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MONEY MARKET: UNDER PRESSURE OF THE OIL FACTOR AND DEBT BURDEN
Alexandr Mukha
Summary
In 2015, the drop in global prices of crude and refined oil amid significant foreign debt payments by Belarusian residents had a profound negative impact on the performance of the country's money market. Seeking to alleviate foreign economic shocks the National Bank of Belarus shifted towards a more flexible exchange rate regime. In 2016, the central bank will maintain the strategy of the undervalued real effective exchange rate of the Belarusian ruble against the basket of currencies of the main trade partners with a view to encouraging the export of Belarusian goods and services while restraining imports. The ruble redenomination announcement and Decree No. 7 of 11 November 2015 brought about even stronger devaluation expectations and pushed the demand for foreign exchange. The dollarization of individual bank deposits reached a new high in the history of contemporary Belarus.
Trends:
• Obvious negative impact of changes in the global oil price on Belarus's economic dynamics;
• Plunge in the export of Belarusian goods and services and currency receipts from Russia in the U.S. dollar equivalent;
• National Bank's shift to a more flexible exchange rate for the Belarusian ruble amid scarce gold and foreign exchange reserves;
• Outflows of individual foreign exchange deposits that may cause a deficit of currency liquidity in the banking sector.
Impact of the oil factor
Last year, the drop in prices of crude oil and oil products produced a massive negative impact — both direct and indirect — on Belarus's economic performance. According to our estimates, the fall in the export of Belarusian refined and crude oil accounted for 38% of the overall decrease in Belarus's commodity export last year. However, the reduction in Belarusian export supplies to Russia in 2015 (other than oil products) accounts for an additional 43.6% of the total export drop.
Statistics1 make it clear that the main reason behind the reduction in Belarusian commodity export in 2015, as against 2014, was the drop in oil prices:
• Belarusian commodity export — minus USD 9.395 billion year on-year in 2015;
• Export of oil products — minus USD 3.022 billion;
• Export of crude oil, including condensed gas — minus USD 544.956 million;
• Export of goods to Russia (exclusive of refined oil) — minus USD 4.1 billion.
Of the overall drop in export supplies by USD 9.4 billion in 2015 from the level reported in 2014, the reduction in oil prices accounted for USD 7.7 billion, meaning that the 'oil' factor should be blamed for 81.6% of the total curtailment of the country's export proceeds. Specifically, Russia's current economic troubles — the economic slowdown and the depreciation of the Russian ruble — are associated primarily with low oil prices, along with the economic sanctions imposed by the Wfest. As a result, Belarus suffers from a double negative impact of low prices of crude and refined oil: 1) a direct effect of decreasing revenues from foreign deliveries of crude and refined oil; and 2) a indirect (and bigger in value terms) effect associated with the decrease in Russia's demand for Belarusian-made goods and profitability of Belarusian export (due to the sharp depreciation of the Russian ruble).
In 2015, Russia accounted for 38.9% of Belarus's export supplies. According to our estimates, Russia's share in Belarus's overall export deliveries (exclusive of oil products, crude oil, and potash fertilizers) reached 60.2% (and 80%—90% for some commodity items).
According to the National Bank, last year's currency proceeds generated by commodity and service exports, incomes and transfers of nonfinancial companies and households fell by 23.4% from 2014, or by USD 10.068 billion to USD 33.024 billion, a new record low from 2010 (USD 29.746 billion).2
1 Here and below: "Official statistics." National Statistical Committee of the Republic of Belarus. Web. 5 Apr. 2016. <http://www.belstat.gov.by/en/ ofitsialnaya-statistika/>.
2 Here and below: "Statistics." National Bank of the Republic of Belarus. Web. 5 Apr. 2016. <http://www.nbrb.by/engl/>.
The share of the Russian ruble in the structure of currency proceeds of nonfinancial companies and households (proceeds associated with flows of goods, services, incomes, and transfers) decreased from 37.7% in 2014 to 33.7% in 2015. The share of the U.S. dollar went up to 26.8% from 23.3%, the share of the euro edged down to 36.6% from 37%, and the Belarusian ruble accounted for 1.4%, up from 1.1%. The share of other currencies increased to 1.5% of currency proceeds in 2015 from 0.9% in 2014.
In 2015, Russia paid Russian rubles for 83.6% of imports from Belarus, whereas 1.3% of import deliveries were paid for in Belarusian rubles, 10.3% in U.S. dollars, 4.3% in euros, and 0.5% in other currencies. The share of the Russian ruble in the structure of payments by nonfinancial companies and households for imported goods and services, as well as for incomes and transfers, increased from 36.8% in 2014 to 45% in 2015. The share of the U.S. dollar went down to 27.8% from 33.5%, the share of the euro shrank to 25.6% from 28.2%, and the share of the Belarusian ruble and other currencies remained unchanged at 0.9% and 0.7%, respectively.
In 2015, Belarus paid Russian rubles for 75.9% of Russian supplies, whereas 1% of imports from Russia was paid for in Belarusian rubles, 16.1% in U.S. dollars and 7% in euros. The increase in the share of the Russian ruble was due to the change to payments for Russian gas and oil to Russian rubles.
Overall, in 2015, currency payments for goods, services, incomes, and transfers by nonfinancial companies and households decreased by USD 10.419 billion (or by 25.6%) to USD 30.356 billion. As a result, the balance of current foreign economic operations associated with flows of goods, services, incomes, and transfers reversed from a deficit of USD 642.4 million in 2014 to a surplus of USD 2.668 billion. In other words, during the period under review, the balance showed an improvement by USD 3.31 billion in absolute terms.
The inclusion of export customs duties on crude and refined oil (approximately USD 1.4 billion) in the Belarusian budget beginning January 2015 significantly contributed to the surplus of current foreign economic operations, along with the substantial reduction in currency payments.
Money market
According to the National Bank of Belarus, sales of foreign exchange by households exceeded purchases by USD 129.6 million (including cashless transactions) in 2015, sales by non-residents exceeded purchases by USD 227.2 million, whereas purchases by companies were USD 403.8 million above sales last year. The structure of net supply of foreign exchange by households looks the following way: net sales of foreign exchange — USD 970.1 million, and net conversion of ruble-denominated deposits into foreign exchange — minus USD 840.5 million.
The change to continuous order matching from the fixing trading regime at the Belarusian Currency and Stock Exchange contributed to the flexibility of the exchange rate of the Belarusian ruble vis- -vis the main foreign currencies. At the same time, one of the disadvantages of the new currency regime is the limited time for a trading session and narrowing of the exchange currency market to currency sale/purchase deals within the framework of mandatory currency surrender. The remaining types of transactions with foreign exchange were moved to the OTC market. The new terms of currency trade thus affected companies' capacity to sell/buy foreign exchange on the domestic money-market.
The redenomination move announced by Presidential Decree No. 7 of 11 November 2015 resulted in stronger depreciation expectations in the economy and marked increase in demand for foreign exchange (including in the cashless segment of the domestic money market). As a result, the Belarusian ruble depreciated vis-à-vis the main foreign currencies. Furthermore, given the new rules in the deposit market (introduction starting 1 April 2016 of taxes on interest incomes — applicable to foreign exchange deposits for a term of less than 24 months — and reduction in rates on revocable deposits), there is a risk of outflows of personal deposits denominated in foreign currency from commercial banks and deficit of currency liquidity in the banking sector.
In this context, banks can cut their contributions to the country's gold and foreign exchange reserves, which means the
central bank will have a lower amount of liquid reserve assets. Belarus's IMF SDDS foreign exchange reserves are notably formed with an extensive use of foreign exchange attracted from commercial banks, which account for an estimated 69.8% of the total. As of 1 March 2016, the National Bank's currency obligations to the banking sector stood at USD 2.868 billion.
Importantly, Belarus is one of the region's and world's leaders in terms of dollarization of personal deposits denominated in foreign exchange. By 1 March 2016, the share offoreign exchange deposits in the overall structure of personal deposits had reached 82.3%, a new record high in the history of contemporary Belarus. According to our estimates, the proportion of ruble-denominated deposits was at 17.7%.
Debt burden
In 2015, the increase in debt service payments of Belarusian residents (companies, banks, government, and central bank) resulted in more pressure on the domestic money market, hence further depreciation of the national currency.
According to the NBB, in 2015, the foreign debt of Belarusian residents dropped by USD 1.749 billion (by 4.4%) to USD 38.275 billion as of 1 January 2016, a new record high of 69.7% of the country's GDP. The relative ratio of the foreign debt of Belarus's residents therefore exceeded the economic security threshold (at 60% of GDP). Belarusian residents had never been under such debt pressure.
As a result, payments to service the foreign debt become a serious challenge for the state, companies, and banks. An additional problem is that amid the fall in transfers of export duties on oil products to the state budget (the entire amount of these receipts is used to repay and service the foreign debt) the government has been forced to cut some state expenditures in order to be able to make foreign debt payments in full and on a timely basis.
However, it should be noted that in this case, the total debt burden on the state is associated with the service and repayments by the state authorities, monetary authorities, commercial banks and companies, in which the state owns more than 50%. In 2015,
the foreign debt of the public sector (the extended definition) and the foreign debt of the private sector secured by the state decreased by USD 161.5 million (0.7%) to USD 23.05 billion as of 1 January 2016, which accounted for 60.2% of the total foreign debt of Belarus's residents.
Residents' short-term external debt obligations (based on their remaining maturity) went down by USD 2.901 billion (13.6%) to USD 18.409 billion as of 1 January 2016. These obligations are measured by adding the amount of unpaid short-term foreign debt to the amount of unpaid long-term foreign debt maturing within 12 months (based on its original maturity).
In 2016, residents' foreign debt payments are estimated at USD 19.314 billion (including debt refinancing operations). As of 1 January 2016, Belarus's gold and foreign exchange reserves were at USD 4.176, enough to cover only 21.6% of debt payments. At the same time, according to the Guidotti rule, a country's gold and foreign exchange reserves should cover at least 100% of the upcoming annual payments for all of that country's residents' foreign debts (government, central bank, companies, and banks).
Belarus believes it will be able to fill the gap by making use of a loan from the Eurasian Fund for Stabilization and Development (USD 1 billion), placing a third issue of its Eurobond (up to USD 1 billion), and selling state-owned assets. In this case, the monetary authorities will be able to increase gold and foreign exchange reserves, improve adequacy indicators for reserve assets and reduce expectations of further depreciation in the economy.
At the same time, a new loan program with the IMF looks quite unlikely because of certain political barriers and the Fund's own potential problems (due to troubled borrowers). Specifically, in March—December 2016, borrowers are expected to pay the IMF USD 6.133 billion3, which includes payments by Greece - USD 3.433 billion, Portugal - USD 499.2 million, Sri Lanka - USD 313 million, Jordan - USD 247.2 million, and Ukraine - USD 158.1 million.
Here and below: "Data." International Monetary Fund. Web. 5. Apr. 2016. <http://www.imf.org>.
Further, by 31 March 2016, the IMF had allocated USD 109.313 billion within the framework of fifteen loan agreements to finance programs in other countries (including USD 10.735 to finance an EFF program in Ukraine). As of 1 April 2016, the combined outstanding debt to the IMF was at USD 77.25 billion, including Portugal - USD 20.827 billion, Greece - USD 16.439 billion, Ukraine - USD 10.851 billion, Pakistan - USD 5.58 billion, Ireland - USD 5.316 billion, Jordan - USD 1.832 billion, Tunisia - USD 1.413 billion, Iraq - USD 1.256 billion, and Cyprus - USD 1.116 billion.
Conclusions
According to our estimates, as soon as the proportion of personal deposits denominated in foreign exchange exceeds 85%, the pressure on the exchange rate of the ruble will substantially decrease, because ruble deposits of households will be formed by transferable deposits (including card accounts) and time deposits of the conservative part of the population (such as pensioners and residents of regions). Therefore, the conversion of ruble deposits into foreign exchange deposits will slow, and the ruble will have prerequisites for growing stronger (all other things being equal).
The more so because in 2016, households' capacity to buy foreign exchange in the market for cash foreign currencies will be narrowing due to the anticipated stagnation of the real incomes of the population (i.e. given the annual consumer inflation rate) amid growing unemployment and forced underemployment of Belarusian workers. Further, this year, the monetary authorities will be looking for ways to restrain depreciation and inflationary processes in the economy through the use of monetary targeting regime, implementation of the state budget with a surplus and other available instruments.
In 2016, the authorities will likely devaluate the ruble against the U.S. dollar faster than their Russian counterparts devaluate the Russian ruble (by 3 to 7 percentage points) in order to offer Belarusian exporters an additional price-based competitive advantage in the Russian market. In this case, the National Bank may continue devaluating the Belarusian ruble vis- -vis the
Russian ruble towards the BYR 300-310 range. However, such a move would result in rising prices of Russian-made goods in the Belarusian market.
After all, this year, the National Bank will stick to the tactics of the undervalued real effective exchange rate of the Belarusian ruble in order to encourage the export of Belarusian goods and services to foreign markets while limiting foreign imports of goods and services.
