The risks of financial volatility
After the tense August, the news background in September can be called quite positive. The situation in the financial markets of developing countries has stabilized and the likelihood of a large-scale regional crisis has significantly decreased. That is connected both with the adequate actions of the authorities of these countries, and with the successful help of international funds. Thus, despite the previously expressed position of President Recep Erdogan, the Central Bank of Turkey significantly raised the key rate (from 17.75% to 24%). The Central Bank of Russia also moved to tightening monetary policy: for the first time since December 2014, the regulator raised the refinancing rate (from 7.25% to 7.5%) and indicated readiness to continue such a policy in the event of an increase in inflation risks. Thanks to the support of the IMF, which agreed to provide the next part of the stand-by loan in advance, the tension on the Argentine financial market has also significantly decreased.
The emerging recovery of developing markets, as well as the growth of oil prices (at the beginning of October the price of a barrel of Brent oil reached USD 85, the possibility of overcoming the USD 100 level in the coming months is being seriously discussed). Taking into account the interests of exporters, for whom the Russian market remains the main one, the National Bank took advantage of this situation and weakened BYN to RUB, gradually returning BYN rate to the level of the beginning of the year. In addition to restoring the price advantages of Belarusian producers in the Russian market, the rise in prices for potash fertilizers, achieved as a result of an agreement with Chinese consumers, will have a favourable effect on improving the current situation. Thus, under the new agreement, the price of potash fertilizers for China in the first half of 2019 will be USD 290 per ton instead of current USD 230. It is important that the moderate devaluation of BYN, happening during the last 2 months (the growth in the value of the currency basket from August 1 exceeded 4.5%), did not have (at least for now) a noticeable effect on Belarusian money market.
For the past 31 months in a row, the population remains a net seller of currency, while in August the amount of net sales of cash currency increased by 20% and almost reached USD 200 million. Excessive supply in the foreign exchange market allows to maintain the country’s gold and currency reserves at around USD 7 billion, despite payments for servicing the national debt. In August, the situation in the deposit market somewhat improved: the growth in BYN deposits accelerated (+ 2.45% for the month), and the outflow of foreign currency decelerated (-0.75% over this period). The rates in the interbank market are stable at a level of just over 10%. There are no noticeable changes in the market of corporate and consumer lending. The situation with the budget execution is also favourable: for 8 months of the year, the authorities have accumulated a budget surplus of BYN 4.66 billion, or more than 6% of GDP.
At the same time, the key negative factor in the financial sector is the rise in inflation risks. Both internal and external factors create the potential to accelerate inflation. At the moment the renewed growth in the population’s inflationary expectations (from 11.4% to 11.7% in the third quarter in comparison with the second one), as well as the devaluation of the national currency can be observed. External factors are associated with the rising cost of commodities (in particular oil), as well as with the expected acceleration of inflationary processes in Russia. In such circumstances, the National Bank refrained from the usual reduction of the refinancing rate and at the next quarterly meeting, kept it at the level of 10%. Moreover, given the parameters of the plan for socio-economic development promulgated by the authorities, it seems that there is no plan to reduce it next year as well. The joint anti-inflation program of the Government and the National Bank adopted in September is also evidence of the authorities’ determination to keep annual inflation at the planned level of 5-5.5%. The program contains a list of various measures aimed at dedollarization and the development of competition. It also determines the timing of tariff increases for the population on basic services. For example, it is planned to increase the cost of housing and communal services to the population up to the level of their 100% reimbursement in 2020.
The government is also facing difficulties in fulfilling the instructions of President Lukashenka to reduce the level of external public debt. Although its rate to the country’s GDP slightly decreased (from 30.7% at the beginning of the year to 28.3% of GDP in August), its nominal level has been growing for the last 4 months (+ USD 158.9 million). Domestic public debt is also increasing (+ BYN 373 million, or 4% since the beginning of the year), much of which is denominated in foreign currency.
Some concerns, especially taking into consideration the pre-election character of the 2019 year, cause the authorities’ intention to increase social spending. Thus, with the general level of budget expenditures actually remaining the same in 2019, the expenditures for social support of the population are planned to increase by 10%. Also, according to some information, by the end of this year, the next increase in pensions and wages in the public sector is expected. It will be funded by the budget surplus and the pension fund. The policy of administrative wage growth (the average level of which in September came close to the level of BYN 1000) is also taking place. The main risk of stimulating domestic demand through increasing incomes of the population is traditionally associated with accelerated growth in consumer imports, which negatively affects the national currency rate and creates prerequisites for accelerating inflation.
The risks to economic growth
In the first 8 months of the year, the GDP growth went down to 3.7% (a month earlier it was 4.4%) and came very close to the planned level. This situation is primarily connected with the sharp failure of indicators in agriculture (minus 5.5%) caused by poor harvest of grain due to adverse weather conditions. According to the National Bank, the factor of recovery growth is close to exhaustion, as a result of which the growth of the economy is approaching the equilibrium level. At the same time, growth is slowed down in trade (in retail from 9.6% to 9.4%, in wholesale from 6.7% to 6.1%), and in industry (from 7.5% to 7.1%).
The external background for the implementation of the authorities’ plans on the GDP growth by 4% in 2019 remains quite difficult. Economic growth in Russia remains low and tends to stagnate. Thus, according to the IMF forecast, this year it will be 1.7% of GDP, and next year it will slow down to 1.5% of GDP. The largest developing economies are also beginning to slow down due to the forced tightening of monetary policy. The weakening of global growth is predicted by industrial indices of the European Union and China, as well as statistics on the creation of new jobs in the United States. In such a situation, there are fears that the Belarusian authorities may attempt to more actively stimulate economic growth during the pre-election period, and once again will try to sharply increase domestic investments. Thus, according to some information, the authorities can encourage banks to increase credit and investment activity in order to activate investments. In particular, according to the National Bank in Belarus, it is necessary to expand the practice of investment banking, which implies the entry of banks into enterprises’ capital and, in fact, the provision of free resources to them on a non-refundable basis.
The risks to economic independence
Relations with Russia are still the key factor in maintaining financial stability and ensuring balanced economic growth. Currently, the issues of the supply of oil and oil products by Russia, as well as the provision of regular credit resources to Belarus are on the agenda. Some positive dynamics can be noted on both issues, although they have not yet been definitively resolved. After the threats of a complete cessation of the supply of petroleum products, voiced by the Russian authorities in August, the parties nevertheless came to some agreement on this issue. Thus, the mechanism of annual approval of the indicative balance of the supply of Russian oil products to Belarus has been agreed. According to available assurances, Russia is ready to fully meet the needs of the chemical industry in Belarus with a 10% growth margin. Representatives of the Belarusian Government also declare the readiness of their Russian colleagues to work out a compensation mechanism for losses resulting from a tax manoeuvre in the Russian Federation, which is really sensitive to the Belarusian economy. Belarusian authorities are counting on Russian loans as the most important source of refinancing payments for servicing state debt this and year. For example, the Government of Belarus hopes to receive a total of USD 1.4 billion in loans from the Russian Federation (of which USD 1 billion is an intergovernmental loan and 2 tranches of a loan from the Eurasian Stabilization and Development Fund for USD 200 million each). It should be noted that, despite assurances voiced earlier, Belarus did not receive the next sixth tranche of the ESDF loan at the beginning of October. The agreements in the oil sector may remain unfulfilled due to unacceptable of Russian political or military conditions for the Belarusian authorities.
Reducing tensions in the financial markets of developing countries decreased the risk of accelerating inflation and devaluation of BYN. At the same time, the rejection of a policy of further monetary easing reduces the potential for economic growth. The desire of the authorities to achieve the stated goals in the pre-election period can be accompanied by an increase in the social focus of budgetary expenditures, as well as forcing banks to increase domestic investment. Excessive use of such approaches will create additional risks for financial stability in the economy.