Last week the International Monetary Fund and Belarus’ Central Bank published several reports on the state of the country’s financial sector. While the Belarusian side is being more discreet, the IMF experts underline the need for urgent additional measures to enhance financial stability.
One of the key recommendations given by the experts is to increase banking solvency. “There is an urgent need to transition to an independent and risk-based oversight of the financial sector. A well-functioning financial safety net should be put in place. Bank FX liquidity buffers should be enhanced, including through a gradual increase in the FX component of reserve requirements on foreign currency deposits”, the IMF warns.
Besides, following the results of the assets quality check, Belarusian authorities are recommended to “firmly address any needed recapitalization and restructuring of banks”. The IMF also draws attention to the need to solve the situation with bad assets that have been growing for the past nine months.
To deal with problem loans, experts suggest a complex approach paired with reforms of state-owned enterprises and the reduction of directed lending.
In general, experts say, the situation in the Belarusian financial sector is very tense. Credit risk is being reflected in increasing NPLs while provisioning rates remain low. Deposit outflow has slowed, but deposits remain well below their 3Q2015 peaks. The IMF called recently introduced measures to distinguish between revocable and irrevocable deposits “steps in the right direction”.
“The banking system faces significant challenges. Bank profitability is being squeezed. Banks also face significant challenges adjusting to cuts in government directed lending and guarantees. Given the significant state presence in the banking sector (state-owned banks account for about 65 percent of the banking system assets), any needed recapitalization relating to the state bank-SOE nexus has implications for the budget”, the report reads.
Experts recognize that the authorities are “taking some important steps to reduce financial sector vulnerabilities”. In 2015, they closed four small banks, removed 1.5 percent of GDP in bad assets from state-owned bank balance sheets, and established a Financial Stability Department in the NBRB to monitor macro-financial linkages and risks.
Domestic credit growth remains subdued, despite excess domestic currency liquidity in the system and lower interest rates. Banks remain risk averse and face dim near-term market prospect, the report concludes.
The IMF mission headed by Peter Dohlman is working in Belarus on 19 September – 1 October. The purpose of the visit is to discuss economic reforms that an IMF credit program can back up.
Full report here.