Belarus lacks reliable creditors for economy
Amid reduced corporate debt on loans, since early 2016, distressed bank assets grew by 86%. Bad debt is on the rise due to restrictions on concessional lending to the economy and high interest rates on loans. Under the conditions of excess liquidity, banks will continue to lower rates on loans, but will maintain high standards for borrowers to trim growth of bad debts.
According to the National Bank, as of June 1st, 2016, distressed assets in the banking system totalled BYR 51.5 trillion, which is 86% more as compared with January 1st, 2016. The share of distressed assets in banks reached 12.44%. A year ago, the rate was 5.56%. Bad loans have grown amid curtailed lending to the economy. Loan debt in the national currency since early 2016 reduced by BYR 0.5 trillion and totalled BYR 161.3 trillion on June 1st, 2016, and debt on loans in foreign currency decreased by USD 217 million to USD 11.4 billion.
The National Bank’s tight monetary policy is the main culprit of bad debt growth in the banking system. Allocation of soft loans for housing construction was virtually frozen, which affected the growth of bad debt in construction. Interest rates on national currency corporate loans range from 25% per annum and higher, which amid a difficult financial situation at enterprises is virtually unattainable. The Finance Ministry, in order to ensure timely repayment of all due external and internal debt payments, has restricted the funding of state programs in Q1 2016. As there are no loan opportunities, which could be used to repay previous loans, enterprises accumulate overdue debt. In some cases, the state provided modest financial support to the most important businesses, such as the cement, metal and wood industry.
The banking system has a significant liquidity excess. On July 13th, the National Bank placed its short-term bonds worth BYR 8.5 trillion at 18.8% per annum. The money could be used to aid enterprises, however there was a lack of profitable projects. The banking system gradually reduces interest rates on loans, both in national and foreign currency, but businesses refrain from taking new loans. Meanwhile, banks will not issue loans to unprofitable enterprises in order to avoid future bad loans. Over 60% of enterprises in Belarus are either cost-ineffective or their cost-effective sales make less than 5%, which is not enough, to service loans and invest in development amid constant depreciation of the national currency. Businesses with a 20% return on sales and higher constitute less than 10% of all enterprises, and they do not require high volume of loans at high interest rates.
In the given circumstances, banks will continue to reduce interest rates on loans, but will not lower loan requirements for enterprises, which on the one hand, may reduce loan-servicing costs and reduce debt burden for previous loans; but, on the other hand, will mean that loans will be issued only to capable borrowers. In addition, banks may rely on the state to refinance troubled debts.
The National Bank constrains lending to the economy, which leads to an increase in bad debts on previously issued loans. In order to solve the issue with overdue loans, the National Bank will continue to reduce interest rates, and in some cases, bad loans will be reissued to the state.
The Labour and the Tax Ministries are considering the possibility to include persons engaged in some economic activity without forming a legal entity in the social security system. When the decree No 337 comes into effect, the number of private entrepreneurs is likely to reduce due to the possibility of reducing the tax burden when switching to a tax payment as an individual. 95% of self-employed, including PE, pay insurance premiums on the basis of the minimum wage. The number of self-employed citizens is expected to increase, the number of insurance contributions to the pension system from PE will decrease, the number of citizens who will pay a fee to finance government spending will decrease by several tens. Self-employed citizens have the alternative not to pay social security fees and save resources for future pensions, which, given the gradual restriction by the state of pension requirements could be a more long-sighted option.