National Bank’s gradual devaluation strategy challenged

On September 26^th, 2013, an auction for government foreign currency bonds was declared invalid.

Paying off and servicing public debt in October might be a challenge for the National Bank. In addition, the National Bank needs resources to stop the population from withdrawing Belarusian rubles from bank deposits, which happens due to the weakening of the national currency. The only solution is to raise bank deposit interest rates. Since the National Bank will not have any additional currency revenues, it will have to sacrifice some gold reserves.

In October, public debt repayments will be the highest. Belarus needs circa USD 430-440 million to pay back to the IMF and other creditors. The situation is particularly challenging as the Mozyr Refinery is closed for major overhaul which may last until late October. As a result, petroleum products sales in foreign markets will fall. In addition, Belaruskali has had to (de facto) stop the export of fertilizers. These factors combined will result in the slowdown on the Belarusian Currency and Stock Exchange, and the National Bank will have to make more efforts to smooth out peaks in demand for foreign currency, which will continue growing in all economic sectors. Moreover, September 2013 data on gold reserves level will surely demonstrate a decline.

The situation on the deposit market raises the most concerns. In September, the weakening of the national currency against a basket of currencies will be about 2.5 %. Devaluation expectations of the population increased dramatically in September. Citizens leave their savings in banks if interest rates are circa 45%-50% per annum and deposits are made for 1-2 months. It is possible that soon the interest rates will start playing against the inflow of deposits, since clients will start questioning banks’ reliability, as they offer high interest rates against the background of an overall drastic state of the economy. Alternatively, if interest rates drop, the population’s demand for foreign currency will only increase. On September 1^st, the volume of ruble deposits was about BYR 3.75 billion and in July their volume dropped by 9%.

The National Bank had planned to use external and internal borrowings to partially replenish the dwindling international reserves. Domestic borrowing failed partially – the National Bank managed to sell only USD 22.51 million worth of state foreign currency bonds in the country. The situation with external borrowing is challenging too – negotiations about the last EurAsEC ACF tranche might be procrastinated, leaving no hopes for its allocation in October.

The National Bank has ‘impossible’ tasks: to fulfill its domestic and international commitments and to maintain the gold reserves’ current level without restricting access to foreign currency (because that would result in inevitable panic and a one-time devaluation of the national currency). The gradual devaluation strategy is probably a certain way out of the situation, but it requires more foreign currency than the National Bank has.