The risk of financial instability.
It’s been the second consecutive month of general improvement in all segments of the financial market. Thus, in February the foreign exchange market registered significant net sales of foreign currency by all economic actors, and in March the trend continued, according to the authorities. This allowed to reach the stability of the Belarusian ruble against the currency basket without actually spending the foreign exchange reserves (according to the Chairman of the National Bank Pavel Kallaur, the net foreign exchange interventions for 3 months of 2015 amounted to only USD 40 thousand). Despite the moderate growth of the Belarusian ruble deposits (the fixed-term ruble deposits grew by 3.3%, which is below the capitalization level), the rates on the Belarusian ruble market in March showed a significant drop (to the level of 35-40% on private deposits since the end of March). It was conditioned either by administrative (direct «recommendations» to reduce deposit rates) or regulatory decisions of the National Bank (reduction of reserve requirements on attracted foreign currency funds from 10% to 9%, decrease of the rate on operations on liquidity provision to banks from 40% to 35%). The latter measures have led to significant improvements in bank liquidity, which by the end of March has become even excessive after the historical maximum deficit in January. The slowdown in the inflation rate (up to 1.7% in February after a 2.4% a month earlier) and its retention in the planned area allowed the Government to finally cancel the sensational ban on price increase.
At the same time it is worth noting the continuing growth of risks in the banking system. The most discussed event of the March was the first for many years actual bank failure, which happened to the retail Delta Bank. The status of the banks specializing in consumer lending has deteriorated sharply in early 2014, and the events of December have obviously added negative effect. But in case of Delta Bank, in addition to the tactical problems, apparently, there occurred an ordinary disinvestment by the Ukrainian capital owner. If this reason will be confirmed, it will raise the question of quality of the banking system monitoring by the National Bank, which is considered to be super strict. The good news is that the problem of Delta Bank did not lead to a «raid» of depositors on the banks, indicating the same level of confidence in the banking system among the population. The guarantee by the Government of a 100 percent return of the deposits to the population contributed to this a lot. To return the funds to the investors of Delta Bank, the resources of the Agency for the guaranteed reimbursement of bank deposits will be used. At the same time the resources of the Agency are limited: to repay all obligations of the sufficiently small Delta Bank the Agency will spend about a third of the amount accumulated since 2008. It is obvious that in case of problems with larger banks, it will be no longer possible to ensure the return of deposits, and the only option will be the use of budgetary resources. In general, the situation in the banking system remains tense. Thus, in the 4th quarter of 2014, six banks showed losses. The past devaluation triggered the expected rapid growth of bad debts in the economy amid the general reduction in lending.
Despite the significant operating surplus (4.9% of GDP), the situation with execution of the state budget remains tense. As a result of oil prices reduction, the budget will receive less USD 1 billion only on oil export duty. The Ministry of Finance already announces adjustments to the budget in the first half year in terms of reducing its expenditure side.
The risk for economic independence.
The authorities still did not manage to solve the problem of the low level of gold and foreign currency reserves. Despite the stability in the foreign exchange market, the gold and foreign currency reserves continue to decline, even though somewhat slower already (by USD 73.5 million for the February according to the IMF determination or by USD 266.5 million according to the National Standard). This is due to the repayments on the public debt, the refinancing sources for which have not yet been found. Thus, as expected, the negotiations with the IMF during their visit to Minsk in the framework of the monitoring mission did not give the desired result. Though the authorities have declared readiness of the program for discussion with the IMF, it was obvious according to the reaction of the IMF representatives that much more radical reforms are expected compared with the offer of Belarusian authorities. Although the situation on the international market significantly improved for the new placement of sovereign bonds (current yield on quoted Belarusian Eurobonds dropped from 19-20% to 12-13% per annum), the current rates are still actually at the prohibitive level. We are unable to attract substantial resources even through the placement of government bonds on the domestic market. In such situation Russia remains the most realistic source of external financing. In March, the Belarusian authorities have stepped up the rhetoric on the need to accelerate the integration within the EAEC. This rhetoric implied the offers of earlier establishment of a monetary union between the member countries. This rhetoric is obviously used as an additional pressure on slow Russian colleagues continuing to promise financial support (for example, Prime Minister Medvedev announced its readiness to refinance the loans of Belarus in the amount of repayment for 2015), but in practice no funds have been allocated. For example, in March the Russian government agreed to provide a loan to Belarus amounting to USD 110 million only, which looks almost mockingly in the current situation.
The risk of economic recession.
In the context of some stabilization in the financial sector and still a high chance of getting the refinancing of debts from Russia, the most problematic issue remains the real sector of economy, particularly the industry. This is evident both according to the statements of the authorities and the statistics (a fall in industry in January-February was at the rate of 5.8% against a decline in GDP at the rate of 0.6%, while maintaining the growth of stock reserves). A record net loss of economy of the country in January 2015 (almost BYR 42.6 trillion) showed how significant the impact reflected on the financial status of the enterprises due to the devaluation effected in winter. This loss obviously to a large extent was the result of revaluation of the foreign currency loans of the enterprises, and due to the legislative changes “on the paper” this figure will be adjusted towards a substantial reduction.
However, in practice this does not negate the fact of increase of the credit burden on enterprises with foreign currency loans, in the context of fall of the domestic demand and the demand on the Russian market. An additional challenge for the enterprises was a significant reduction of state support and reduction of bank loans. As a result, more and more state-owned enterprises started going bankrupt, and if earlier this measure was used by small enterprises, in March a sufficiently large enterprise of the construction sector «Zabudova» declared bankruptcy. A good example of problems in the engineering sector is the situation at MAZ: amid falling sales in Russia, compared to the level of last year, in late March almost 2 times for 10 days the company stopped the main line due to lack of funds for purchase of accessories. The example with MAZ shows that even the largest enterprises, previously included in the list of 106 priority enterprises in terms of government support, cannot expect meeting their needs at the expense of the state budget or issuing resources.
If the recipe for solving financial problems is generally standard, it is not clear how the Government can improve the situation in the industry. The Russian economy continues to decline, and the calls on expanding the export through its promotion by the staff of the diplomatic missions may not be taken seriously. In this situation the only thing actually offered by the Government is trying to reach the start of the economic growth in Russia and occupy vacant niches there by that time. The authorities are lobbying the need for a unified industrial policy in the EAEC, which seems to be based on the promotion of import substitution. In fact, it is still the same way of obtaining additional preferences in the Russian market, which increases the already substantial dependence on Russia.
Thus, in March, the situation in the economy developed in line with the tight monetary and fiscal policy implemented in late 2014. The stabilization of the financial market is accompanied by worsening of the situation in the real sector of economy and the accumulation of risks for the banking system. The intrigue is whether the authorities will be able to stick to the chosen measures long enough in the context of the upcoming presidential elections.