currency. According to the regulator, individuals’ FX sales to banks exceeded their FX purchases from banks by $78.5 million in October, compared to $182.7 million in September. </p> <p>   </p> <p> In addition to the appreciation of the Belarusian ruble, such factors as the growth of interest rates in the deposit market, the holiday season (travel agencies’ services are paid in Belarusian rubles), continued growth in consumer prices (people are forced to exchange their FX savings for rubles) and other factors could have affected the foreign exchange market statistics in July-October 2021. </p> <p>   </p> <p> As for the exchange rate of the Belarusian ruble, its dynamics is determined by the movement of the Russian currency, which until mid-November felt quite confident against the backdrop of a rise in oil prices. As of 1 November 2021, the Belarusian ruble appreciated against the three-currency basket of the dollar, the euro and the Russian ruble by 4.8% year to date: by 6.06% against the US dollar, by 10.88% against the euro, and by 1.46% against the Russian ruble. </p> <p>   </p> <p> However, in November the situation for the Russian ruble began to change under the influence of geopolitical factors, cheapening oil, as well as the worsening epidemiological situation in the world. Following the Russian currency, the Belarusian ruble began to experience problems. As a result, from November 1 to 29 of this year, the Belarusian ruble fell by 5.6% against the U.S. dollar, by 1.9% against the euro, and strengthened against the Russian ruble by 1.5%. </p> <p>   </p> <p> It is not yet known how much the National Bank had to intervene in trading on the BCSE in the second half of November, but in October it managed to take advantage of favourable conditions and slightly increase foreign exchange reserves. </p> <p>   </p> <p> In October 2021, foreign exchange reserves increased by $89.8m, or 1.1%, after falling by $36.8m, or 0.4%, in September. </p> <p>   </p> <p> October’s increase in foreign exchange reserves was mainly due to the purchase of foreign currency by the National Bank on the BCSE, as well as an increase in the value of monetary gold. At the same time, the government fulfilled external and internal liabilities in foreign currency in October in the amount of about $175m. </p> <p>   </p> <p> As a result, Belarus’ international reserve assets have increased by $1.081 billion, or 14.5%, since early 2021, totalling $8.55 billion as of 1 November, with the approved forecast of at least $6 billion as of 1 January 2022. Given that the government and the National Bank have some $400 million of foreign and domestic liabilities to repay by the end of this year, meeting the forecast parameter for international reserves does not look strained. </p> <p>   </p> <p> EDB reckons Belarus may raise refinancing rate, Belarusian ruble may weaken in 2022 </p> <p>   </p> <p> Senior Analyst at the Eurasian Development Bank (EDB) Anatoli Kharitonchik does not rule out the National Bank raising the refinancing rate to 10% per annum by the end of 2021 from the current 9.25%. Kharitonchik released these figures while presenting the bank’s 2022 macroeconomic forecast for Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan on 25 November. </p> <p>   </p> <p> “We assume a further increase in the values of the estimated standard risk on which market lending rates depend. We do not exclude the possibility that the refinancing rate may be raised to around 10% by the end of 2021 and kept close to this level in the first half of 2022. Provided the inflationary pressure eases, we see a possible start of a reduction in the refinancing rate closer to the end of 2022. At the same time, the availability of market-based credit is likely to remain limited,” says the macro forecast. </p> <p>   </p> <p> If inflationary pressures subside amid financial stability and the absence of strong shocks on the foreign exchange market, the EDB assumes that the refinancing rate may be reduced to around 9-9.5% by the end of 2022 and a trend of around 9% in 2023. </p> <p>   </p> <p> The EDB macro forecast contains assumptions about the exchange rate of the Belarusian ruble against the US dollar in 2022. “We forecast an average exchange rate of Br2.65 per US dollar in 2022. According to our estimates, the ruble is now somewhat overvalued against the currencies of Belarus’ trading partner countries - in the range of 5%. In this regard, support for producers from the exchange rate factor is decreasing, and the impetus for exports from external demand will also gradually decrease. Therefore, we expect a gradual weakening of the Belarusian currency,” said Kharitonchik. </p> <p>   </p> <p> As a result of the impact of inflation and high devaluation expectations, the EDB forecasts a gradual weakening of the Belarusian ruble against the dollar in the medium term. The scale of the ruble depreciation may be limited by the bank’s projected continued subdued domestic demand and, hence, imports. </p> <p>   </p> <p> The EDB stresses that the forecast remains highly uncertain as it is difficult to assess the potential impact of Western restrictions on Belarusian exports, investment inflows and the behaviour of private households. </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-12-02

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