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FOREIGN EXCHANGE MARKET: INTENSIFIED NEGATIVE TRENDS AMID POLITICAL CRISIS
Alexander Mukha
Summary
Demand for foreign exchange and an outflow of FX deposits from banks considerably increased in 2020 amid the burgeoning political crisis. As a result, the banking sector experienced a substantial deficit of liquidity in rubles and foreign exchange, which adversely affected the dynamics and terms of new lending to individuals and businesses.
The deteriorated financial standing of economic entities leads to a marked increase in troubled assets in the banking sector, which is likely to eventually undermine its debt repayment capability. As the political crisis is deepening and access to international financial markets is getting limited, the repayment of debts in foreign exchange by Belarusian residents becomes the major economic challenge.
Trends:
• Increased demand for foreign exchange and outflow of foreign exchange deposits from banks, which contributes to the acceleration of the depreciation of the ruble and contraction of the gold and foreign exchange reserves;
• Deterioration of the financial health of enterprises coupled with growth of troubled assets in the banking sector;
• Lack of liquidity in the banking system, which worsens the terms of lending to households and businesses;
• Limited access to international financial markets, which exacerbates the problem of the repayment and servicing of the external debt of Belarusian residents.
Political crisis brings about higher demand for foreign exchange
The political crisis that followed the August 2020 presidential election in Belarus triggered considerable growth of households and enterprises' demand for foreign exchange. As a result, for the first time in the past six years, the population became a net buyer of foreign exchange on the domestic FX market.
According to the National Bank of Belarus (NBB), individuals bought USD 1.970 billion on a net basis in 20201 (including non-cash) to compare with the net sale of USD 597.7 billion in 2019, USD 1.115 billion in 2018, USD 1.759 billion in 2017 and USD 1.894 billion in 2016 (Table 1), i. e. the analyzed indicator dropped by USD 3.864 billion in 2020 against 2016, which indicates a fundamental change in the behavior of the population in the domestic foreign exchange market.
Business entities bought USD 977.9 million net. Non-residents sold USD 596.7 million on a net basis; banks and non-bank financial institutions sold USD 714.4 million.
Households' net demand for foreign exchange showed the following figures: net cash FX purchases - minus USD 147.5 million; conversion of ruble deposits into FX deposits on a net basis - minus USD 1.822 billion.
Overall net demand for foreign exchange on the domestic foreign exchange market was reported at minus USD 1.637 billion, which, combined with the repayment and servicing of Belarus' public debt in foreign exchange, led to a significant reduction in the gold and FX reserves, which shrank by 20.5% (by USD 1.925 billion) to USD 7.468 billion as of January 1, 2021.
1 Hereinafter «Статистика.» Национальный банк Республики Беларусь, 2021, http://nbrb.by/
Table 1. Net demand and net supply of foreign exchange on the domestic FX market, 2014-2021, USD million
Period Net demand (-) and net supply of (+) foreign exchange
economic entities households1' nonresidents2' banks, nonbank institutions3'
2014 -495.0 -1,385.0 261.7
2015 -403.8 129.6 227.2
2016 -206.1 1,894.0 452.5
2017 -880.0 1,759.0 313.9
2018 -672.4 1,114.8 493.7 617.8
2019 531.7 597.7 571.9 705.9
2020 -977.9 -1,969.8 596.7 714.4
2021, Jan.-Feb. -127.2 -201.4 133.9 -161.8
Note. ''Includes transactions of individuals on the foreign exchange cash market (including payment media) and non-cash transactions; 2'does not include operations performed in accordance with the Eurasian Economic Union Treaty of May 29, 2014, which regulates the procedure for crediting and distribution of import customs duties in the EEU; 3'includes spot transactions with own funds (without conversion operations), including of the Development Bank of the Republic of Belarus and non-bank financial institutions. The symbol '...' means that the data was not published.
Source: author's research based on the data provided by the National Bank of the Republic of Belarus.
It is noteworthy that all resident foreign exchange market actors were net buyers of FX in January-February 2021. Households bought USD 201.4 million net (including non-cash), economic entities - USD 127.2 million, banks and non-bank financial institutions - USD 161.8 million. The gold and foreign exchange reserves thus decreased by 4.7% (by USD 354 million) in January-February 2021 to USD 7.114 billion as of March 1.
This net demand for foreign exchange could lead to a noticeable acceleration of depreciation of the Belarusian ruble against main basket currencies. The depreciation could be even greater, if the National Bank stopped intervening to support the ruble,
focusing solely on the repayment and servicing of the public debt in foreign exchange amid limitations in external borrowing for residents of Belarus.
Table 2. Dynamics of the average weighted exchange rate of the Belarusian ruble against the dollar, euro and Russian ruble, 2013-2021
Period Average weighted exchange rate of the Belarusian ruble against1)
USD % year on year EUR % year on year RUB2) % year on year
2013 0.8971 107.2 1.1834 109.8 2.7840 103.9
2014 1.0260 114.4 1.3220 111.7 2.6628 95.6
2015 1.6254 158.4 1.7828 134.9 2.6237 98.5
2016 1.9998 123.0 2.2010 123.5 2.9845 113.8
2017 1.9333 96.7 2.1833 99.2 3.3126 111.0
2018 2.0402 105.5 2.4008 110.0 3.2417 97.9
2019 2.0887 102.4 2.3342 97.2 3.2303 99.6
2020 2.4607 117.8 2.7760 118.9 3.3776 104.6
2021, Jan.-Feb. 2.5899 119.83) 3.1395 132.43) 3.4773 101.63)
Note. 1)Taking into account the denomination of the Belarusian ruble since July 1, 2016; 2)exchange rate of the Belarusian ruble to 100 Russian rubles (RUB); 3)% against January-February 2020.
Source: author's research based on the data provided by the National Bank of the Republic of Belarus.
According to the National Bank, the weighted average exchange rate of the Belarusian ruble against the U. S. dollar fell in January-February 2021 by 19.8% to 2.5899 denominated Belarusian rubles (BYn), and by 32.4% against the euro to BYN 3.1395 (Table 2).
Monetary incomes and wages
Depreciation of the Belarusian ruble will consequently lead to a decrease in households' monetary incomes in real terms and
in a dollar equivalent, which may rekindle social discontent and political tensions in the country.
According to the Belarusian National Statistics Committee (BELSTAT), in 2020, real cash incomes (adjusted for the consumer price index for goods and services) rose by 4.6% year on year to the all-time high of BYN 90.116 billion2 (Table 3). However, in dollar terms, according to our calculations, households' cash incomes decreased by USD 2.473 billion (by 6.3%) to USD 36.622 billion.
Table 3. Dynamics of monetary incomes of households in 2013-2020
Period Monetary incomes11, BYN million Monetary incomes in USD equivalent, million % year on year
Monetary incomes Real disposable monetary incomes Monetary incomes in USD equivalent
2013 44,228.6 49,301.4 137.5 116.3 128.3
2014 52,627.6 51,293.0 119.0 100.9 104.0
2015 56,289.1 34,631.8 107.0 94.1 67.5
2016 58,705.4 29,355.6 104.3 93.1 84.8
2017 64,106.9 33,159.3 109.2 102.8 113.0
2018 72,787.3 35,676.6 113.5 107.9 107.6
2019 81,659.3 39,095.8 112.2 106.1 109.6
20202) 90,116.4 36,622.3 110.4 104.6 93.7
Note. 'Taking into account the denomination of the Belarusian ruble since July 1, 2016; 2)preliminary data.
Source: author's research based on the data provided by the National Bank of the Republic of Belarus.
The average accrued wage (not accounting micro and small organizations without departmental subordination) decreased in January-February 2021 by 4.2% to USD 494.9 (Table 4).
2 Hereinafter «Официальная статистика.» Национальный статистический комитет Республики Беларусь, 2021, http://www.belstat.gov.by/ ofltsialnaya-statistika/.
Table 4. Dynamics of accrued average monthly wage in 2013-2021
Period Nominal wage1), BYN Wage in USD equivalent % year on year
Nominal wage Real wage Wage in USD equivalent
2013 506.1 564.2 137.7 116.4 128.5
2014 605.2 589.9 119.6 101.3 104.6
2015 671.5 413.1 110.9 97.7 70.0
2016 722.7 361.4 107.6 96.2 87.5
2017 822.8 425.6 113.9 107.5 117.8
2018 971.4 476.1 118.1 112.6 111.9
2019 1,092.9 523.2 112.5 106.5 109.9
20202) 1,250.9 508.4 114.5 108.2 97.2
2021, Jan.-Feb.2) 1,281.8 494.9 114.83) 105.43) 95.83)
Note. 1 Taking into account the denomination of the Belarusian ruble since July 1, 2016; 2) without micro-organizations and small organizations without departmental subordination; 3) % against January-February 2020.
Source: author's research based on the data provided by the National Bank of the Republic of Belarus.
Large outflow of deposits from the banking sector
The political crisis evoked a large-scale outflow of deposits from Belarusian banks. According to the NBB, households' deposits in Belarusian rubles decreased by 9.6% (by BYN 783.6 million) to BYN 7.378 billion as of January 1, 2021, while deposits in foreign exchange decreased by 22.4% (by USD 1.688 billion) to USD 5.850 billion. This indicates the growing distrust of the banking sector and a fall of living standards against the backdrop of the economic recession.
Belarus' GDP in U. S. dollar equivalent decreased by 5.3% (USD 3.343 billion) from 2019 to USD 59.742 billion, which is
below the GDP of 2008 (USD 60.746 billion), while the purchasing power of the dollar decreased significantly over the period under review as a result of a large money issue by the Federal Reserve System of the United States.
Alongside the large outflow of households' deposits, the banking sector experienced a significant deficit of ruble and foreign exchange liquidity. On March 17, 2021, the National Bank held credit auction #745 at the announced interest rate of 9.75% per annum for the period of 180 days. Twenty-six bids of 15 banks totaling BYN 3.702 billion were accepted. The NBB only provided commercial banks with BYN 250 million, which makes up 6.8% of the banks' aggregate need for ruble liquidity.
The National Bank fears that if banks' requests are met in full, inflation and depreciation of the Belarusian ruble may sharply accelerate, the more so, as annual inflation in February 2021 reached 8.7%, and double digits were a definite probability in the short run, while the inflation benchmark under the monetary targeting policy is set at or below 5%.
Growing credit risks in the banking sector
In the current environment, banks will limit lending and raise interest rates on new loans, which, consequently, will produce a negative impact on the financial performance of Belarusian enterprises and economic growth of the country.
First of all, the availability of bank loans to the private sector and households will reduce due to the crowding-out effect, which means that banks will primarily provide credit support to state-owned enterprises and purchase government bonds. According to the Ministry of Finance, in the first quarter of 2021, Belarus' government long-term bonds worth USD 721 million were placed on the domestic financial market.
As the political crisis was growing acute, the Ministry of Finance lost access to international financial markets. Therefore, the placement of new issues of FX-denominated government bonds will continue on the domestic market, which means that banks will reduce credit support for private companies and households and worsen terms for new lending.
Also, an expected increase in overdue debts in the national banking sector can also add fuel to the fire. According to the National Bank, from January 1, 2020 to March 1, 2021, banks' non-performing assets increased by 35.4% (by BYN 965 million) to BYN 3.692 billion. This is not the entire amount of non-performing assets, as troubled assets of banks attributed to Risk Group III are not taken into account.
Banks increased the reserves accumulated to cover potential losses on assets exposed to credit risk by 23.9% (by BYN 873 million) to BYN 4.532 billion from January 1, 2020 to March 1, 2021. Accordingly, the actual amount of troubled assets in the banking sector is larger.
The increase in overdue debts to banks stems from the deteriorated financial standing of enterprises. BELSTAT reported that in 2020, the net profit of enterprises dropped by 41.2% (by BYN 4.529 billion) to BYN 6.104 billion year on year. The net loss of loss-making companies thus grew by 250% (by BYN 4.515 billion) to minus BYN 6.314 billion against 2019.
Further deterioration of the financial standing of business entities may significantly increase debt repayment risks faced by banks, among other things, in terms of fulfillment of their obligations to counterparties, including depositors and non-residents.
It is noteworthy that, according to the National Bank, in the fourth quarter of 2020, the difference between the reference rates on ruble loans and deposits fell into the negative area to minus 1.2 percentage points. This situation is alarming, since banks are getting in the red.
Repayment of debts in foreign exchange as the key economic challenge
In 2021, Belarus has found itself in a difficult economic situation: accumulated external liabilities of Belarusian residents have reached the all-time high amount of USD 42.149 billion as of January 1, 2021, while access to new borrowings from external sources worsened considerably due to adverse political developments.
The approaching annual payments on the principal debt and interest on the external debt of Belarusian residents total over USD 16.4 billion. In conditions of the political crisis and sanctions imposed by Europe and the U. S., it will be extremely difficult to refinance and pay off the debt routinely as before.
Unfortunately, in the current situation, an increase in overdue foreign debts of Belarusian residents is highly possible. In fact, the repayment and servicing of foreign and domestic debts of Belarusian residents denominated in foreign exchange is the key economic challenge in 2021-2022.
By allocating USD 1.5 billion in three tranches to the Belarusian government, Russia and the Eurasian Fund for Stabilization and Development (EFSD), in fact, just spread over Belarus' liabilities to them. The loans are primarily given to enable the Belarusian government to fulfill its previous obligations to Russia and the EFSD.
Conclusion
The future of the national economy of Belarus largely depends on its ability to overcome the internal political crisis. If it fails, the recession will continue in 2021 under pressure of the sanctions imposed by the European Union, the United States and their partners, large payments on the foreign debt and unavailability
of funds to borrow, as well as the expected depreciation of the Belarusian ruble against major foreign currencies.
Belarus' dependence on its major creditor, Russia, which is unwilling to fully substitute international lenders, will increase, while in case of transition of power and resolution of the political crisis, Belarus would be able to resume external borrowing and ensure sustainable socio-economic and demographic development.
