The risk of financial instability.
The month was characterized by remarkable transformation in the financial market aimed at liberalization. The changes in the foreign exchange trading procedure and their transition to the internationally and generally accepted principle of a two-way auction were mostly covered in mass media. The purpose of such changes was making the exchange rate more market-oriented and transparent to economic agents. However, the ruble was not let float freely. The National Bank does not refuse to participate in the auction through the interventions aimed at smoothing the fluctuations. Thus currently the trading procedure is technically far from perfect (the auction lasts for a short period of time, the bidders are represented by the banks only; there is a lack of updating information about the auction), though the innovation itself is progressive for sure. Less visible, but perhaps more important was changing by the National Bank of the bank liquidity regulatory policy. In accordance with the new rules, the focus moved to the auctions aimed at provision/withdrawal of ruble liquidity, and the value of other instruments (for example, transactions at a fixed rate) will be reduced. As a result, the rate on the ruble market will become more volatile and its changing will depend on the goal of targeting the monetary base. In other words, the National Bank sets the task for the strict control of the amount of money in the economy and thus reducing the inflation.
The time for such change was perfectly chosen: the currency market has shown a very favourable situation for the past three months (in April the net sale of foreign currency by individuals and enterprises exceeded USD 420 million), though it was partially conditioned by the increased sale of foreign exchange reserves of the population because of falling revenues. At the same time both ruble and foreign currency deposits continue showing growth (in April the fixed-term ruble deposits of the population increased by 8%, and the foreign currency deposits increased by 1.4%), and the substantial excess in liquidity was generated in the banking sector.
The recent changes are still invisible for the real sector and the population, and did not seriously affect the main market indicators. However, they still bear some risks: weakening of the Russian ruble in May-June provoked a sizeable drop in the Belarusian currency to the dollar (by 8% since the mid May), which rate is still the main indicator for the ruble assets holders. This may cause the overflow of ruble deposits to the currency, if the depositors perceive such weakening of the national currency as a stable trend. The increase of ruble rate should promptly hold the outflow, which has already occurred several times in recent years. However, starting from 01.06.2015, the National Bank introduced an additional burden for the banks in case of their exceeding the recommended rates on deposits and loans. As a result the normal market growth of rates in the market of ruble deposits may be blocked, because of disadvantageousness for the banks to exceed the maximum recommended level of interest on deposits. Undoubtedly, the National Bank may quickly review the upper limit of the rate, but the fact that the National Bank has to address two mutually contradictory goals is quite illustrative: on the one hand, it should make the rate in the ruble market more market oriented, and on the other hand, it should stimulate the reduction of the credit price in the economy.
At the same time, the first signs of deterioration of the basic conditions for a stable ruble begin to appear. Thus, the foreign trade statistics has shown a significant negative result for the second consecutive month (minus almost USD 427 mln. in April and minus USD 386 mln. in March), so the trading results in January-April 2015 have been worse than the results for the same period last year. In terms of the real exchange rate of the national currency (i.e. adjusted to the inflation rate in Belarus and in the countries being our biggest trading partners), the situation returned to the mid 2014, and according to the IMF, the ruble is significantly overvalued. The potential weakening of the real effective exchange rate from now until the end of the year is estimated by the IMF experts at 7%, which corresponds to the nominal growth of the US dollar by 15-20%.
The situation in the banking sector remains tense enough. After bankruptcy of «Delta Bank», in May the regulator imposed licensing restrictions on two more small banks and two more banks were deprived of the right to carry out their activities. The total share of these banks in the banking sector assets was small (only 0.18%) and the decision of the National Bank will not have any dramatic consequences. But such principle position of the regulator to the lack of capital, which was not previously taken too seriously, evidences careful monitoring of the banking sector to prevent the proliferation of risks to its stability. Special attention to the risks for the banks related to depreciation of the ruble and the deterioration of the solvency of creditors is also paid to in the last IMF report. According to the IMF, the authorities will have to recapitalize major state-owned banks to support their own capital, which will create additional pressure on the budget and may result in the actual deficit at 7% of GDP.
The risk for economic independence.
There remains uncertainty around the situation with obtaining more credits to be used for payments under the significant foreign debts in the second half of 2015. As expected, the IMF is ready to provide a loan only in case of major reforms aimed at price liberalization, privatization and withdrawal of directed lending. However, the main part of the reforms should be at the initial stage of the credited program. Another loan from AF EurAsEC is also undecided: experts of the Eurasian Development Bank expressed willingness to consider the application of Belarus by the end of June, but their opinion on the required reforms is generally identical to the relevant opinion of the IMF experts. Prime Minister Andrei Kobyakov once again assured that the Russian authorities promised to refinance all repayments due this year, though the details of amounts and terms of refinancing are still missing.
A lot of attention in mass media was paid to the visit of the President of China Xi Jinping to Belarus. On the one hand, the visit brought particular economic benefits: an agreement was signed by the Bank of Development and «Belarusbank» for a loan in the amount of USD 1 billion to finance joint projects; they agreed upon SWAP transaction between the central banks in the amount of about USD 1 billion; they also agreed to finance the construction of mining and processing potash industry. The resources in the framework of these loans are mainly for joint projects and they will not appear in gold and foreign exchange reserves of the country (except for SWAPs, the amount of which will increase the rate of gold reserves in the national definition), but will undoubtedly have a certain effect on the economic growth. On the other hand, most of the rest of signed memorandums and agreements, the amount of which reached USD 7 billion, may be expected to share the fate of the 15-billion credit line opened by the Chinese Government in 2012. Those funds largely remained unused because of the lack of promising projects from the Belarusian side. Now the situation has not significantly improved, especially in the light of the current deteriorating economic situation.
The news regarding the EAEC recently associated with its new and future members: Armenia and Kyrgyzstan. Both countries are entering the economic union in an accelerated mode, though some time will not live according to the rules of the union. The fact that the discussion of the fundamental conditions of the national economy functioning in the framework of the Union is carried out after the entry into the Union, evidences a clear bias of the EAEC towards the political PR project. Obviously, the goals and vision of the future by the EAEC allies is currently seriously uneven. Thus, the Kazakh authorities have developed a program of concrete steps on reforming the state system aimed at liberalization of the economy (including the reduction of customs duties) and generally at Westernization of the entire model of society (even, for example, transitioning to English speaking education in high school and higher educational establishments). With this approach, joining the EAEC was initially considered by Kazakhstan as «Cutting through the window to Europe», which in the current conditions of the Russian-Ukrainian conflict is losing its relevance. The Belarusian authorities in their turn initially saw the economic union as a way to get energy resources at the Russian domestic prices, and also to get preferential access to the Russian market, having built at the same time additional trade barriers on its perimeter. In general, all of the current actions of the Belarusian authorities in the framework of the EAEC (promoting the idea of a speedy removal of all restrictions in mutual trade, introduction of labeling products as «Product of the EAEC», coordination of common procurement regulations) are aimed at achieving these goals. It is obvious that in the situation of reduced energy prices and reduced capacity of the Russian market, especially for the Belarusian investment goods, the attractiveness of the EAEC for Belarus objectively falls. Thus, Alexander Lukashenko, has repeatedly stated the need to protect the domestic market from «unreasonable» import even in the customs union. All this increases the likelihood that further integration processes within the EAEC will be blocked, the number of mutual claims will increase and, in the end, the EAEC will suffer the fate of the many integration projects existing in the former Soviet Union.
The risk of economic recession.
The situation in the real sector of the economy continues to get worse: a decline in GDP in January-April accelerated to 2.6%. The bottom of such fall was not yet passed in the industry, which showed negative dynamics of 7.5%. And the situation in mechanical engineering is still getting worse. Thus, in April 2015 in comparison to April 2014 the production of trucks and buses fell by 3 times, and trucks by more than 2 times, tractors by 40%, and harvesters – 30 times more. In this situation the authorities maintain restraint and do not to use large-scale incentive measures because of fear for negative consequences for the financial markets. However, the first signs of willingness to loosen a few screws in the second half of the year have already appeared. Thus, A. Lukashenko repeatedly stated the need to save jobs and that monetary policy should ensure the economic development; and Prime Minister A. Kobyakov has announced a program of budgetary support to large enterprises, the most affected by the crisis. Due to the political and social reasons the authorities may not prevent bankruptcy of «family silver». However, the Russian economy also continues falling, and in such situation it is impossible to sell the asset to the investor at a reasonable price, regardless of all the efforts. Thus, there is no alternative to increasing the state support for the critically important enterprises, although the authorities, apparently, will do their best to dispense such support.
Thus, the economic situation in May did not suffer significant changes. After having reached stable financial market situation and having implemented progressive changes in it, the authorities continue to take a passive stance on the gaining strength fall of the real sector of economy. The Government is not ready to carry out serious reforms, but it is also afraid of returning to the practice of budget support for the public sector. If the crisis Russia gets worse (and now it is the most likely scenario), it will be impossible to continue maintaining such status quo, and taking into account the presidential campaign the choice will be made in favour of increasing support for the inefficient enterprises.