Saturday, October 4, 2014

4/10/2014: IMF on Russia: What Never Hurts Repeating...


As predicted (see here: http://trueeconomics.blogspot.ie/2014/09/2992014-russian-economy-briefing-for.html) IMF came in weighing heavily on the doom for its outlook for Russian economy this week.

In its "Russian Federation: Concluding Statement for the September 2014 Staff Visit" report from  October 1, 2014, the Fund notices (quite a sharp eyesight there) that: "Geopolitical tensions are slowing the economy already weakened by structural bottlenecks."

According to the IMF, the solution is for the Central Bank of Russia (CBR) to "tighten policy rates further to reduce inflation and continue its path towards inflation targeting underpinned by a fully-flexible exchange rate." Investment is falling down, capital flight de-accelerated but remains a problem, deposits are desperately needed for the banks to stay liquid (absent foreign funding sources and coming bonds maturities), so has to kill the economy to keep economy alive dilemma...

On fiscal side, things are ok-ish: "While the projected overall fiscal stance is appropriately neutral in 2015, the needed fiscal consolidation should resume in the following years… The proposed federal budget, which is consistent with the fiscal rule, envisions a loosening in 2015. However, this is offset by a tightening at the sub-federal levels. This strikes an appropriate balance between the need to consolidate in the medium term, with the non-oil deficit remaining near historical high, and the need for supportive fiscal policy in the face of the current downturn." And as I noted in the note linked above: "The use of the National Wealth Fund for domestic infrastructure projects may be appropriate to consider if done in the context of the budget process and subject to appropriate safeguards. The diversion of contributions from the fully-funded pillar weakens the viability of the pension system, creates disincentives to save, and dilutes the credibility of the fiscal rule."

On growth: "The economic outlook appears bleak. GDP is expected to grow by only 0.2 percent in 2014 and 0.5 percent in 2015." Not as gloomy as the World Bank but uuuuugly…
Drivers, predictably are:

  • "Consumption is expected to weaken as real wages and consumer credit growth moderate." No… wait… they are already weak and moderated… 
  • "Geopolitical tensions—including sanctions, counter-sanctions, and fear of their further escalation—are amplifying uncertainty, depressing confidence and investment. Capital outflows are expected to reach USD 100 billion in 2014 and moderate somewhat but remain high in 2015." Again, no surprises here.
  • "Inflation is projected to remain over 8 percent by the end of 2014 mostly due to an increase in food prices, caused by import restrictions, and depreciation of the ruble. In the absence of further policy actions, inflation is expected to stay above target in 2015." That we know too. No surprises here. 

On banks, pretty much same as I have been saying: "Increased oversight and heightened financial stability remain a priority. Banks and the corporate sector are facing a challenging environment due to the weak economy, limited access to external financing, and higher financing costs. Existing financial buffers together with appropriate policy responses by the CBR have limited financial instability thus far. Nonetheless, the current uncertain environment could create difficulties in individual banks and businesses, even in the near term. In case of acute liquidity pressures, emergency facilities should be temporarily offered to eligible counterparties, against appropriate collateral, priced to be solely attractive during stress periods."

On structural side, I would have expected more clarity. Instead, we have more generalities: "Despite the slowdown, the economy is expected to have limited excess capacity owing to structural impediments to growth… Even if [geopolitical] uncertainty dissipates next year, domestic demand and potential growth are projected to remain weak in the medium term due to insufficient investment and deterioration in productivity. Potential growth is projected to be about 1.2 percent in 2015, reaching 1.8 percent in 2019, with downside risks. Structural reforms are needed to provide appropriate incentives to expand investment and allocate resources to enhance efficiency. Protecting investors, reducing trade barriers, fighting corruption, reinvigorating the privatization agenda, improving competition and the business climate, and continuing efforts at global integration remain crucial to revive growth."

Then again, all this you could have heard at our briefing breakfast for IRBA… to stay ahead of the IMF analysis… 
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