Ex­change Rate as a 'Shock' Ab­sorber

Flex­i­ble ex­change rate helps the Be­laru­sian econ­omy ad­just to ex­ter­nal shocks

Economy of Belarus - - FRONT PAGE -

Last year Be­larus’ econ­omy came un­der the im­pact of a set of fun­da­men­tal and spec­u­la­tive fac­tors. Fall­ing oil prices and the de­val­u­a­tion of the cur­ren­cies of Be­larus’ ma­jor trad­ing part­ners, the con­tin­u­ing geopo­lit­i­cal ten­sions were among the first rea­sons to cause the volatil­ity on the coun­try’s for­eign ex­change mar­ket. They still con­tinue to af­fect all sec­tors of the econ­omy. What ap­proaches are em­ployed in the coun­try to min­i­mize the neg­a­tive im­pact, and what can be ex­pected in the near fu­ture?

Mar­ket Melt­down

Sharp fluc­tu­a­tions in the global fi­nan­cial and com­mod­ity mar­kets are out of sync with the re­cent gen­eral trends. Nearly a year ago oil mar­kets en­tered a deep down­ward spi­ral un­moored from the $100-per­bar­rel mark that had an­chored them for quite some time. Oil prices re­bounded a lit­tle in H1 2015 but then crashed to be­low $43 per bar­rel as of 24 Au­gust. The last time oil fell be­low $46 per bar­rel was at the be­gin­ning of 2009. By the end of Au­gust, oil prices re­cov­ered a bit and rose to $54. How­ever, the prices are highly volatile and are poised for fur­ther de­cline.

One of the main rea­sons for the on­go­ing cri­sis was the oil over­sup­ply due to “the price war” be­tween the oil pro­duc­tion lead­ers: Saudi Ara­bia and the United States. The stock mar­ket tur­bu­lence in Asia, Europe and the United States that started in Au­gust played its part, too. The prices for oil and other com­modi­ties fell fur­ther on the heels of the steep declines in Asian and Euro­pean stock mar­kets. The ex­perts at­tribute the stock cri­sis that started in China to the mar­ket cor­rec­tion that hap­pens ev­ery few years, and also to the in­vestors’ jit­ters in the wake of the Yuan de­val­u­a­tion.

This sit­u­a­tion has a di­rect im­pact on the bud­gets of Rus­sia and Kaza­khstan that de­pend to a large ex­tent on the rev­enues from energy ex­ports. Ad­di­tional fac­tors for Be­larus’ key part­ner Rus­sia were the Ukraine con­flict, the Western sanc­tions, sig­nif­i­cant pay­ments on cor­po­rate for­eign debts and cap­i­tal flight. All of this caused a big drop in the value of the Rus­sian ru­ble.

To­day the ex­change rate can re­spond flex­i­bly to ex­ter­nal and in­ter­nal pres­sures, and this is one of the key fea­tures of the new mon­e­tary regime

The Euro­pean Union, Be­larus’ sec­ond big­gest mar­ket af­ter Rus­sia, is also feel­ing the pain from the slow eco­nomic growth and de­val­u­a­tion. Not to men­tion Ukraine, another Be­larus’ im­por­tant trad­ing part­ner, who is strug­gling with eco­nomic woes and is vir­tu­ally in a state of civil war.

For Be­larus the slump on for­eign mar­kets re­sulted in a con­sid­er­able con­trac­tion of ex­port and fall in rev­enues from the sale of oil prod­ucts. The coun­try has not been in such a dif­fi­cult eco­nomic sit­u­a­tion since the global eco­nomic cri­sis of 2008-2009.

The cur­rency mar­ket as a seg­ment of the fi­nan­cial mar­ket that is most sus­cep­ti­ble to quick changes was among the first to reel from these neg­a­tive trends. All for­eign eco­nomic im­bal­ances and the in­creas­ing de­mand for U.S. dol­lars re­sulted in the ris­ing volatil­ity of the Be­laru­sian ru­ble ex­change rate.

Ex­tra Flex­i­bil­ity

To­day the ex­change rate can re­spond flex­i­bly to ex­ter­nal and in­ter­nal pres­sures, and this is one of the key fea­tures of the new mon­e­tary regime, namely mon­e­tary tar­get­ing which Be­larus in­tro­duced on 1 Fe­bru­ary fol­low­ing the rec­om­men­da­tions of in­ter­na­tional fi­nan­cial or­ga­ni­za­tions.

“The un­der­stand­ing of what is go­ing on in the world econ­omy, the present-day risks cou­pled with the volatil­ity prompted us to change the ap­proaches we used in the mon­e­tary pol­icy. We need to make this pol­icy more flex­i­ble, able to ad­just to the chang­ing for­eign eco­nomic en­vi­ron­ment in or­der to ab­sorb the shocks com­ing from out­side,” Sergei Kale­chits, Deputy Chair­man of the Board of the Na­tional Bank of the Re­pub­lic of Be­larus, said at a round­table ses­sion held in BelTA’s press cen­ter on 25 Au­gust.

This pol­icy makes in­fla­tion its base­line, with the broad money sup­ply used as its in­ter­me­di­ate tar­get and the ru­ble-de­nom­i­nated mon­e­tary base ful­fill­ing its op­er­a­tional func­tions. Pre­vi­ously the an­chor cur­rency was the U.S. dol­lar, and the op­er­a­tional rule was to re­strict daily fluc­tu­a­tions. To­day’s an­chor is the bas­ket of for­eign cur­ren­cies (Rus­sian ru­ble ac­counts for 40% of the bas­ket, U.S. and Euro cur­ren­cies for 30% each) and the rule is to re­strict the amounts of in­ter­ven­tions by the Na­tional Bank.

Sim­ply said, mon­e­tary tar­get­ing aims to con­trol the money sup­ply to curb in­fla­tion, while the pre­vi­ous regime was about the reg­u­la­tion of the ex­change rate. Bankers say that the ex­change rate is in a pegged float now. The ex­change rate was made more flex­i­ble as the Na­tional Bank switched to the new cur­rency trade regime in the form of con­tin­u­ous or­der match­ing which re­placed the cur­rency fix­ing regime on 1 June.

Un­der the new regime which is widely used through­out the world one can place or­ders for the pur­chase and sale of for­eign cur­rency dur­ing the en­tire trad­ing ses­sion. A trade op­er­a­tion is ex­e­cuted when there are match­ing or­ders in the trad­ing sys­tem. The fix­ing regime which was used be­fore meant that all trans­ac­tions with one for­eign cur­rency were con­ducted at a fixed ex­change rate. Now the ex­change rates can vary from trans­ac­tion to trans­ac­tion.

“In fact, this per­tains to the mar­ket-driven ex­change rate for­ma­tion mode which means that the ex­change rate of the na­tional cur­rency vis-а-vis the U.S. dol­lar and other cur­ren­cies de­pends on the de­mand and sup­ply on the cur­rency mar­ket,” the rep­re­sen­ta­tive of the Na­tional Bank said.

It is worth say­ing that the new for­eign ex­change pol­icy of the reg­u­la­tor was wel­comed by the ex­pert com­mu­nity. In par­tic­u­lar, se­nior an­a­lyst of Al­pari Com­pany Vadim Io­sub be­lieves that a

float­ing ex­change rate is the most ad­e­quate ex­change rate for­ma­tion mech­a­nism as it re­flects both the global and do­mes­tic trends.

“The pre­vi­ous ex­change rate for­ma­tion regime ac­cu­mu­lated the im­bal­ances, de­pleted the gold and forex re­serves, which would even­tu­ally lead to the abrupt de­val­u­a­tions of the na­tional cur­rency. The float­ing ex­change rate pol­icy which we have now is ex­pected to fully re­flect and sum up all pos­si­ble in­ter­nal and ex­ter­nal fac­tors, which will help bal­ance the ex­change rate,” the ex­pert ex­plained.

As a re­sult, the mon­e­tary tar­get­ing ap­proach will help ad­dress two ma­jor sets of is­sues: sup­port the com­pet­i­tive­ness of Be­larus’ ex­port and curb in­fla­tion. The H1 2015 sta­tis­tics demon­strate how suc­cess­ful these ef­forts were.

In Jan­uary-June Be­larus had a for­eign trade sur­plus at around $1.2 bil­lion, up some $0.5 bil­lion from the same pe­riod in 2014. The cur­rent ac­count of Be­larus’ bal­ance of pay­ments, in gen­eral, has im­proved sig­nif­i­cantly. In H1 2014 its deficit made up ap­prox­i­mately 7% of the GDP, and now the fig­ure stands at around 1.9% which is nor­mal for the coun­try. Be­larus’ gold and for­eign ex­change re­serves have sta­bi­lized. As for in­fla­tion, in Jan­uary-June it reached 7.3% as against 10.2% in H1 2014. Ex­perts pre­dict that in 2015 in­fla­tion will not ex­ceed 18% plus or mi­nus two per­cent­age points.

“In such highly volatile ex­ter­nal con­di­tions, we have man­aged to suc­cess­fully ful­fill the tasks of macroe­co­nomic bal­anc­ing, which pro­vides a ba­sis for the tran­si­tion from the anti-cri­sis agenda to a de­vel­op­ment strat­egy,” Be­larus’ Econ­omy Min­is­ter Vladimir Zi­novsky stated at an ex­panded par­tic­i­pa­tion ses­sion of the Be­laru­sian gov­ern­ment.

The Econ­omy Min­istry, jointly with other agen­cies con­cerned, has al­ready worked out a strat­egy to re­store the eco­nomic growth with­out dis­tort­ing the gen­eral macroe­co­nomic bal­ance. Ex­port growth and the uti­liza­tion of for­eign loans were named Be­larus’ key re­serves in H2 2015.

Macrosta­bil­ity Fac­tor

Mean­while, the global mar­kets con­tinue suf­fer­ing from in­creased volatil­ity. In such con­di­tions, pre­dict­ing prices for oil and se­cu­ri­ties and, ac­cord­ingly, fore­cast­ing for­eign ex­change rates are like read­ing tea leaves.

“To­day Be­larus’ cur­rency mar­ket is highly de­pen­dent on global trends: oil prices, stock mar­kets and for­eign cur­ren­cies,” Vadim Io­sub ex­plained. “As the ex­ter­nal fac­tors are too many, it is dif­fi­cult to give pre­dic­tions about even one par­tic­u­lar as­pect. If we take, for ex­am­ple, the price for oil, I think it is equally likely that it will rise by 30% or fall by the same mag­ni­tude

In Jan­uary-June Be­larus had a for­eign trade sur­plus at around $1.2 bil­lion, up some $0.5 bil­lion from the same pe­riod in 2014

As the global mar­ket tur­bu­lence and other mar­ket fac­tors grad­u­ally sub­side, the volatil­ity of the Be­laru­sian ru­ble ex­change rate will de­crease too

in the next sev­eral months,” the ex­pert said.

For ex­am­ple, a de­crease in oil sup­ply in con­nec­tion with the lower pro­duc­tion of hard-to-get oil and the bank­ruptcy of some oil com­pa­nies can tip the scales in fa­vor of a pos­i­tive out­come. Be­sides, in late Au­gust the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (OPEC) voiced readi­ness to take mea­sures “for the oil mar­ket to achieve equi­lib­rium with fair and rea­son­able prices.” In turn, Iran’s de­sire to re­claim its share on the oil mar­ket and the on­go­ing com­pe­ti­tion be­tween the USA and Saudi Ara­bia can con­trib­ute to the neg­a­tive trend.

Oil prices and the Rus­sian ru­ble ex­change rate are also sig­nif­i­cantly af­fected by the risks as­so­ci­ated with the state of the Chi­nese econ­omy and the in­ter­est rate of the U.S. Fed­eral Re­serve Sys­tem. For ex­am­ple, if in Septem­ber the FRS de­cides to raise the rate, in­vestors will speed up the with­drawal of cap­i­tal from de­vel­op­ing mar­kets, in­clud­ing Rus­sia, and will show low in­ter­est in raw ma­te­ri­als-based goods, which will have a neg­a­tive im­pact on oil prices and the Rus­sian ru­ble ex­change rate.

In this highly un­pre­dictable con­text a flex­i­ble ex­change rate of the Be­laru­sian ru­ble is ex­pected to soften the blow and re­duce the im­bal­ance. In re­sponse to out­side fac­tors, mainly to the fluc­tu­a­tions in the Rus­sian ru­ble ex­change rate and oil prices, the dy­nam­ics of the Be­laru­sian ru­ble rate al­lows main­tain­ing eco­nomic com­pet­i­tive­ness and busi­ness ac­tiv­i­ties act­ing as a macroe­co­nomic sta­bil­ity fac­tor.

“As the global mar­ket tur­bu­lence and other mar­ket fac­tors grad­u­ally sub­side, the volatil­ity of the Be­laru­sian ru­ble ex­change rate will de­crease too, the Na­tional Bank rep­re­sen­ta­tives prom­ise.

In the near fu­ture the cen­tral bank will fo­cus on en­sur­ing price sta­bil­ity in or­der to pre­serve the pur­chas­ing power of the na­tional cur­rency. The sta­bi­liza­tion of in­fla­tion pro­cesses will en­sure the eco­nomic sta­bil­ity in the mid-term per­spec­tive and will foster longterm eco­nomic growth.

At the same time Be­larus con­tin­ues to de-dol­lar­ize its econ­omy, di­ver­sify ex­ports, and de­velop small and medium-sized busi­nesses. These are the pri­or­ity ar­eas of pro­gram doc­u­ments of the Be­laru­sian gov­ern­ment and the Na­tional Bank. They are ex­pected to en­hance the coun­try’s re­silience to the ex­ter­nal threats. In­creas­ing the vol­ume of na­tional cur­rency trans­ac­tions within the Eurasian Eco­nomic Union can play an im­por­tant role in over­com­ing the eco­nomic de­pen­dency on the U.S. dol­lar and en­sure closer co­op­er­a­tion be­tween the mem­ber-states in the macroe­co­nomic, mon­e­tary and fi­nan­cial ar­eas.

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