Industry needs cheap ruble loans
On March 13th, the National Bank lowered the discount rate by 1.5 percentage points to 28.5% pa.
The National Bank gave in to the government’s persistent demands and reduced the discount rate. Lower interest rates will increase the borrowing volumes by businesses and will shift the focus to long-term borrowings. But the sources for the long-term ruble lending to the economy remain unclear.
As of 13th March, 2013, the discount rate in Belarus has been reduced by 1.5%, rates on standing facilities operations to withdraw liquidity has been reduced by 2 percentage points to 17%. The interbank market has about BYR 9 trillion in excess liquidity, which results in lower interest rates on overnight loans in the national currency (to 17.4% pa). Against the background of excess liquidity, banks have started to gradually reduce loans’ interest rates.
The financial situation in the industry is unfavorable. Net profits fell in the most of the country’s industrial enterprises, overdue accounts receivable and accounts payable have increased, in early 2013 warehouse stocks grew by BYR 7.5 trillion. Additional credit resources are needed to maintain current operations, because enterprises’ own funds are limited and insufficient. Short-term loans do not solve the problem because the loans need to be repaid in a short time, when operating cycle can take several months. With sales’ profitability in the industry declining to 9%, the long-term interest rate on bank loans 40% pa and higher is prohibitive. Loans’ rates reduction to 20% pa (or lower) and better availability of long-term loans would reduce the severity of the financial problems at the enterprises.
The banking system’s liquidity is short-lived. Experience from mid-2012 demonstrates that if the interest rates on national currency loans were reduced substantially, companies would be able to “digest” the excess liquidity in -3-4 months. Individuals, if national currency deposit rates decrease, will convert ruble deposits into foreign currency, reducing the ruble liquidity in the banking system. If international counterparties provide loans, they will be in foreign currency. The government then might expand the well-advanced practices of subsidizing interest rates for businesses, and increase equity resources volumes.
While waiting for a significant reduction in interest rates on loans in national currency, businesses reduced their borrowing volumes. Lower interest rates will increase the borrowing volumes by businesses and will shift the focus on long-term borrowings. But the sources for the long-term ruble lending to the economy remain unclear.
President Lukashenka has met with the head of Chechnya Ramzan Kadyrov, who visited Minsk and the Minsk Automobile Plant. Minsk has always sought to have independent links with Russian regional elites, partially, to compensate for the Kremlin's diminishing interest in Belarus. In recent years, Belarus’ contacts with the Russian regions have been extremely intense. However, with some leaders of Russian regions, primarily heads of large republics, communication was more difficult to build. As many analysts in Minsk suggested, Minsk could regard contacts between President Lukashenka and the head of Chechnya as an additional communication channel for relieving tension in relations with the Kremlin. However, most likely, a trusting relationship with Kadyrov is a value for Minsk as such, provided Kadyrov’s broad business and political interests, and a high degree of autonomy for the Chechen leader from the Kremlin.