Deposit market interest rates grow competing for customers
Business deposit rates on July 19th reached 45% per annum.
On July 22nd, the National Bank will raise the upper margin in the deposit market, both for individuals and for businesses. Against high devaluation sentiments, customers are extremely quick to react to new proposals from banks. Large state-owned banks are using the situation to reshape the client market in their favour.
On July 19th, the National Bank adopted a Monetary Policy Committee decision (motion of 18.07.2013 No 29), envisaging higher rates on standing facilities designed to support the liquidity up to 40% per annum. Interest rates’ dynamics in the interbank market has reached a new record-high level for interbank loans - 41-42% per annum. The National Bank’s decision marks the beginning of the next round of deposit rates’ growth in the banking system, both for individuals and for businesses (the upper margin is now 40%, which is 5% points higher).
The National Banks’ objectives are quite clear: to prevent ruble deposits outflow from the banking system. Two major state banks – Belagroprombank and Belarusbank – make the most attractive offers for private individuals. During past week, Belagroprombank has twice updated its ruble deposit rates up to 34% per annum. Belarusbank, which managed not only to maintain the deposits’ volume but increase it by late June, has set a de facto minimum margin at the deposit market at 30% per annum with 15-days term deposits. Customers were quick to react to these offers and transferred part of their savings from other banks to these two.
Market situation is as follows. Core state-owned banks find the missing liquidity and their profits allow to keep loan rates at a minimal margin. Other banks are in a situation when they are either forced to raise deposit interest rates or experience deposits’ outflow to banks with higher interest rates on deposits. As a result, they will be forced to seek for liquidity sources at the interbank market. At the interbank market rates exceed 40% per annum. Given circumstances it is extremely difficult for them to raise funds at such rates or issue loans, even with a minimal margin. If large state owned banks can afford some decline in yield or even small losses, small private banks can’t. Higher loan rates will force businesses to look for alternative options. And large state-owned banks will be able to make the most attractive offers to them, thereby gaining new long-term customers.
Today, against sharp increase in deposit rates, banks start fighting for new customers and large state-owned banks have a clear advantage, which they use to expand their client base and to increase the market share.
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.