National Bank risks turning off depositors by supporting real sector
The government has managed to convince the National Bank to boost lending to the economy amid gradually reducing loans’ interest rates. The population has immediately reacted to the lower deposit rates with the national currency withdrawal from deposits. Once again, the banking system might face a liquidity deficit, which could be treated either with money printing or by sharply rising loans’ interest rates.
As of May 19th, the base rate will be reduced by 1% to 21.5 % per annum.
The National Bank has implemented measures to reduce corporate loans’ interest rates. As of May 19th, the base rate will be reduced to 21.5% per annum, which is one percent below the current rate. Most banks’ interest rates on corporate loans are tied to the National Banks’ base rate. In addition, the National Bank has decided to reduce the interest rates on standing facilities liquidity support from 28% to 27% per annum. Thus, the National Bank cuts rates on the interbank lending market. According to the National Bank’s decision, the new upper limit for interest rates on corporate loans will be 39.4 % per annum.
When corporate loans’ rates reduce, the deposit interest rates also gradually reduce. The population responds to the decline in deposit interest rates by withdrawing ruble deposits from the banking system. In February 2014, the influx of term deposits was BYR 1 175.8 bln, in March it declined to BYR 850.4 bln, and in April – to BYR 364.2 bln. Given the volume of term deposits and the interest rates on loans, it can be stated there was an outflow of deposits from the banking system in April, because deposits’ capitalization is 2.5%, which is double the volume of rouble deposits’ growth. In fact, the banking system is seeing an outflow of the population’s ruble deposits, which make up a substantial part of the banks’ passive base.
The banking system might see a repetition of the mid-2013 situation, when there was a significant outflow of deposits from the banking system amid a sharp decline in deposits’ interest rates. Low interest rates on loans led to a substantial increase in the volume lending in the economy. The National bank did not have means to support liquidity, therefore the interest rates on the inter-bank loans market went up from 21% to 60% per annum within a month.
Provided, that the National Bank is easing its monetary policy, it may launch money printing in order to support banks’ liquidity. However, such measures will result in greater pressure on the national currency. In the context of the announced, but not received loan from Russia, this may lead to further languishing gold reserves. Alternatively, interest rates on the inter-bank market may go up.
The National Bank has decided to increase the volume of lending to the economy. Excessive credit pumping may lead to a sharp increase in demand for rubles, which only the National Bank has in sufficient quantities. The interest rates on loans for the economy will further depend on the National Bank’s decisions.
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.