Belarusian National Bank set to reduce public debt servicing costs
The National Bank has decided to change the size of mandatory deductions to the reserve fund. Due to an increase in people’s expenses in 2016, the Belarusian international reserves grew and all due public and domestic debt payments were made. By reducing interest rates on currency deposits, the NB would save circa USD 25 million to refinance public debt.
As of February 1st, 2017, the National Bank will increase the size of compulsory contributions by banks to the reserves fund from corporate and private foreign assets from 7.5% to 11%, and will reduce the contributions in national currency from 7.5% to 4%. When the new rules take effect, banks’ cost of fundraising in foreign currency will increase, which will reduce interest rates on foreign currency deposits. Simultaneously, banks may leave interest rates on rouble deposits unchanged, so as the discount rate will reduce from 18% to 17% per annum as of January 18th, 2017.
In 2016, the National Bank increased its gold reserves by USD 751 million from USD 4.175 billion to USD 4.927 billion, while paid its due international and domestic debt, which totalled circa USD 3.3 billion in early 2016. Foreign currency inflow was provided by raised utility costs for the population, reduced soft loans and reduced interest rates on all types of deposits. The interest rate on rouble deposits decreased from 23% to 13% per annum and on currency deposits - from 3.7% to 2% per annum. This made households to spend more and earn less to due to lower income from deposits. In January - November 2016, the population sold USD 1.8 billion net, and the National Bank bought a part of this sum from the banks to refinance its debt.
By reducing the interest rate on currency deposits, and retaining the interest rate on rouble deposits, the National Bank aims to solve two tasks. First, amid reduced profitability of currency deposits, some depositors may decide to convert their currency funds to the national currency and place it in the banking system, thereby boosting foreign currency supply on the domestic currency market. Second, by reducing rates on foreign currency deposits by 1 per cent, the National Bank will reduce the annual yield of currency depositors by USD 74.5 million. Due to deficit of reliable borrowers, banks will invest foreign currency deposits of the population in the National Bank bonds. By setting a lower interest rate on its bonds, the National Bank will save money for refinancing its current debt, which relates to the obligations of the state. Throughout 2016, interest rates on the NB bonds dropped from 7% to 5% per annum and due to the NB efforts, may reduce to 4% per annum or lower by late 2017, enabling the NB to save circa USD 25 million.
Overall, by reducing deposit interest rates, the National Bank reduced profitability of deposits and increased its international reserves in 2016. Due to the need to increase the international reserves by USD 0.5 billion in 2017 and to reduce public debt servicing costs, the National Bank is likely to pursue its current policy aiming to reduce currency deposit profitability and interest rates on government bonds may reduce to 4% per annum.
The Belarusian economy was shrinking for the second year in a row, in 2016, by 2.6%. Before 2015, the Belarusian economy was growing for 18 consecutive years. In order to stop the economic slump, Belarus needs a favourable international market situation and to settle all trade disputes with Russia. The Belarusian economy is unlikely to recover before 2018.
According to the preliminary reports, in 2016, Belarus had a 2.6% GDP decline. The Belarusian economy was shrinking for the second year in a row – a 3.8% decline in 2015. Most economic indicators in 2016, except in agriculture, had negative values. Wholesale trade had the most negative impact on GDP due to falling exports of potash fertilizers and petrochemicals, as well as construction, due to reduced investment in fixed assets by enterprises and decreased housing construction volumes.
In 1996-2011, the Belarusian economy was growing most rapidly, average GDP growth rate was 6.9% per year. In 2011, amid emission injections in the economy, disproportionate growth of wages against the background of low productivity and significant financial aid for loss-making agricultural, construction and industrial enterprises, the Belarusian rouble depreciated by three times. The absence of economic reforms and significant relative weight of state in the economy amid deteriorating external economic environment led to a sharp economic slowdown – circa 1% per year in 2012-2014; the slowdown was followed by the recession, caused by a slump in the prices for basic exports from Belarus and cuts in soft loans issued to maintain production volumes.
Belarus’ budget for 2017 is based on anticipated 0.2% growth. The expected decrease in the construction volume is circa 17% in 2017, which is unlikely to allow industrial growth with the renewal of fixed assets by legal entities. Even if wages grow, they will be offset by the 15% increase in utility tariffs by late 2017. Wholesale trade is largely dependent on the potash market situation and the oil processing volume at the Belarusian refineries. In view of the planned reduction in Russian oil supply in Q1 2017 to 4 million tons, wholesale growth is only possible provided the potash market situation improves. In late 2016, engineering output increased significantly, but amid the trade conflict with Russia, she may prioritise purchases from domestic manufacturers. In the given circumstances, Belarus’ GDP would only grow in 2017, provided the Russo-Belarusian dispute over energy supplies was fully resolved, Russia removed barriers for Belarusian exports and the potash market situation improved. That said, Belarus’ GDP in 2017 is likely to decrease by 0.5% - 1% and is likely to be followed by an attempt to overcome the recession in 2018.
The Belarusian economy has been in recession for two consecutive years. Amid anticipated decline in retail trade, construction and unresolved dispute over energy supplies from Russia, economic recession is likely to persist in 2017 and the economic recovery may be postponed until 2018.