The risk of financial instability.
The current situation in the financial sector remains relatively stable. The transition to the new way of currency trading resulted in increased fluctuations of the ruble, but it did not lead to the significant weakening (the cost of the currency basket in the past month increased only by 1.5%). There is still an oversupply situation in the currency market, and the foreign trade in goods improved by the end of May (only minus USD 163.8 mln., which is likely to be covered by the traditional advantage in the external sale of services). After several months of intense fall, it is the second month in a row that the gold and currency reserves of the country (hereinafter referred to as the GCR) do not show significant dynamics, which is not bad in itself.
The National Bank will continue holding its quite aggressive policy to reduce the rates on the ruble market, using both economic and administrative measures. Thus, totally in June the rates on constantly available transactions to withdraw liquidity from banks decreased from 20% to 16%, and the rates on liquidity provision decreased from 35% to 30%. The banks were recommended to lower the interest rates on ruble deposits for the period up to 6 months to the level of 25-26% per annum, and in case of the longer-term deposits to set the rates at 30% per annum. This recommendation was implicitly implemented, which resulted in a drop of interest rates in the market of both ruble and foreign currency deposits. The desire of the authorities to bring the level of rates closer to the level of inflation, which continues to fall (by 0.7% in May), is clear, but it certainly implies significant risks. At the end of May the tendency of the actual outflow of ruble deposits was observed (nominal growth of ruble deposits among the population was less than the average percentage of capitalization in the past month), and in June it should continue. Though, judging by the statistics of bank liquidity, which retains a substantial surplus (about Br 5-6 trillion as of the beginning of July), this outflow is far from critical. In general, it is a quite favorable situation for another depositors’ inflow to the banks: the cut in rates takes place on the eve of the next elections, and so when the low public confidence in the national currency traditionally falls. The bad news to provoke the beginning of the outflow of ruble deposits may be, for example, a sharp drop in the gold and currency reserves of the country in August after payment of USD 1 billion within the scope of the Eurobonds repayment. In connection with this, it will be very important for the authorities to get large amounts of foreign loans in July-August 2015, or at least to secure their guaranteed receipt. A certain concern is called by the possible weakening of the Russian ruble at the background of the Eurozone crisis.
Today, the potential sources of external credits remain the same: the Russian government, AF EurAsEC, which was renamed as the Eurasian Foundation for Stabilization and Development (hereinafter referred to as EFSR), and the IMF. At the same time the plans of the new Eurobonds placement in 2015 seem to be have been finally abandoned by the authorities, which once again moved them to the next year. The prospects of getting money from the first two sources are considered optimistic. Thus, according to the Minister of Finance Vladimir Amarin, it is planned to negotiate the next loan with the Government of Russia in July, and the approximate amount could reach about USD 1.3 bln. The discussion of the EFSR loan will take place already in July and is also being evaluated as having a good chance of success. However, the visit of the IMF mission to Minsk in July to discuss the possibility of a new credit program promises to become the most intriguing event. The result and the course of negotiations will be a litmus test of the authorities’ readiness to make major economic reforms.
The risk of economic recession.
The situation in the real sector continues to deteriorate: the decline in GDP accelerated to 3%in five months, the production decreased by 7.7%. The most critical situation is in heavy industry, which traditionally provides a significant number of jobs. In such situation it was likely that the authorities will be forced to increase the support of the state-owned enterprises, which ultimately could lead to destabilization of the financial sector. But, apparently, this time the authorities decided to refrain from pumping the economy with resources during the election period. Moreover, the total volume of the state-planned economy will be reduced both in terms of the plans for 2016 and by the end of 2015. For example, the construction of housing with government support in 2015 will make about 1.5 million sq. m. (as predicted by the authorities) instead of 2.5 million according to the original plan, and the number of state programs for the future five-year plan is expected to be reduced to 24, instead of 101 at the very beginning.
However, the actions of the authorities in terms of state support still cannot be called successive. Thus, in fact, upon the request of Alexander Lukashenko, the Government developed a program of spot support to several enterprises of the “family silver” (MAZ, MTZ, Gomselmash, Gomel Casting Plant) from the budgetary sources and resources of the banks. In general, this method of state support is certainly more civilized and should not trigger the rise in inflation and the fall in the national currency, but it still may have negative consequences: it is either the reduction in government spending on other areas and the growth of bad debts at banks, and the reduced availability of credit resources for the effectively operating enterprises. All these factors, in turn, influence the overall economic growth. It is also doubtful that such measures will be supported by the IMF, although the authorities will try to justify their need to support producers during the period of temporary difficulties.
The question of the authorities’ willingness to carry out major structural reforms remains important. On the one hand, the members of the Government declare development of the roadmap of structural reforms, intended to lay the basis for the country’s economic development program for the next five years, and to be submitted in the process of negotiations with the IMF. However, any details with respect to the main direction, speed and methods of the planned reforms are still absent, and Alexander Lukashenko’s repeated demand to save the industry and not to reduce employment in this sector is absolutely inconsistent with the objective of restructuring the national economy.
Thus, the key risks are risks associated with the possibility of a sharp outflow of the ruble deposits under the conditions of low gold and currency reserves. The Government has so far failed to neutralize these threats by building up reserves, despite all the exhortations. The situation is getting even worse due to the next period of low ruble rates in anticipation of the presidential campaign. The problem of the economic downturn is yet not solved either, and it is obvious that there is no consensus in the Government offices towards the reasons for the current situation and the way forward.