The risks of financial volatility
Against the background of a steady recovery in economic growth, we can state the exhaustion of factors that largely determined the key indicators of financial stability for the last 2-3 years. In this regard, in the near future, the authorities will be struggling not for improvement of the situation but for its retention at the achieved level. After historically minimal inflation at 4.6% in 2017, the plans for the current year are more restrained by the authorities: consumer price growth should not exceed 6%. This is connected to several objective reasons. The authorities consider the key one to be the existing “reserve” of growth in administrative prices associated with the government’s plans to increase the population’s payment for housing, utilities, transportation and other services. The growth of oil quotations at the end of 2017 formed a significant potential for the growth of the cost of oil products in the domestic market. Alignment of prices for gasoline with the Russian market will ensure their growth by 17%. In addition, the weakening of the BYN to the RUB, which amounted to about 3.8% in the last 3 months, negates the factor of the downward impact of imported inflation.
In this case, the priority growth of the average wage relative to the level of productivity is of particular concern. The dynamics of these parameters showed the greatest disproportion in December, when the average wage increased by 19% and almost reached the level of BYN 1000. In January 2018 this indicator is traditionally likely to decrease, but the practice of administrative incentives for salaries is likely to be preserved against the background of President Lukashenka’s new demands.
The growth of incomes of the population has already negatively affected the state of the domestic foreign exchange market. As a result of December, the deficit of foreign currency on the market was developing, while for the first time in 23 months, a net purchase of USD 41 million for population operations was recorded (source). This confirms the National Bank’s assumption that a significant amount of currency sales by the population in the last 2 years was connected to the desire to maintain consumption level against the background of falling real incomes. Accordingly, the observed increase in household incomes marked the end of the period when the redemption of the excess currency by the National Bank in the domestic market was an important source of replenishment of the country’s gold and currency reserves.
The situation with liquidity in the banking sector has also drastically changed: after a year and a half of excess liquidity, the situation of its deficit returned, which is more typical for Belarus. So, for the first time since April 2016, the National Bank was forced to take measures to support the current liquidity of banks. This is due to the growth in demand for loans (primarily BYN ones, the balances of which for the year increased by BYB 3.3 billion, or 21%), and to stagnation in the size of household deposits. So, BYN deposits for the year grew only by 13%, which corresponds to the level of current capitalization, while the outflow of foreign currency deposits exceeded USD 510 million, or 3.7%. An important role was played by the increase in the National Bank of the reserve ratio for currency deposits in January from 15% to 17%, which was done within the policy of dedollarization of household deposits.
The change in the liquidity situation led to the reversal of rates in all segments of the financial market. Thus, the maximum rates on BYN deposits of the population increased from 11.5% in December to 13% at the end of January, interbank rates on the results of January amounted to 10.5% compared to 9.6% a month earlier. Increase in interest is observed for some of the credit programs of individual banks. In conditions of insufficient liquidity, the demand for new currency bonds of the National Bank was also less than planned, the cost of which also had to increase by almost 0.5 percentage points.
In such a situation, in late January, the National Bank again decided to reduce the refinancing rate (from 11% to 10.5%) and interest rates on constantly available liquidity provision operations (from 12% to 11.75%). Although the National Bank justifies its decision by slowing inflation, under current conditions such a measure looks contrary to the market situation and can be assessed as excessive weakening. At the same time it is worth considering that the National Bank in the case of increasing risks has serious leverages to affect the liquidity situation, for example, by reversing the reduction of reserve rates. In addition, according to the regulator, the current situation is largely connected with the influence of seasonal factors.
It is obvious that further reduction of the refinancing rate has very little potential. The authorities estimate the possible bottom of its fall at 9.5% in 2018. More substantial dynamics of the refinancing rate requires significant progress in terms of increasing confidence in the national currency. The National Bank intensifies its work in this area by taking measures to liberalize the foreign exchange market. After the reduction in the norm of compulsory sale of currency, it was decided to abolish the target purchase of currency by legal entities and limit in the time of its possession. The issue of lifting the ban on the opening of accounts in foreign banks by individuals is being considered. Along with monitoring inflationary expectations of the population, the National Bank started issuing quarterly reviews of inflationary processes. Gradual achievement of the dedollarization will increase the sensitivity of the economy to the monetary measures of the National Bank and make it more manageable, as well as will also contribute to the growth of supply in the currency market by the population, but on a qualitatively different basis.
The latter is especially important for replenishing the gold and foreign currency reserves, the level of which in January has shown a significant drop against the background of the repayment of Eurobonds in the amount of USD 800 million. At the moment the authorities consider the external and internal borrowing to be the main sources of the replenishment. The authorities plan the next placement of Eurobonds in the amount of USD 600 million. It is expected to receive the 6th tranche of the loan of the Eurasian Stabilization and Development Fund by USD 200 million in the first quarter. It is planned to attract USD 400 million the domestic market as well.
At the same time, the current level of gold and foreign currency reserves is sufficient to meet the external obligations of the authorities in the medium term, which was positively evaluated by the agency Fitch and led to an increase in its credit rating of Belarus from level B- to B. So, if in 2014 the agency estimated the need for external financing at level of 223% of the level of international reserves, now the indicator is more modest – 101%. Together with the increase in the country’s place in the OECD rating, this should positively affect the potential cost of new debt placements in international markets.
The back side of the achieved size of the gold and foreign currency reserves was the record level of the external public debt of Belarus. In 2017 its level increased by 22.6% and by the end of the year, according to official statistics (not taking into account the size of state guarantees) reached USD 16.7 billion, or 30.7% of GDP. Its further growth not only increases the risks connected with exceeding the maximum allowable level, but also creates significant pressure on the budget. For servicing the national debt in 2018, BYN 2.54 billion has to be taken from the budget funds, which is approximately 25% more than in the previous year.
The risks to economic growth
After the GDP growth of 2.4% was achieved at the end of 2017, the potential for economic growth in the current year is also estimated quite positively. In particular, the growth in the world economy as a whole (+ 3.1%) and in the economies of major trading partners in particular (in the EU + 2.2%, in Russia + 2.3%) should contribute to the positive dynamics. The significant oil growth observed in recent months is another positive factor. Belarusian authorities consider the increase in production by new and modernized enterprises to be important factors in the economic growth as well. Thus, only the output of the planned production volumes of Geely cars according to the calculations of the Government should ensure a GDP growth of 1 percentage point.
The political importance of accelerating economic growth forces the Government to apply measures of budgetary and quasi-budgetary support to the public sector, the use of which was significantly intensified at the beginning of the year. At the same time, a part of the expenses for supporting the enterprises of machine building and light industry was made completely secret. According to some calculations these expenses amounted to BYN 800 million. The measures to administratively stimulate the incomes of the population have an ambiguous effect on economic growth: on the one hand they support domestic consumer demand, but on the other hand they negatively affect the financial condition of enterprises and facilitate the withdrawal of net exports to the negative zone, which negatively affects GDP dynamics.
However, even the achievement of a 3.5% growth planned by the Government under favorable conditions does not reduce the economic backlog from most of the neighbouring countries. At the same time, the authorities’ actions to increase the potential for economic growth are also limited. If measures to liberalize the conditions for the functioning of the private sector should have a positive effect (although it is highly likely to be limited), in terms of reforming the public sector, only a negative trend can be noted. Thus, judging by the lack of new information, the Government rejected the widely discussed idea of separating the functions of the state as the owner and the operational manager. The super-tough conditions (the retention of the number of employees, the prohibition of conversion, preservation of social guarantees) are still proposed for potential privatization deals. Once again voluntaristic ideas of combating mediation are publicly announced.
The risks in the social sphere
The pressure on the budget from external debt and the real sector forces the authorities to limit social spending. In the process of implementing the budget of 2017, the planned expenditures for financing the social sphere were reduced by BYN 488.7 million, while the plan for the Social Protection Fund’s expenditures was reduced by BYN 399.6 million. At the same time, the economy is experiencing difficulties due to a steady reduction in the number of employees, which seriously limits the growth potential and creates problems for financing pension costs. In such a situation, the authorities are trying to solve the problem by the usual administrative means. So, in January the decree “On the promotion of employment of the population” was signed. It is designed to replace “the decree on social parasitism” that caused broad protests in the spring of 2017. The main idea of the legislative act is creating the list of able-bodied citizens not involved in the economy and the introduction for them of full payment of a part of social services, a specific list of which has not yet been determined. The mechanism of the decree’s work is still unclear, but it has every chance of causing new tensions.
In January, we can state a certain deterioration in the financial sector, caused both by the exhaustion of the economic recession factor and by actions to stimulate income of the population. At the same time, the authorities have enough tools to manage the existing risks and neutralize their negative impact. In the event of further easing of monetary and budgetary policies to encourage economic growth, the risks will gradually increase.