Ruble Faces Backsliding

Three factors of the devaluation of the Belarusian currency are voiced.

Financial adviser of OOO Forex Optimum Zhanna Kulakova writes in the Belarusians and Market magazine that dependence on the Russian market and strong dollar, and huge foreign debts will influence the Belarusian ruble and will keep it from strengthening.

Russian Ruble-Linked

Since the beginning of 2018 the Belarusian ruble has got stronger against the currency basket of the National Bank only by 0.9%. Though currency fluctuations were much more noticeable. Since the beginning of the year dollar has grown by 8.9%, euro - by 3%, the Russian ruble lost 7.8%.

The Belarusian ruble has strengthened against the drop of the Russian ruble, and the decline of the latter one is determined by geopolitical factors. Amid the extension of anti-Russian sanctions and threats of imposition of restrictions to investments in the Russian public debt, Russia has faced large-scale sale of federal bonds. As as result, since the beginning of the year the Russian ruble has lost 16% against bi-currency basket of the Russian Central Bank.

Trade dependence of Belarus on Russia remains: a half of the foreign trade turnover goes to Russia.

In this situation the strengthening of our ruble against the Russian one may cause problems in foreign trade. The import increase and the export drop are quite possible, which may trigger imbalances in the domestic currency market and cause the weakening of the national currency of Belarus. In other words, our market has allegedly missed to completely deal with problems linked to the Russian ruble, and some decline of the national currency is possible in future.

It can be evaded, if the Russian ruble gains strength in the foreseeable future. However, given geopolitical risks which remain such a scenario is unlikely to be reliable. Moreover, further weakening of the Russian currency may occur, caused not only by sanctions, but by the situation on the oil market. Over the past month and a half Brent barrel has dropped by more than 20% and reached the value fixed in the beginning of 2018. The Russian currency has lost one of its major mean of support, as well as the federal budget has lost a significant part of earnings.

Hard Dollar

One more external factor which influenced the currency rate of Belarus is a visible strengthening of dollar on the international market. Since the beginning of the year the American currency has increased by 6.3%. At that, no global changes of economic origin has occurred in the USA. The Federal Reserve System (FRS) marks up interest rates, "cleans" the market from excess of money brought in the system after the crisis of 2008-2009. The economy still shows a moderate growth, and Donald Trump is still unpredictable. In a moment overall negative attitude towards the American currency has been replaced with positive one. As any currency, dollar is subject to fluctuations on the market.

It's not possible to describe further prospects as positive ones, despite the fact that the US FRS is one of the few which tightens the monetary policy, and dollar is increasingly reliable unlike other world currencies. Political risks related to Trump still remain. The fact that the US President is an active opponent of a strong dollar makes its reasonable to doubt further strengthening of the national currency of this country. However, it can't be excluded that the Belarusian market will have to respond to this fact.

Domestic Risks

The Belarusian ruble has to be aware of both domestic risks mainly related to high public debt and unreasonable growth of wages. In January-September of 2018 an average wage grew by 12.2% in real terms, and the labour efficiency grew only by 4.1%. Such a gap has been for several months already. The situation is somehow smoothed with slow growth of pensions, benefits and other social payments, it results in moderate growth of real income of the population (7.8%).

It all affects the currency market. "Surplus" of money and growth of the devaluation expectations against the strengthening of dollar causes decline in net currency sales by the population. In October individuals sold 44.4 million dollars, in September - only 6.7 million dollars; moreover, previous net sales, as a rule, exceeded 100 million dollars monthly. Given enterprises' transactions, which serve traditionally as buyers of currency, and transactions of non-residents, currency surplus is faltering in the domestic market: it made up only $17 million in October, the deficit of $149 million was recorded in September. If the situation does not change, there are some risks of it, the ruble may be pressured.

The surplus is being spent for the debt service. Given success in the first six months, the currency market of Belarus had the surplus of currency equaled to 961 million dollars. In theory, the situation could promote a significant strengthening of the Belarusian ruble. However, it did not happen in practice, because all currency surplus goes to the replenishment of gold and forex reserves and the service of the foreign debt. The government's reserves are not enough to service debts on its own. New loans are constantly required.

The situation is hardly to change drastically: the debt burden will be high for many years. For example, the draft budget for 2019 implies allocation of 2.8 billion rubles, or 400 million rubles more than in 2018. As 95% of the public debt is made up of foreign currency, the state will continue to buy out surplus of currency in the domestic market until it is possible. I means no strengthening of the Belarusian ruble is foreseen. Its rate will be stable at best; however, gradual backsliding is likely to happen.