Reduced interest rates on deposits create favourable environment for liquidity crisis in Belarus
Reduced interest rates on deposits in national currency have prompted the population to withdraw their savings from the banking system. The liquidity crisis of July-August 2013 could repeat. While waiting for financial aid from Russia, the National Bank may switch on the money printing press.
According to the National Bank’s report, in May, there was an outflow of time deposits in national currency.
In May, the population withdrew BYR 151 bln worth of deposits in the national currency from the banking system. They were prompted by reduced proceeds due to lower interest rates (below 35% per annum) and increasing uncertainty around devaluation of the Belarusian ruble. The population accounts for over 60% of the total volume of term deposits in Belarusian rubles. Partially, they could convert their roubles into hard currency.
Events in early June 2014 are reminiscent of events from summer 2013, which resulted in liquidity crisis in the banking system. Back then, reduced interest rates in the banking system led to a rapid outflow of individual and legal persons’ deposits, and lower interest rates (20-21% per annum) sharply increased demand for loans. As a result, excess liquidity in the banking system turned into liquidity deficit within a month. The National Bank supported some banks’ liquidity, mostly state-owned.
In July 2013, interest rate on interbank loans increased from 21% pa to 61% pa, which resulted in the rapid growth of rates on loans and deposits, and suspended lending - even on previously opened credit lines. To stabilise the situation, interest rates on rouble deposits had to rise to 45% per annum and remain this high for a while.
In 2014, the situation is characterised by thinner international reserves (by USD 2.6 billion) and a large volume of term deposits in Belarusian roubles (USD 600 million). In addition, in June – July, Belarus has to repay its public debt (circa USD 1 billion). The debt will be repaid from the bridge loan provided by Russia’s VTB Bank.
There are two possible ways out of this situation. First, the National Bank repeats its actions. Interest rates will grow, but the government will be unable to show the desired economic results. Second, banks’ liquidity needs are covered by money printing – until Belarus receives the loan from Russia and other loans, which will carry Belarus safely into early 2015. In 2015, Belarus anticipates to raise an additional USD 1.5 billion from export duties and reduce the current account deficit to acceptable values.
As anticipated, reduced interest rates have led to an outflow of individuals’ funds from the banking system. The National Bank might change its tactics policy if liquidity shortage occurs, but its policy’s success will depend on the timely receipt of financial assistance from Russia, on which the Belarusian leadership is really counting.
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.