Consequences for Belarus
The world stock markets have suffered a serious blow in the past several weeks. The list of hit countries also includes Russia and even Ukraine. However, the Belarusian economy does not seem to be affected by the world financial crisis. The European Radio for Belarus asks Siarhei Zhabanau, en economic observer with BelGazeta business daily, why Belarus has stayed away from the world crisis.
In the view of the commentator, Belarasians have nothing to do with the problems of stock markets simply because there is no real stock market in Belarus.
"Why does it happen? There are no stock exchanges in Belarus. This question should actually be addressed to our government - not me. Personally, I don't see a big problem that we do not have a full-fledged stock market. It is there, but it is just at the stage of birth. I think it is good, because all of us are not living through a panic now".
The reason is simple: Belarus does not have big companies like banks in Europe or Russian petrochemical giants.
"We don't have securities that could lose 15-17 percent of their value daily. We are now talking about the crisis of Russian big companies, Ukrainian steel plants and large Western banks and financial structures. We have nothing like that, so people should not be worried"'.
Stock markets, Siarhei Zhbanau says, allows to make huge money on condition that economy is healthy.
"This is like two side of the coin. On the one hand, it is very good to have a national stock exchange when economy is on the rise. When economy is in crisis, it becomes disadvantageous to have a powerful stock exchange. In the first case, everyone is happy because stocks allow making huge money. During the crisis, people start losing a lot of money".
It appears that Belarus has chosen its own way of economic development. There is no stock market in Belarus, so world's financial turmoil does not affect this country. The only bad thing is that we can't develop our economy with the help of a stock market like it is done in the other countries.
Process of Financial Crisis
Before a financial crisis materializes, there is a currency crisis. The financial liberalization on interest rates, lending, foreign investment, as well as fixed exchange rates, usually leads to financial capital inflow due to high interest rates. The expansion in lending without proper management training, lack of sufficient knowledge in risk assessment tools on loans, and the existing weak financial regulations leads to excessive risk-taking by local financial institutions. Depositors and investors that were behind the financial capital inflow perceived their funds to be safe because of fixed exchange rates and the implicit safety net of the government and the IMF. Fixed exchange rates may encourage risk-taking behavior by the financial institutions and investors. The excessive risk-taking leads to loss and deterioration of the net value of financial institutions and, consequently, produced insolvency and reduced lending which in turn creates a credit crunch and pushes the economy closer to financial crisis. The decline of stock markets before or during the financial crisis creates more uncertainty in the market. All of the above creates the proper circumstances for financial crisis in developing economies, where loans are short-term and many of them denominated in foreign currency.
The short term loan contracts and their denominations in foreign currencies move the currency crisis into financial crisis in the following manner. The devaluation of the currency increases the debt burden of domestic firms (especially in Indonesia where devaluation reached 75%), that had foreign debt denominated in foreign currencies. The devaluation reduces the net value of the financial institutions creating banking crisis. The devaluation reduces the ability of households and firms to pay their debt and, consequently, reduces the assets of the financial institutions. Also, devaluation of currency increases the liabilities of financial institutions because the inflow of foreign funds comes as short term loans denominated in foreign currencies. The decrease of financial institutions’ assets and the increase of liabilities combined with short term loans denominated in foreign currencies create a liquidity problem for the financial institutions. This insecurity with banks’ viability may create panic forcing many financial institutions to close their doors. Additionally, the devaluation of currency in developing countries increases current and expected inflation, which increases nominal interest rates, weakens some firms and bankrupts a large number of local firms.
The weakness of financial institutions, the high degree of illiquidity, speculative attacks and the inability of the central banks of developing countries to defend the currency may result in currency crisis. Tax on capital should not induce liquidation or outflow of funds as long as net rate of return on capital is larger than proceeds of liquidations of capital. But also, pessimistic expectations can lead to financial collapse of the mid-level income country. The financial collapse would lead not only to financial capital flight but a decline of investment and income below financial autarchy level.
The contractionary fiscal and monetary policies of developing countries were a pre-condition for loan approval from the IMF. These contractionary policies are intended to solve budget deficits and increase interest rates to stop the decline of exchange rates. This process of restructuring increases the number of firms unable to pay their debt.
The financial crisis in developing countries leads banks to increase interest rates and to reduce their lending to achieve capital adequacy ratios. By reducing loans, firms must reduce their production, thus reducing income and increasing unemployment rates, which leads to a reduction in profits for some firms and bankruptcy for other firms. The bankruptcy of some firms worsens the balance sheets of the banks, leads to a further reduction in lending, and starts a new vicious cycle. This vicious cycle may push some banks into collapse. The collapse of any bank reduces the available information about creditworthy borrowers. These creditworthy borrowers may have a difficult time finding alternative suppliers of funds, especially in developing countries. Therefore, creating effective financial regulation is a worthwhile goal to pursue.
The depreciation of currency increases the volume of exports, but firms need working capital in order to expand their production. If banks reduce their lending, then production will decrease instead of expanding.