15.04.2010 — 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.
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.
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.
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