CC BY
12
currency market: stability gained at the cost of private incomes
Alexander Mukha
Summary
In 2016, the stability of the Belarusian domestic money market was achieved through massive net sales of foreign exchange by households amid the marked decrease in personal assets and incomes in real terms. The growth of foreign exchange supply by households helped the state to make up for most of the lost currency revenues caused by the drop in export supplies of Belarusian-made oil products.
In 2017, supply of foreign exchange by Belarusian households will further decline, which will aggravate risks associated with the unsettled oil and gas dispute between Belarus and Russia (including social and political risks). The additional downward pressure on the exchange rate of the Belarusian ruble and gold and foreign exchange reserves of the state will become a result of significant payments by Belarusian residents under their foreign debt obligations amid delays in the receipt of external financing.
Trends:
• Increase in foreign exchange supply by households, which produced a beneficial effect on changes in the key indicators of the domestic money market;
• Drop in the export of oil products and potash fertilizers, and resulting reduction in currency proceeds (a new record low since 2009);
• Economic safety limit in terms of the relative ratio of residents' external debt was significantly exceeded;
• Current level of gold and foreign exchange reserves fails to meet international reserve adequacy standards.
Money market records
In 2016, massive net sales of foreign exchange by households became the main factor ensuring the stability of the domestic money market. During the period under review, households sold USD 1.894 billion on a net basis (including cashless transactions)1 — a record high since Belarus gained indepen-
Hereinafter: "Statistics." National Bank of the Republic of Belarus. Web. 21 March 2017. <http://www.nbrb.by/engl/>.
dence. During the same period, non-residents sold a net USD 452.5 million, whereas companies bought USD 206.1 million on a net basis.
The structure of net foreign exchange supply by households looked at follows: net sales of foreign exchange — USD 2.441 billion (another all-time high) and conversion of ruble-denominated deposits to foreign exchange deposits on a net basis — minus USD 547.1 million. As a result, the net supply of foreign exchange by individuals and non-residents (USD 2.347 billion), alongside other factors, enabled Belarus to increase its gold and foreign exchange reserves by USD 751.3 million (or by 18%) to USD 4.927 billion as of 1 January 2017 (despite significant payments under external and internal debt obligations of the state denominated in foreign exchange).
Therefore, last year, households not only contributed quite generously to the stability of the domestic money market, but also helped the government and the National Bank to comply with the schedule of payments under external and internal obligations denominated in foreign exchange. At the same time, individual foreign exchange deposits dropped by USD 782.1 million (or by 9.5%) to USD 7.431 billion as of 1 January 2017.
Individual savings with banks denominated in foreign exchange (foreign exchange deposits, precious metals, and currency-denominated bonds) narrowed by USD 509 million (by 5.8%) to USD 8.275 billion as of 1 January 2017. Therefore, the amount of foreign exchange that individuals sold on a net basis (originally stored at home, rather than with banks) can be estimated at USD 1.932 billion — Belarusians had never before sold so much cash to domestic banks.
According to our calculations, in 2016, households were forced to sell a third of their unorganized savings in foreign exchange. If this pace persists, Belarusians would have sold all of their unorganized savings within two years (other things being equal).
What are the reasons for this massive net supply of foreign exchange by households? Unfortunately, the main reason is the marked decrease in personal incomes in real terms. Be-
larusians began to withdraw their foreign exchange deposits and sell foreign currency in order to be able to maintain an acceptable level of consumption of commodities and services.
According to our calculations, in 2016, the average wage paid to Belarusian workers (excluding micro- and small organizations without departmental affiliation) went down by 12.7% year-on-year from USD 413.6 to USD 361.12. The combined wage bill of Belarusian workers (excluding micro- and small organizations without departmental affiliation) decreased even more, by USD 2.297 billion (by 15.5%) to USD 12.506 billion. The decrease was due to not only the reduction in the amount of the average wage, but also the drop in the average number of workers during the period under review by 95,801 people3 (from 2.982 million in 2015 to 2.886 million in 2016). It appears that Belarus owes the stability of its internal money market to the impoverishment of its citizens.
Risks of the oil and gas spat
According to the National Bank, last year's currency proceeds generated by commodity and service exports, incomes and transfers of nonfinancial companies and households fell by 10.3% from 2015, or by USD 3.401 billion to USD 29.623 billion, a new record low since 2009 (USD 25.255 billion). The drop was mostly due to the reduced export of Belarusian-made oil products, crude oil, and potash fertilizers. We can illustrate the curtailment of Belarusian export supplies using the following statistics:
• export of Belarusian goods — minus USD 3.245 billion from 2015;
• export of oil products — minus USD 2.74 billion;
Based on the average weighted U.S. purchase price in the market for cash currencies: in 2015 - BYN 1.626853 per USD 1 (redenominated), in 2016 - BYN 1.9995 per USD 1.
Hereinafter: "Official statistics." National Statistical Committee of the Republic of Belarus. Web. 21 March 2017. <http://www.belstat.gov.by/en/ ofitsialnaya-statistika/>.
• export of potash fertilizers — minus USD 651.112 million;
• export of crude oil, including gas condensate — minus USD 107.701 million;
• export of other goods — plus USD 253.866 million. Therefore, the reduction in supplies of Belarusian oil products resulting from shorter deliveries of Russian crude amid the unsettled gas row between Belarus and Russia accounted for 84.4% of the overall decrease of Belarusian commodity export during the period under review.
Under the circumstances, the delay in the receipt of the third and fourth installments of the loan from the Eurasian Fund for Stabilization and Development (EFSD) totaling USD 600 million is also noteworthy. Apparently, the reasons for the delay are purely political and are associated with the gas spat. In late February 2017, Deputy Prime Minister of Russia Arkady Dvorkovich said that Belarus's debt to Russia for natural gas had exceeded USD 600 million.
Further delays in the settlement of the oil and gas dispute may have some serious negative consequences for the Belarusian economy, including:
• reduction in gold and foreign exchange reserves;
• depreciation of the Belarusian ruble vis-à-vis the main foreign currencies;
• lower foreign exchange proceeds and export of Belarusian oil products;
• aggravation of the financial situation at Belarusian oil-processing plants;
• lower amount of export duties transferred to the state budget;
• reduction in state expenditures (including spending on social needs);
• poorer external stability, creditworthiness, and economic security parameters.
Furthermore, against this backdrop, the Belarusian government may be faced with the need to resort to the "belt-tightening" practice with respect to Belarusians who have already grown poorer, which may aggravate certain social and political risks, given the country's significant social stratification.
Foreign debt: beyond economic security
In 2017, the increase in payments under foreign obligations of Belarusian residents (companies, banks, government, the National Bank) will cause additional pressure in the domestic money market causing the Belarusian ruble to depreciate against foreign currencies.
According to the NBB, in 2016, the combined debt of Belarusian residents went down by only USD 691.1 million (or by 1.8%) to USD 37.567 billion as of 1 January 2017, a new record high of 79.7% of GDP. Therefore, the relative external debt ratio exceeded the economic security threshold of not more than 60% of GDP. Belarusian residents had never experienced such a debt pressure.
It should be noted that the deterioration of the relative foreign debt ratio was caused exclusively by the drop in the U.S. dollar equivalent of Belarus's GDP amid the depreciation of the domestic currency and economic slump. According to our calculations, in 2016, Belarus's GDP in the U.S. dollar equivalent went down by USD 8.104 billion (by 14.7%) to USD 47.165 billion, a record low since 2007, when it was reported at USD 45.276 billion). As of 1 January 2017, the structure of Belarus's gross foreign debt broken down by economic sectors looks as follows (in descending order):
• government (USD 14.151 billion);
• non-financial organizations, households, and noncommercial organizations servicing households (USD 13.566 billion);
• banks (USD 5.915 billion);
• direct investments within the framework of intercompany lending (USD 1.889 billion);
• central bank (USD 1.475 billion);
• other financial organizations (USD 571.3 million).
On a per capita basis, the country's foreign debt decreased to USD 3,952.4 as of 1 January 2017. In the BYN equivalent, it amounted to BYN 7,740.8 per person, or BYN 16,792.7 per employed person, which is equivalent to 20.9 wages (based on the average wage of BYN 801.6 in December 2016). In other words, in order for Belarus to pay its foreign debt in full (includ-
ing interests), Belarusians will have to work for more than 21 months.
In 2016, Belarus spent USD 6.31 billion to repay its foreign debt, which is equivalent to 13.2% of GDP, or 21.2% of the export of commodities and services. To repay the principal debt Belarus spent USD 4.901 billion, and USD 1.409 billion was spent on interests and other payments. The government paid USD 1.46 billion to meet its debt obligations, or 16.5% of the republican budget revenues. The schedule of upcoming foreign debt payments as of 1 January 2017 includes USD 45.651 billion worth of payments of the principal debt and interests. The combined debt burden of the state is associated with the servicing and repayment of debts of the government, monetary authorities, as well as state banks and companies with a stake belonging to the state in excess of 50%. Therefore, in 2016, the foreign debt ofthe public sector according to the broad definition, along with the foreign debt of the private sector secured by the state dropped by USD 173.5 million (or by 0.8%) to USD 22.382 billion as of 1 January 2017 (Table 1), equivalent to 59.6% of the combined foreign debt of Belarusian residents.
Table 1. Foreign debt of the public sector according to the broad definition, along with the foreign debt of the private sector secured by the state in 2016, USD mln
Indicators 1 January 2016 1 January 2017 Change
USD mln %
Foreign debt of the public sector according to the broad definition, along with the foreign debt of the private sector secured by the state, including 22,555.7 22382.3 -173.5 -0.8
1) foreign debt of the public sector according to the broad definition 22,517.6 22,382.3 -135.4 -0.6
— state administration 12,972.5 14,151.1 1,178.6 9.1
— central bank 1,744.6 1,475.4 -269.2 -15.4
— banks 2,819.1 2,632.6 -186.5 -6.6
— other sectors 4,981.4 4,123.1 -858.3 -17.2
2) foreign debt of the private sector secured by the state 38.1 0.0 -38.1 X
Source: National Bank of Belarus.
Short-term foreign debt obligations of Belarusian residents (based upon remaining maturity) dropped by USD 1.499 billion (or by 8.5%) to USD 16.118 billion as of 1 January 2017. The debt is measured by adding the amount of unpaid short-term foreign debt to the amount of unpaid long-term foreign debt due to be repaid within one year (based on the original maturity).
Overdue foreign debt of Belarusian residents decreased by USD 65.7 million (or by 6.5% to USD 938.5 million as of 1 January 2017. Overdue foreign debt of the public sector according to the broad definition went down by USD 70.8 million (or by 24.7%) to USD 215.8 million at the start of the year.
In 2017, Belarusian residents will have to pay USD 17.168 billion to repay their foreign debts (including debt refinancing). As of 1 January 2017, Belarusian gold and foreign exchange reserves amounted to USD 4.927 billion, which was enough to cover 28.7% of upcoming debt payments, whereas to meet the Guidotti standard reserves should be enough to pay 100% of the debt incurred by residents (government, central bank, companies and banks).
Therefore, the current level of gold and foreign exchange reserves of Belarus fails to meet international reserve adequacy and economic security standards, which, in case of a negative scenario, may jeopardize the domestic money market.
Conclusion
In 2017, households will remain net sellers of foreign exchange; however, net sales might at least halve from the year 2016, with all the negative consequences that come with it. In other words, the state will hardly be able to rely on households' fall money in the near term. The drop in foreign exchange supply by the population will bring about faster depreciation of the Belarusian ruble vis-à-vis the main foreign currencies.
Against this backdrop, the government and the National Bank will increasingly require new external financing. However, if the oil and gas dispute between Belarus and Russia persists, new installments of the EFSD loan will be delayed as well. At the same time, prospects of taking a new IMF loan as part of
the extended facility remains vague (mostly due to political obstacles). Without a new IMF loan Belarus will find it harder to place a third issue of sovereign Eurobonds.
A positive outcome of the oil and gas spat will improve the situation in the Belarusian economy to some extent. Otherwise, some economic, social, and political risks in the country may aggravate, which, amid the belt-tightening policy might pose an additional threat to the stability of the domestic money market of Belarus.
