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.
Over the past year, military-political relations between Minsk and Kyiv have become complicated. Due to their high inertia and peculiarities, this downward trend would be extremely difficult to overcome.
The root cause of the crisis is the absence of a common political agenda in the Belarusian-Ukrainian relations. Minsk is looking for a market for Belarusian exports in Ukraine and offers its services as a negotiation platform for the settlement of the Russo-Ukrainian war, thereby hoping to avoid political issues in the dialogue with Kiev. Meanwhile, Ukraine is hoping for political support from Minsk in the confrontation with Moscow. In addition, Ukraine’s integration with NATO presupposes her common position with the Alliance in relation to Belarus. The NATO leadership regards the Belarusian Armed Forces as an integral part of the Russian military machine in the western strategic front (the Baltic states and Poland). In addition, the ongoing military reform in Ukraine envisages a reduction in the number of generals and the domestic political struggle makes some Ukrainian top military leaders targets in politically motivated attacks.
Hence, the criticism of Belarus coming from Ukrainian military leadership is dictated primarily by internal and external political considerations, as well as by the need to protect the interests of generals, and only then by facts.
For instance, initially, the Ukrainian military leadership made statements about 100,000 Russian servicemen allegedly taking part in the Russo-Belarusian military drill West-2017. Then the exercises were labelled quazi-open and military observers from Ukraine refused to provide their assessment, which caused a negative reaction in Minsk. Further, without citing specific facts, it was stated that Russia was building up its military presence in Belarus.
Apparently, the Belarusian and Ukrainian Defence Ministries have entangled in a confrontational spiral (on the level of rhetoric). Moreover, only a small part of the overly hidden process has been disclosed. That said, third states are very likely to take advantage of the situation (or have already done so). This is not only about Russia.
The Belarusian Defence Ministry officials are restrained in assessing their Ukrainian counterparts. However, such a restraint is not enough. Current military-political relations between Belarus and Ukraine are unlikely to stabilise without the intervention of both presidents.