National Bank stakes all

High deposit rates failed to improve the banking system’s liquidity and resulted in the financial paralysis of corporations. The National Bank is ready to lower loan interest rates, which will reduce deposit interest rates and increase pressure on the Belarusian ruble. Such a manoeuvre ahead of the New Year,implies, that the National Bank is firmly reckoning on substantial foreign exchange proceeds before the year-end.

In November, the National Bank reduced rates on liquidity support operations by 10 % per annum.

During the past two month, trends on the currency and deposit markets have included creeping interest rates on ruble deposits and net demand for foreign currency by population. Interest rates on ruble deposits in early November broke the threshold of 50 % per annum, some small banks offered deposits with a yield of 55 % per annum. Even large state-owned banks, which hold more than half of the population’s deposits in the banking system and have access to liquidity from the National Bank, offer interest rates at 52-53 % per annum. Such high interest rates were meant to provide a stable inflow of ruble deposits in the banking system, and reduce the pressure on the foreign exchange market.

In November the banking system’s liquidity slightly improved. The lack of liquidity was estimated at BYR 2- 2.2 trillion – in October up to BYR 4 trillion (about USD 430 million). National Bank actually stopped lending to the economy in the national currency. Corporations stopped borrowing in BYR (interest on loans for corporations reached 70%-80%) and resorted to foreign currency loans at 10% per annum.

Meanwhile, overly expensive ruble loans and limited ability to receive foreign currency loans have resulted in a sharp increase in economic arrears. In August and September, overdue payables grew by BYR 4 trillion (about USD 430 million). The share of debts in the system increases and threatens to escalate into a massive crisis with payments. In such a situation, pressure on the currency market reduces, but economic activity slows down. Therefore, the National Bank, under the Government’s pressure, decided to lower liquidity rates. As a result, ruble deposit and loan rates for private persons and corporations will go down.

The dangers of this decision are that in December foreign currency demand might go up and ruble deposits might start outflowing from the banking system. As a result, gold reserves will reduce and devaluation will follow shortly.

It appears that the National Bank anticipates substantial foreign currency revenues before the year-end, which will enable it to withstand the outflow of ruble deposits in December. Otherwise, Belarus is looking at devaluation.