National Bank of Belarus concerned about foreign currency credits
Against the background of minor currency fluctuations, the sharp rise in interest rates in the credit market shifted enterprises’ focus towards borrowing in foreign currencies. Deteriorating economic situation in Belarus raises National Bank’s concerns about solvency of enterprises in terms of foreign currency borrowings. The newly introduced restrictive measure is designed to reduce the credit risk for the banking system.
On November 18th took effect the National Bank’s resolution No 577, which restricted foreign currency lending to Belarus-resident legal persons.
Lack of liquidity caused by the new obligatory reserve requirements resulted in a significant increase in interest rates on BYR loans. Interest rates in the interbank market increased from 19% per annum to 64% per annum. Therefore legal persons started borrowing in foreign currency at 9% per annum to meet their immediate needs. Thus, in September and October legal persons have increased their debt to the banking system by USD 790 million.
Shifting focus towards borrowing in foreign currency has increased the credit and foreign exchange risks for the banking system. Part of the foreign currency loans are long-term loans, which means that if foreign currency rate changes substantially, there will be problems with servicing these loans. In addition, the projected external debt growth as committed to the ACF EurAsEC in a letter of intent has already been exceeded, and further growth in lending is not desirable, because negotiations about the following tranche will start soon.
Therefore the National Bank has to find ways to restrict corporate lending in foreign currency. Lending in foreign currency for working capital purposes at the cost of the bank’s currency reserves has been restricted. However, if a bank has the opportunity to attract foreign capital from the foreign headquarters or from credit agreements with foreign partners, it is allowed to do so.
So, on the one hand, the National Bank reduces the pressure on the foreign exchange market by limiting the demand from the banks and legal enterprises and reduces the credit risks of the banking system – if there are any significant exchange rate fluctuations, and, on the other hand, ensures customers inflow to the banks, which offer borrowing in foreign currency, encouraging foreign currency inflow in the Belarusian economy. Thus, foreign contractors bear currency risks.
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.