Belarusian economy-2015 risk factors: banking sector and wage growth
Amid slowdown in economic activity, Belarus has restored wage growth. Such a situation has occurred due to the National Bank’s measures aiming to stabilise the national currency. Further wage growth and potential problems in the banking sector due to asset quality deterioration may become the main domestic risk factors for the Belarusian economy in 2015.
In early 2015, Belarus increased the share of the Russian rouble in the basket of currencies up to 40%, its strengthening therefore has led to wage growth from USD 400 to USD 450. Simultaneously, since early 2015, the economy has been reducing its debt in the national currency to the banking sector. Due to economic slowdown, businesses have lowered their demand for expensive loans and the population has reduced the volumes of consumer loans fearing of possible problems with repayments amid mass lay-offs at enterprises.
The National Bank is the main culprit of such a trend. In order to reduce devaluation risks, the National Bank very swiftly lifted the restrictions on sales of foreign currency, which were in place during the devaluation. It also increased the cost of available resources in banks in order to support liquidity and, together with the government undertook measures to limit lending to a number of state programmes. All these actions have led to a stabilisation on the domestic currency market and of the national currency exchange rate; interest rates on deposits have ensured the outflow of rouble resources from the currency market; high interest rates on loans have hampered growth of lending to enterprises and encouraged repayment of earlier loans.
Amid the upcoming presidential campaign in late 2015, wages in Belarus may continue to grow. As a result, the demand for foreign currency and consumer imports may increase. In addition, demand for domestic products on the domestic and external markets may decline due to deterioration of the competitiveness and increased costs.
After the devaluation, the banking sector requires additional resources. Previously, half of the cash flow was through banks with Russian capital, which now have limited access to international financial markets. Due to deteriorating financial health of industrial enterprises, the volume of non-performing loans, which is already high, will swiftly increase. If creditors are unable to repay loans, banks might be unable to recover credit funds in full due to significantly exaggerated value of collateral assets. Amid the lack of funding and deterioration of the assets’ quality, any problem with customer service may lead to a collapse of some banks and the banking system as a whole. If so, the National Bank would support rouble obligations only and would be unable to repay foreign currency liabilities to depositors in full.
The National Bank has managed to overcome the devaluation expectations swiftly, but created the preconditions for new economic problems to emerge. Wage growth and expected deterioration in asset quality in the banking system would be the main risk factors for the Belarusian economy in 2015.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.