Currency market situation in Belarus is threatening banking system stability

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April 22, 2016 19:39

In December 2015, the outflow of foreign currency and ruble household deposits from the Belarusian banking system persisted due to reduced interest rates. The state lacks funds to compensate for the deposits loss and if situation deteriorates rapidly, it may restrict citizen’s access to their foreign currency savings in banks.

According to the National Bank, in December 2015, the volume of term deposits in national currency by the population reduced by BYR 1.3 trillion or 4.6%, and the volume of term deposits in foreign currency decreased by USD 83.5 million or 1.1%. The population spent its BYR cash on cash and non-cash foreign currency. In December 2015, the population was a net buyer of foreign currency and bought a total of USD 111.7 million. Legal persons bought another USD 183.6 million, which did not help preserving the gold reserves.

As a rule, when devaluation expectations rose, the population withdrew BYR from the banking system and bought foreign currency, which was saved in foreign currency deposits in the banking system. The situation in November and December 2015, however, deviated from this rule. When people bought foreign currency, they did not put it back in the banks and moreover, started withdrawing currency from the banks. The main culprit was a decrease in interest rates on deposits, both in national and foreign currencies. The yield on ruble deposits decreased to 25%, which in terms of crippling devaluation seemed insufficient, and interest rates on foreign currency deposits fell to 4% per annum with a downward trend.

For the National Bank, withdrawal of currency and ruble resources from the banking system was the least favourable case scenario. Banks used currency deposit funds to issue long-term loans and should the need arise, are unlikely to be able to cope with mass-withdrawal of deposits by the population. As of early January 2016, BYR devalued by 7%, which would only increase demand for currency from the population and increase the outflow of ruble deposits (as of January 1st, 2016 they totaled BYR 40 trillion or USD 2 billion). Funds raised from the Finance Ministry bonds with a total worth of USD 450 million would be insufficient.

Even if the negotiations with the IMF are successful, the first tranche of the loan would arrive by mid-February at the earliest. In the given circumstances, the risk of restrictions on bank deposits will increase, eventually leading to the paralysis of the banking system. That said, the National Bank has almost no resources to prevent such a scenario.

Overall, the premature reformatting of the deposit market by the National Bank has resulted in an outflow of all kinds of household deposits from the banking system. Enhanced devaluation processes in the absence of foreign currency loans may lead to the currency market paralysis and restrictions on access to deposits for the population.

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