The severe
reduction in export proceeds in 2009 resulted in a slump in foreign exchange
supply in the domestic money market. Imports of commodities and services, on
the other hand, fell less sharply, which bolstered demand for foreign exchange.
Growing expectations of ruble devaluation provided additional demand for
foreign currency, upsetting the balance on the money market. Under these
circumstances, the government and the National Bank of Belarus (NBB) applied
for a Stand-By Arrangement (SBA) loan from the International Monetary Fund
(IMF).
Following the Fund’s recommendations, the NBB devaluated the Belarusian
ruble on January 2, 2009 and re-pegged the ruble to a basket of currencies.
In the second half
of the year, the process of de-dollarization resumed in Belarus amid signs of
stabilization on the domestic foreign exchange market: the demand for foreign
exchange subsided, while ruble-denominated bank deposits increased, showing
that public trust in the ruble had been restored.
Tendencies:
global economic crisis triggered
devaluation expectations and demand for foreign exchange in Belarus;
however, in late 2009, de-dollarization resumed;
ruble devaluation caused foreign trade
imbalance;
key challenges – credit, currency and
liquidity risks – remain high.
Devaluation shock
The step
devaluation of the Belarusian ruble against the U.S. dollar by 20.5% to 2,650
rubles to the dollar from 2,200 rubles on January 2, 2009 followed by a re-peg
to a basket of currencies (consisting of the U.S. dollar, the euro, and the
Russian ruble, with equal weights) was one of last year’s key events. After a
decade-long respite from the previous step devaluation (in 1998, after the
August financial crisis in Russia),
the one-off drop in the value of the national currency came as a shock for
households. To compare: in 1998, the ruble was devaluated by 348.1%, whereas
since the beginning of the global crisis in August 2008, the national currency
has been devaluated by 37.6%, to 2,905 rubles to the dollar as of February 18,
2010 from 2,111 rubles in August 2008.
Despite the
devaluation, Belarus
saw spiking net demand (demand minus supply) for foreign currency since the
global financial and economic crisis erupted. There were two reasons behind the
increase in net demand for foreign currency: firstly, currency supply dropped
because of a decline in exports, and secondly, the demand for foreign exchange
hiked as a result of devaluation expectations, shift of currency preferences
towards foreign currency and extensive repayment of external loans.
In the period from
September 2008 through February 2009, net demand for foreign currency from all
domestic money market players reached a new record high of U.S. $5.078 billion
(up from U.S. $415.1 million in January-August 2008), which included U.S.
$2.986 billion of net demand for foreign currency from corporate entities, U.S.
$2 billion of net demand from households and U.S. $108.8 million of net demand
from banks; non-residents, on the other hand, sold U.S. $17.8 million in
foreign exchange in excess of purchases. There is no saying what could have
happened to Belarus’ gold
and foreign exchange reserves and the national economy as a whole had the
government failed to attract loans from Russia,
Venezuela
and the IMF, totaling U.S. $2.788 billion (overall external financing,
including Russian Gazprom’s U.S. $625 million payment for a shareholding in
Beltransgaz, totaled U.S. $3.413 billion).
The one-off devaluation
of the ruble predictably resulted in a transfer of ruble-denominated deposits
of households to foreign exchange deposits. Moreover, retail foreign exchange
deposits exceeded savings in rubles for the first time ever. The share of
currency deposits rose in 2009 to a level recorded back in 2002.
Before the crisis,
households and companies used to spend and save rubles more willingly than
foreign exchange: the share of ruble-denominated bank deposits of households
ranged between 63.7% and 68.3% in 2007-2008, up from 26% in 1999 (after the
1998 crisis). However, by January 1, 2010, the share of foreign
exchange-denominated deposits had reached 55.9%, up from 41.7% in early 2009
and 32.6% on November 1, 2008, just a few weeks into the crisis. Ruble-denominated
retail deposits made up 44.1% of the total as of January 1, 2010, down from
58.3% on January 1, 2009 and 67.4% on November 1, 2008.
Furthermore,
according to our estimates, households have up to U.S. $3.5-4 billion in
savings stored at home. It would however be very difficult to lure at least
some of this money back into the economy.
Competitiveness of
exporters
One of the
objectives of the ruble devaluation was to increase the price competitiveness
of Belarusian exporters in conditions where the main trade partners saw their
national currencies depreciate against the dollar. In 2008, the real effective
rate of the Belarusian ruble against the basket of currencies of the main trade
partners appreciated by 17.75% (December on December, allowing for inflation
rates in partner countries), whereas in 2009, the devaluation reduced the
nominal exchange rate by 19.77% against the basket.
The ruble real exchange index was thus
brought back to the pre-crisis level. Moreover, National Bank Governor Petr
Prokopovich believes the ruble could appreciate against the basket of
currencies in 2010. For this year, the central bank had set a peg to the basket of three currencies with a ±10% band
around central parity (the starting point being 1,036.27 rubles vis-à-vis the
basket as of December 31, 2009), which means the ruble is projected to
fluctuate between 932.64 rubles and 1,139 rubles to the basket.
However, the January 2009 devaluation
of the ruble was not enough to balance foreign trade: currency proceeds fell by
U.S. $11.876 billion, or 31.4%, year-on-year in 2009 to U.S. $25.911 billion,
whereas payments for imports reduced by only U.S. $10.795 billion, or 26.6%, to
U.S. $29.791 billion. As a result, Belarusian export-import operations demonstrated
a deficit of U.S. $3.88 billion in 2009, which compares to U.S. $2.799 billion
logged in 2008.
In this situation, any reduction in the
real exchange rate of the Belarusian ruble would help anchor inflation
processes, but not devaluate the national currency in nominal terms. Real sector enterprises should therefore be
looking for sources of increasing their competitive power in improving the
quality of their products and services, raising the share of innovative
products, cutting selling prices and attracting FDI instead of insisting on
having the ruble devaluated by the monetary authorities again.
De-dollarization
is back
As the money
market grew more stable in the second half of 2009, de-dollarization processes
resumed: net sale of foreign exchange by households reached U.S. $205.7
million, while individual deposits in Belarusian rubles increased by 995.9
billion rubles in July-December. It seemed trust in the national currency had
been restored.
The current level
of Belarusian gold and foreign exchange reserves (U.S. $5.653 billion as of
January 1, 2010, under IMF SDDR) will suffice to smooth money market
fluctuations and serve as an additional guarantee of financial stability, at
least in the short run. Moreover, the IMF forecasts a substantial increase in
Belarusian reserves, to a new record high of U.S. $7.2 billion by the end of
2010. The Fund projects Belarusian gold and foreign exchange reserves at U.S.
$15.4 billion by the end of 2014.
Medium-term risks
Attention must be
paid to the fact that the U.S. $2.591 billion increase in gold and foreign
exchange reserves in 2009 was entirely based on external loans, payments for
state property and SDR allocation, totaling U.S. $5.145 billion. If Belarus had
been left on its own, gold and foreign exchange reserved would have plunged by
U.S. $2.553 billion.
The country’s
international reserve assets, formed exclusively by external loans and payments
for state property, are not sufficient under international standards. Under the
IMF methodology, gold and foreign exchange reserves in an economy are at an
adequate level if they cover three months’ worth of imports. Belarus falls
short of this standard with reserves able to cover 1.65 months’ worth of imports.
Since payments for import of commodities and services were at U.S. $3.422
billion in December 2009, Belarus
needs to accumulate at least U.S. $10.26 billion in reserves in order to meet
the IMF standard.
However, countries
that export commodities subject to high price volatility, and this holds for
Belarus, are advised to have sufficient reserves to cover six months’ worth of
imports, not three (the Central Bank of Chile and the National Bank of Poland uphold
this criterion). This means Belarus
should have at least U.S. $20.53 billion in reserves, 3.6 times the volume it
has today.
At the same time,
it should be emphasized that further increases in external borrowing could
result in additional macroeconomic and financial risks. Belarus’
foreign liabilities total U.S. $21 billion (this includes the loans received in
the fourth quarter of 2009), and if this trend remains, the foreign debt-to-GDP
ratio will exceed the 50%-60% threshold in two or three years.
Between October 1,
2009 and October 1, 2010, Belarusian citizens will have to pay, or refinance, a
total of U.S. $9.187 billion worth of short-term external loans. Only principal
debts are included here, whereas overall payments under short-term foreign
debts, including the principal, interests, dividends, commissions, etc., will
amount to U.S. $10-10.5 billion.
Another important
aspect is that overdue external indebtedness rose 33.6% in the first three
quarters of 2009 to U.S. $797.6 million as of October 1, 2009. The increase in
the current foreign debt may threaten both companies (if they fail to gain
profits sufficient to cover the principal and interests) and the state as the
owner (the main risk is the loss of property in case of bankruptcy and
resulting negative image).
It cannot be ruled
out that in the medium term, foreign borrowing will not be enough to cover the
balance of payment deficit, because additional borrowing means additional
spending on debt service. As a result, the Belarusian ruble may lose its value once
more, whereas some corporate borrowers may run the risk of going bankrupt.
The IMF loan repayment
schedule looks as follows: U.S. $12.7 million in 2009, U.S. $74.4 million in
2010, U.S. $78 million in 2011, U.S. $456.7 million in 2012, U.S. $1,704.4
million in 2013 and U.S. $1,366.9 million in 2014, and U.S. $83.8 million in
2015. This means the heaviest debt service burden is scheduled for 2012-2014.
Furthermore, Belarus
will have to start repaying Russian state loans, with a burden distributed
evenly throughout the next ten years.
Banks’ troubled
assets
Amid the crisis,
the key risks in the financial sector of the country are the credit risk,
liquidity risk and foreign exchange risk.
As of January 1,
2010, debts under loans and other active operations of commercial banks stood
at 66.288 trillion rubles, up 37.5% compared with 2009. Troubled (extended and
overdue) debts rose more than 120% under the national methodology in 2009, to
657.9 billion rubles as of January 1, 2010. In December, troubled debts fell by 255
billion rubles, or 27.9%, which indicates an improvement in the financial
position and financial discipline of borrowers. On the other hand, the decrease
may be caused by banks’ efforts to make their financial reports look nicer and
“mask” soured debts to avoid additional expenditures on provisioning for loans.
Banks frequently
extend untied loans to defaulted borrowers so that they could repay earlier
loans (in December 2009, banks’ loan portfolio expanded by 2.49 trillion
rubles). This scenario does not seem to help, though, but aggravates the
already unfavorable situation and facilitates risk accumulation. Furthermore,
the increase in troubled assets (by international standards), by 250% in 2009
alone to 3.014 trillion rubles as of January 1, 2009, is also alarming.
However, reserves
for assets subject to credit exposure are formed based on the national
methodology. By January 1, 2010, special reserves (for possible credit loss)
had reached 1.353 trillion rubles, representing an increase of 120% from the
level of January 1, 2009. The share of troubled loans in the banking system stood
at 0.95% as of January 1, 2010, and troubled assets made up 4.24% of the total
(in 2010, the National Bank has raised the ceiling for troubled assets in the
banking sector to 10% from 5%).
The gap between
long-term assets and liabilities of banks kept widening in 2009, indicating
growing liquidity risks, which were mostly concentrated in the two largest
banks of the country – Belarusbank and Belagroprombank (they are involved in
financing state problems more than other systemic banks). At the same time, all
commercial banks saw access to borrowings, both on the domestic and foreign
financial markets, narrow in 2009.
As inflows of
resources from corporate entities, households and administrations ran low (or
stopped completely), the National Bank remained the only source of support for
commercial banks. Last year, NBB funds in the resource base of commercial banks
hiked by 5.199 trillion rubles, or 160%, to 8.437 trillion rubles as of January
1, 2010. This significant increase in support coming from the central bank
prevented a “paralysis” of settlements in the banking system and the economy as
a whole.
We believe it
would be logical for the monetary authorities to pursue the following policies:
to further reduce the refinancing rate (it went down to 13% on February 17,
2010), narrow the spread between the refinancing rate and rates on bank
liquidity support operations (the ceiling is now 20.5%) and curtail (or set
zero-rated) reserve requirements for corporate and retail deposits.
Alexander Mukha, BusinessForecast.by