The risks of financial volatility
The National Bank continues to take active measures aimed at dedollarization of the deposit market and the economy in whole. So, they decided to raise the reserve deposit rate on currency deposits from 15 to 17%. It is expected that this measure will force banks to reduce rates on currency deposits, thereby reducing their comparative attractiveness in comparison with BYN deposits. At the same time, the National Bank continued to stimulate a fall in rates on the BYN market, reducing the rates of providing BYN liquidity to banks from 13 to 12%.
The National Bank’s actions look quite decisive against the background of the visually fragile state of the deposit market in recent months: foreign currency deposits continue to decrease slowly (-0.35%), while the growth of BYN deposits (+ 0.9%) is below the current capitalization. The weakening of the national currency, which has been observed in recent months, can also have a negative impact on the deposit market. Thus, the USD/BYN rate since September 1 increased by 4.7%, and the value of the currency basket – by 4.2%. Apparently, the achieved share of irrevocable deposits in the structure of household savings, which has increased by 30 percentage points since the beginning of the year and reached the level of 65%, adds to the authorities’ confidence in their actions. The inability to early claim the deposit prevents the situation of the depositors’ mass claims to banks, which was repeated several times in the period from 2011 to 2014. In such circumstances, the possibility of unbalancing the financial system, caused by the interest rate policy of the National Bank, is insignificant.
The domestic demand is recovering against the background of interest rates’ fall stimulated by the authorities. Thus, the increase in retail trade turnover since the beginning of the year amounted to 2.8%, and BYN lending to individuals since the beginning of the year increased by 19%. At the same time, the highest growth rates, as before, are demonstrated by consumer lending, which grew by 7.5% in October, and by 58% since the beginning of the year. The increase in the average salary by the end of the year can be an additional factor of substantial growth in domestic demand. Despite the fact that even the current increase in real wages exceeds productivity growth, the authorities do not abandon the populist goal of increasing it to the level of BYN 1000 by the end of the year. Thus, based on its level of BYN 841 in October, growth over the last 2 months of the year should be about 12%.
This achievement with the active use of administrative measures will negatively affect the financial condition of enterprises and lead to excessive stimulation of domestic demand. This, in turn, worsens the balance of foreign trade in goods, which in recent months and shows deficit trend. In October, the deficit of foreign trade in goods rose to a record in 2017 – USD 590.6 million. You can expect an increase in inflation risks, as relatively low current growth in consumer prices is also connected to the economic depression. There is also a certain potential for price increase from the point of cost inflation. Thus, the index of producer price growth since the beginning of the year amounted to 109.8%, producer prices of agricultural products – to 109.4%, and consumer price growth – only to 103.9%. At the same time, according to EBRD experts, the current inflation expectations of the population at least double the observed inflation, which also creates a significant potential for its growth. Already in October, inflation was 1.2% since the beginning of the year (a record), and its annual level rose to 5.3%. Administrative wage growth, obviously, will worsen the situation in the foreign exchange market, which in November showed the worst performance in the last 2 years. Net sales of currency by the population in November decreased to USD 65 million, which is much less than net purchase by legal entities in the amount of USD 211 million.
At the same time, one can call the budget plans of the authorities for 2018 quite restrained. The planning of budget revenues and expenditures is based on very conservative forecasts of key indicators: the price of oil – USD 45.9 per barrel (with the current level of around USD 62), the Russian ruble rate – 60.5 RUB for 1 USD, the economic growth in Russia – 1.7%, the cost for Potash fertilizers – USD 205 per tonne (while the current contracts of the Belarusian Potash Company are providing around USD 230 per tonne). The monetary policy of the National Bank is also expected to be restrained: according to the statements of its officials, in 2018 the National Bank will the reduce the refinancing rate by 0.25%, when there are necessary conditions for it.
The risks of economic recession
The economy continues to show restorative dynamics, while its speed somewhat increases. GDP growth for 10 months reached a level of 2% compared to 1.7% a month earlier. The expectations of economic growth in Belarus and the region are also improving according to the forecasts of international financial organizations. At the same time, the main source of growth can be the growth of demand in foreign markets (primarily in Russia) and the improvement of the conditions for the purchase of gas and oil. For this reason, according to IMF experts, the economic growth of Belarus in the medium term may stabilize at the level of 2% per year, which will increase the backlog in the level of economic development from most of the neighbouring countries.
In order to overcome this barrier, the IMF recommends the Belarusian government to maintain a policy of macro-stabilization, stimulate private sector development, carry out a profound reform of the public sector and develop a new system of social support for the population in the face of structural changes. The authorities can boast of active work on the first two points of this list. In November the presidential decree on the development of entrepreneurship was finally signed and published. This legislative act, as conceived by the authorities, should become a significant incentive for the development of small and medium-sized businesses and lead to an increase in their share in the GDP structure from 25-27% to 40% by 2020. The decree provides for a system of measures to reduce the state regulation of business: just changing the order for the implementation of most of the businesses (now only notification the authorities is required); reduction and simplification of sanitary, fire and other requirements for business; introduction of a moratorium on tax increases until 2020; simplification of the documents flow in organizations and so on. The authorities expect the effect of these legislative changes, especially in the sphere of trade and public catering, already in the first half of 2018.
At the same time, the problems of reforming the public sector and creating a new system of social support are not included in the operational agenda of the authorities. The practices like the regulation of wages in banks regardless of the form of ownership or forcing banks to participate in direct investments allow to doubt the readiness of Belarusian authorities to avoid using manual methods of economic management. There are also concerns about the need for increasing the share of investment in GDP, which became public. Without solving the problem of the effectiveness of making investment decisions in the public sector, another attempt to throw in the investment into state enterprises will have major consequences in the form of growing public debt and bad debts in the banking sector.
The main current risk for macroeconomic stability is a populist policy of administrative stimulation of income of the population. After reaching historically minimal inflation in September, the price increase in the country once again accelerated, and inflation risks increased. The indicators in the foreign exchange market and in foreign trade worsened as well. At the same time, ambitious plans to increase average wages contradict the generally restrained budgetary and monetary policies of the Government. The adoption of a liberal decree on the development of entrepreneurship is an important achievement.