13.06.2011 – In 2010, the Belarusian economy was faced with very serious economic shocks caused primarily by the introduction of export duties on Russian crude oil and a general increase in prices of imported energy products. As a result, the country’s foreign trade deficit reached a new all-time high, which aggravated the situation on the domestic foreign exchange market. Amid the presidential election campaign, households’ demand for foreign currency grew stronger, whereas the banking system saw dollarization of deposits resume.
The widening gap between the supply of foreign exchange and demand for it caused a drastic reduction in the country’s gold and foreign exchange reserves, even though Belarus received the final tranche of the loan from the International Monetary Fund (IMF), the last installment from Gazprom for a shareholding in Beltransgaz and proceeds from the placement of the debut Eurobond issue.
Belarus believes the situation on foreign markets will become more favorable for domestic companies in 2011, and the government expects an increase in FDI inflows (including through sale of state property), which the authorities hope will suffice to finance the current account deficit and ensure financial stability.
Introduction of export duties on Russian crude oil supplies and increase in energy product prices aggravated the situation in foreign trade and caused hikes in demand for foreign exchange;
Presidential election campaign triggered a stronger demand for foreign currency from individuals and encouraged households to convert ruble-denominated deposits into foreign exchange;
In 2011, Belarus expects a more favorable situation in foreign trade, reductions in net demand for foreign currency and resumption of de-dollarization processes.
Oil and gas shock
Last year, Belarus was faced with serious economic shocks caused mainly by the introduction of export duties on Russian oil deliveries and a rise in prices of energy resources, including natural gas. This aggravated negative trends in the foreign trade sector: the country’s foreign trade deficit climbed to a new record high of USD 7.426 billion in 2010 from USD 5.518 billion in the year 2009, when the global economy was hit by the recession. In other words, in 2010 alone, the deficit broadened by USD 1.908 billion. The deficit of trade in intermediate materials (including energy products, raw materials, components and materials) increased by USD 3.196 billion in 2010, or 54.8% year-on-year, to reach USD 9.024 billion. This means the entire increase in the country’s foreign trade deficit was due to the expanding deficit of trade in intermediate materials.
The deterioration of the situation in foreign trade brought about an increase in net demand for foreign exchange on the domestic market. According to the National Bank of Belarus, in 2010, net demand for foreign exchange (demand minus supply) from corporate entities increased by USD 3.246 billion, or 90%, to a new record high of USD 6.874 billion. In December alone, companies’ net demand for foreign exchange reached a new high of USD 1.451 billion, which compares with USD 876.8 million in November 2010, USD 521.1 million in October 2010, and USD 297.1 million in December 2009.
According to the central bank statistics, Belarusian companies’ foreign exchange proceeds totaled USD 29.343 billion in 2010, up 16.2% year-on-year. The Russian ruble accounted for 36.6% of the total, up from 25.5% in 2009, the share of the U.S. dollar fell to 31.4% from 38.3%, and the share of the euro decreased to 30.4% from 34.7%. The Belarusian ruble accounted for 0.7% of all proceeds in 2010, down 0.1 of a percentage point, whereas the share of other currencies increased 0.1 of a point to 0.8%.
At the same time, in 2010 payments for import of commodities and services increased 16.4% to USD 34.583 billion. As a result, the balance of foreign exchange proceeds and payments for imports reached a deficit of USD 5.24 billion, compared with USD 4.468 billion in 2009 and USD 2.799 billion in 2008.
In 2010, the overall foreign trade deficit of the country, at USD 7.426 billion, did not coincide with net payments for imports (payments minus proceeds), standing at USD 5.24 billion. The difference may be attributed to the increase in net current liabilities of Belarusian companies under foreign loan agreements amounting to USD 2.141 billion (the surplus of foreign trade transactions that do not envisage monetary payments amounted to mere USD 44.6 million). In other words, a substantial part of imported commodities and services supplied to Belarus in 2010 will have to be paid for in 2011, which will add to negative pressure on the domestic money market. As of October 1, 2010, companies’ debts under trade loans stood at USD 6.74 billion.
It is noteworthy that in 2010, of companies’ overall net demand for foreign exchange, at USD 6.874 billion, payments for imports accounted for around USD 5.24 billion. The remaining USD 1.634 billion was connected with net outflows of foreign capital from the corporate sector, which is quite alarming. Repayment of foreign loans by Belarusian companies, both of principal debt and interest, exceeded new borrowing in foreign exchange, including on foreign markets.
In the four quarters ending on October 1, 2011, Belarusian companies will have to repay (or refinance) at least USD 7.925 billion worth of short-term foreign credits and loans – and this sum includes only principal debt, which means companies will additionally be paying non-residents interest, dividends and other fees, which brings total corporate debt to USD 8.9-9.3 billion.
The deficit of currency to pay for foreign loans and imported raw materials, components and equipment is traditionally covered by the state (companies file applications for currency acquisition with the Belarusian Currency and Stock Exchange), which is the main reason why the state banned down payments for imports from foreign exchange loans of Belarusian commercial banks and raised the exchange charge for currency application to 2% from 0.0095% of the amount of transaction.
These decisions will enable the government to limit import of commodities and services and reduce net demand for foreign currency at the exchange. In January 2011, the demand for U.S. dollars, at USD 682.631 million, exceeded supply, at USD 520 million, by USD 162.548 million. The demand for euros was EUR 74.052 million above the supply, at EUR 282.311 million and EUR 208.259 million, respectively. In contrast, the supply of Russian rubles was RUR 463.085 million in excess of demand, at RUR 6.255 billion and RUR 5.892 billion, respectively. In the first month of the year, net demand for foreign exchange fell to USD 405.1 million, including trading at the OTC market. However, this result was largely due to the absence of supplies of Russian oil on January 1-24.
According to experts’ estimates, Belarus’ recent agreement with Russia on import of crude oil and export of oil products will result in around USD 1.3 billion net benefit for this country in 2011 alone. Belarusian companies also expect a more favorable foreign trade environment this year, with substantial increases in prices of their commodities and services, which will enable the country to bring down the foreign trade deficit.
The second essential factor that shaped the situation on the domestic money market in 2010 was the sharp increase in the population’s demand for foreign exchange, caused by growing inflationary and devaluation expectations of households amid the presidential election campaign.
According to the central bank, net demand for foreign exchange from individuals (including cashless transactions) exceeded USD 1.5 billion in 2010, and in the fourth quarter alone, purchases of foreign exchange from banks exceeded sales by USD 1.537 billion. In other words, the situation on the market of cash foreign exchange and in the banking sector remained stable in the first three quarters of 2010, however, in October-December, during the election campaign, households reduced their deposits with banks by BYR 1.041 trillion, or 9.6%, to BYR 9.811 trillion as of January 1, 2011.
At the same time, foreign exchange-denominated deposits rose by USD 520.6 million, or 13.5%, to reach USD 4.382 billion. Interestingly, since the one-off devaluation of January 2, 2009, ruble-denominated personal deposits never exceeded currency deposits. The share of ruble deposits fell to 42.7% of the total deposits on January 1, 2011 from 44.1% on January 1, 2010, 58.3% on January 1, 2009 and 64.2% on January 1, 2008.
In absolute terms, personal deposits in Belarusian rubles and foreign exchange amounted to BYR 4.804 trillion. The monetary guidelines for 2010 had a more optimistic forecast for the increase in personal deposits – between BYR 5.6 trillion and BYR 7.2 trillion. Banks had clearly expected more from the population in 2010; however, retail deposits were short of the target amid the election race.
Nevertheless, now that the election campaign is over and net demand for foreign exchange from individuals has narrowed, de-dollarization processes have resumed. In January 2011, net demand for foreign currency shrank to USD 56.9 million from USD 649 million in December 2010. In February 2011, households sold more exchange than they bought for the first time since May 2010: during the first two weeks of February, net sales of currency by the population amounted to USD 10 million. Ruble deposits also showed an impressive increase in early 2011: in January alone, they rose by BYR 332.4 billion, or 3.4%, to BYR 10.143 trillion as of February 1, 2011.
Personal deposits in foreign exchange increased by USD 206.7 million in January, or 4.7%, to a new all-time high of USD 4.589 billion. By February 1, 2011, overall bank deposits of households had reached the equivalent of BYR 23.96 trillion. Including savings certificates and bonds issued by banks, households’ funds in the banking system reached BYR 25.043 trillion, another all-time high. The banking system now keeps an estimated BYR 2.641 million worth of savings per capita, an equivalent of USD 877.
The first months of 2011 saw a positive tendency toward a decrease in inflationary and devaluation expectations in the economy. The government also decided to “tie” a part of the increased personal incomes by increasing utility fees on February 1, 2011 with a view to compensating for additional energy costs. Wages are expected to stagnate in real terms, that is adjusted for consumer price inflation, in 2011, which will help balance the economy. Belarusian banks are likely to keep offering positive interest rates on ruble-denominated deposits (above the inflation rate). In other words, the level of yield on deposits denominated in the national currency will be kept quite high (interest rates now stand at 18%-19%.
The Basic monetary guidelines for 2011 forecast an increase in retail deposits by BYR 6.4 trillion to BYR 7.2 trillion, but we have doubts that the target will be reached, because individuals are likely to try new savings instruments, such as precious metals, diamonds, corporate bonds and shares.
By the way, banks had sold 7.64 tonnes of gold in bullion to households and companies by February 2011, and bought back only 1.391 tonnes, which means individuals and corporate entities (except banks) had 6.249 tonnes of gold, worth about USD 280-305 million as of February 1, 2011.
Interestingly, in January 2011 alone, individuals and companies increased 999.9 gold purchases 190% year-on-year to 118.08 kilograms. Sales of silver bullions rose 320% to 329.32 kilograms. Since central banks keep buying gold now, which they consider to be the best way to form reserves, regular participants of the precious metals market should follow suit.
Reasons against devaluation
In the medium term, money market players expect the U.S. dollar to depreciate against most global currencies, mainly because of the growing public debt and budget deficit in the United States. In 2010, the U.S. saw its public debt expand by USD 1.714 trillion to a new record high of USD 14.075 trillion as of December 31, 2010. We believe the reduction in the U.S. dollar exchange rate on the international FOREX market will help keep the domestic money market of Belarus stable. In this case, the NBB will find it easier to ensure flexible and predictable dynamics of the Belarusian ruble vis-à-vis the U.S. dollar.
At the same time, the stronger euro and Russian ruble will contribute to the competitiveness of Belarusian products on the European and Russian markets. The Belarusian exporters whose costs are denominated in Belarusian rubles and proceeds are mostly in euros or Russian rubles will benefits most of all.
We do not expect significant fluctuations of the Belarusian ruble to major currencies in 2011. In this case, a sharp one-off devaluation may aggravate some economic and financial risks
Firstly, consumer prices will hike. However, inflationary pressures are already very strong because of the recent wage push, inflationary expectations of households, faster increase in producer prices and fast increase in lending volumes.
Secondly, a devaluation of the Belarusian ruble will result in additional devaluation expectations and stronger dollarization processes in the economy.
Thirdly, a sharp devaluation of the national currency will cause a substantial increase in the debt burden connected with servicing the overall foreign liabilities of the economy, as well as a drop in the solvency of the government and companies. This will affect the capacity of Belarusian residents to attract foreign financing (including for the purposes of refinancing previous foreign credits and loans). Belarus’ overall foreign liabilities had reached USD 25.593 billion by October 1, 2010, 48.8% of GDP, still short of the safety limit, at 60% of GDP. However, a 20% one-off devaluation would increase the debt to GDP ratio to 58.5% because of the reduction in the U.S. dollar equivalent of GDP, which is very close to the ceiling that ensures economic security.
A smooth continuous devaluation of the Belarusian ruble against the key foreign currencies is therefore more likely in the short run.
The Belarusian economy enters a phase of structural transformations and market reforms. One of the key economic trends of the year 2011 will be an increase in FDI inflows in the economy. The government expects net FDI inflows at USD 6.4-6.5 billion in 2011, including over USD 3 billion from sale of state property.
The projected increase in FDI will enable the government to finance the current account deficit and increase gold and foreign exchange reserves in 2011. This will serve as an additional guarantee of financial stability in Belarus, including the situation in the domestic money market.
In 2011, the NBB plans an increase in international reserves at least at USD 1.2 billion, which, alongside possible reductions in import of commodities and services, will improve the indicator of adequacy of gold and foreign exchange reserves.
We believe the expected recovery of the chief export markets and international capital markets will reduce the risk of depletion of gold and foreign exchange reserves, which will not threaten the economic and social development of the country any longer, however, the country needs to allow major transformations and develop new productions and projects.
Author: Alexander Mukha