De-dollarization of Belarusian economy: new opportunities for sustainable enterprises to raise currency from population

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June 12, 2017 13:01

As of July 1st, 2017 the National Bank has increased the rate of deductions for foreign currency deposits by 4 percentage points up to 15% of raised funds. High interest rates on corporate loans were among the reasons why enterprises were unprofitable. Amid lower profitability of private deposits, enterprises could receive financing directly from deposit holders by issuing bonds with a yield higher than the current rates in banks, but lower than the cost of corporate loans in banks.

The National Bank has adopted measures aimed to continue to de-dollarize the Belarusian economy. In order to further reduce the share of currency savings in the overall structure of deposits, as of July 1st, 2017, banks and non-bank financial institutions will have to increase the share of payments to the mandatory reserve fund from 11% to 15% of foreign currency funds. On June 1st, 2017, the share of foreign currency deposits in the total structure of deposits was 69.3%, and 75% a year ago. In May 2017, the average rate on corporate currency deposits  was circa 1.8% per annum and 2.3% per annum on private currency deposits.

As of May 1st, 2017, the overdue debt of enterprises to banks totalled more than USD 10.5 billion. Private currency deposits were the main source of funds the loans. Banks attracted citizens' funds at 5-6% per annum and issued corporate loans at 10% to 15% per annum. The high interest rate was a deterrent for many enterprises. Amid economic recession, the cost of loans has become one of the reasons for the deterioration in the financial health at enterprises and the growth in problem loans, which reached 14% of the loans issued in 2017.

Measures introduced by the National Bank are intended to increase banks’ costs of servicing currency deposits. Banks will shift additional costs on depositors, which will further reduce interest rates on currency deposits. Banks will not lower the financial stability requirement to enterprises when issuing foreign currency loans and will keep interest rates high - from 6.5% per annum to more than 10% per annum.

In the given circumstances, enterprises could raise funds to fund their activities through bond issues. Bonds do not require discounting of property, as in the case of collateral when banks issue loans. The population would primarily focus on bond yields. Since there have not been corporate defaults with a massive loss of savings in Belarus, most bond issues by well-known and profitable enterprises should be a success, enabling them to make long-term plans. As a result, citizens would withdraw some currency deposits from the banking system and purchase corporate bonds, should those have a profitability at 6.5%-8% per annum; enterprises would receive the necessary funding, reduce the costs of servicing and get rid of the requirement to provide monthly reports to a credit institution; meanwhile banks would lose some proceeds.

Overall, bank deposits are likely to lose their appeal to the population as a savings instrument. This situation would be used by enterprises, which would issue bonds for individuals with a yield higher than bank deposits, but lower than the cost of bank loans.

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