Belarus’ lending policy jeopardises national currency’s stability

The financial situation in May was favourable for preventing the gold and currency reserves from shrinking. However, the National Bank’s actions aiming to further reduce loan and deposit market rates and the uncertainty with the national currency exchange rate after the World Ice Hockey Championships have resulted in increased demand for foreign currency, both by individuals and legal entities. If deposit and loan rates continue to fall, demand for foreign currency might rapidly increase, prompting the authorities to dip into the international reserves.

According to the National Bank, Belarus’ gold and currency reserves decreased by USD 84.5 million in May.

May could be the first month in 2014 to see a rise in international reserves. In May, the government only had to repay USD 100 million to service Belarus’ public debt (the lowest amount in 2014). In addition, numerous tourists and hockey fans were anticipated to generate additional foreign currency inflow. The Belarusian rouble’s stability against the US Dollar implied profitable rouble deposits in the banking system. The Finance Ministry sold currency bonds worth USD 60 million on the domestic market, which could be listed in the international reserves.

Despite the favourable circumstances, Belarus’ gold and currency reserves continued to thin. Yielding to the government’s pressure, the National Bank has introduced several measures in recent months aiming to reduce loans and deposits interest rates. These measures have certainly improved the lending terms to the economy, but reduced the deposits’ attractiveness.

Betting limits on loans for businesses has resulted in lower interest rates on deposits in the banks. Corporate rates dropped below 30% per annum and rouble deposit interest rates for individuals reduced to 39% per annum. The growing lending to the economy has resulted in greater demand for foreign currency, turning legal entities into foreign currency net buyers. Private persons, fearing rouble instability after the World Ice-Hockey Championships, started converting their rouble savings into foreign currency. In May 2014, net demand for foreign currency by individuals and legal entities totalled USD 292 million.

The National Bank is limiting the pace of rate reduction. Rapidly dropping interest rates may sharply increase the demand for loans in national currency and simultaneously rapidly reduce people’s deposits in the banking system, due to the rouble deposits’ lower profitability. Rouble loans will be spent on imported raw materials and goods, while goods manufactured in Belarus will be sent to warehouses or will be sold on the domestic market amid limited demand on foreign markets. Rouble deposits will be converted into foreign currency.

The anticipated VTB loan could cover the needs in repaying and servicing Belarus’ public debt during the next three months, however, it will not be enough if demand for foreign currency increases. In the latter case, in order to bridge the gap, the National Bank would have to resort to the international reserves or seek additional loans.

Regardless of the favourable environment, international reserves shrunk in May. If rouble deposit rates for the population continue their decline, the demand for foreign currency might increase and the banking system will face liquidity shortage, which, in turn, would result in loan and deposit interest rates going up again.