Businesses are no longer interested in government currency bonds
The Finance Ministry sold state currency bonds worth USD 41 million, against anticipated USD 50 million.
The window of opportunity for placing foreign currency bonds in foreign markets has closed. In the domestic market businesses’ demand for various government securities has been filled. Private persons remain the only potential foreign currency source for the Finance Ministry.
State currency bonds were regarded as one of the potential sources to refinance foreign debt in 2013 - 2015. In spring 2013 international bond market situation was favourable for Belarus to place its securities. The yield on Belarusian five-year bonds dropped to 6%, which is lower than the yield on foreign currency bonds issued in the domestic market for businesses and individuals. Belarus failed to take advantage of that situation. Now the situation in the financial markets has changed and bonds’ value has dropped below par, closing the possibility of borrowing on international markets at reasonable rates.
On July 23rd, 2013 Finance Ministry held an auction for the primary placement of government currency bonds (103rd edition). The bonds’ maturity period is 1,310 days at fixed 7.25% pa. The issue was worth USD 50 million, but for the first time in 2013 it was not sold out (only USD 41 million) and will be put on sale again on July 29th. Market seems saturated. In anticipation of the placement, the National Bank has created favourable conditions for foreign currency bonds potential buyers by freeing up banks’ funds allocated for the bonds purchase from the requirement to form compulsory reserves. However bonds’ maturity period (3.5 years) is a restrictive factor for the banks due to dynamic domestic market changes in Belarus.
Private persons remain the only potential buyers of state currency bonds. All previous issues have been sold out. Certain slow down with sales relates to longer maturity period. The best for the population is a one-year maturity period, however that creates certain technical problems for the Foreign Ministry and is contrary to the Ministry’s will to borrow funds for a longer period. The problem has a potential solution – to enable the secondary bond market for individuals – which would expand the potential investors’ pool. But this option requires some technical and regulatory measures that currently are not feasible. Namely, currency bonds placement during vacation period is ineffective.
Thus, the number of potential instruments which could help to refinance foreign debt has reduced. Since private individuals are the only potential investors, it is possible that in the autumn the finance ministry will release the new currency bond issue. The government is still in the need of funds and has virtually no guaranteed funding sources left.
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.