Friday, May 1, 2015

1/5/15: Russian Economy: Latest Forecasts and Debates


Russian economy has been surprising to the upside in recent months, although that assessment is conditioned heavily by the fact that 'upside' really means lower rate (than expected) of economic decline and stabilised oil prices at above USD55 pb threshold. On the former front, 1Q 2015 decline in real GDP is now estimated at 2.2% y/y - well below -3% official forecast (reiterated as recently as on April 1) and -2.8% contraction forecast just last week, and -4.05% consensus forecast for FY 2015. It is worth noting that contraction in GDP did accelerate between February (-1.2% y/y) and March (-3.4% y/y). 2Q 2015 forecast remains at -3%.

In line with this, there have been some optimistic revisions to the official forecasts. Russian economy ministry has produced yet another (fourth in just two months) forecast with expected GDP decline of 2.8% this year. Crucially, even 2.8% decline forecast figure still assumes oil price of USD50 pb. Similarly, the Economy Ministry latest forecast for 2016 continues to assume oil at USD60 pb, but now estimates 2016 GDP growth at +2.3%

These are central estimates absent added stimulus. In recent weeks, Russian Government has been working on estimating possible impact of using up to 80% of the National Welfare Fund reserves to boost domestic infrastructure investment. This is expected to form the 3 year action plan to support economic growth that is expected to raise domestic investment to 22-24% of GDP by 2020 from current 18%. The objective is to push Russian growth toward 3.5-4% mark by 2018, while increasing reliance on private enterprise investment and entrepreneurship to drive this growth.

An in line with this (investment) objective, the CBR cut its key rate this week by 150bps to 12.5%. My expectation is that we will see rates at around 10%-10.5% before the end of 2015. From CBR's statement: "According to Bank of Russia estimates, as of 27 April, annual consumer price growth rate stood at 16.5%. High rates of annual inflation are conditioned primarily by short-term factors: ruble depreciation in late 2014 — January 2015 and external trade restrictions. Meanwhile, monthly consumer price growth is estimated to have declined on the average to 1.0% in March-April from 3.1% in January-February, and annual inflation tends to stabilise. Lower consumer demand amid contracting real income and ruble appreciation in the recent months curbed prices. Inflation expectations of the population decreased against this backdrop. Current monetary conditions also facilitate the slowdown in consumer price growth. Money supply (M2) growth rate remains low. Lending and deposit rates are adjusted downwards under the influence of previous Bank of Russia decisions to reduce the key rate. However, they remain high, on the one hand, contributing to attractiveness of ruble savings, and, on the other hand, alongside with tighter borrower and collateral requirements, resulting in lower annual lending growth."

There is an interesting discussion about the ongoing strengthening in Russian economic outlook here: https://fortune.com/2015/04/29/russia-economy-resilience/. Here's an interesting point: "Russian-born investment banker Ruben Vardanyan pointed out that the collapse of the ruble left much of the economy untouched, with roughly 90% of the population not inclined to buy imported goods. And that population, Vardanyan points out, has only increased its support for Vladimir Putin in the months following the imposition of sanctions." I am not so sure about 90% not inclined to buy imports, but one thing Vardanyan is right about is that imports substitution is growing and this has brought some good news for producers in the short run, whilst supporting the case for raising investment in the medium term.


Meanwhile, The Economist does a reality check on bullish view of the Russian economy: http://www.economist.com/news/finance-and-economics/21650188-dont-mistake-stronger-rouble-russian-economic-recovery-worst-yet.

The Economist is right on some points, but, sadly, they miss a major one when they are talking about the pressures from USD100bn of external debt maturing in 2015.

Here is why.

Russia's public and private sector foreign debt that will mature in the rest of this year (see details here: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html) does not really amount to USD 100bn.

Foreign currency-denominated debt maturing in May-December 2015 amounts to USD68.8 billion and the balance to the USD100bn is Ruble-denominated debt which represents no significant challenge in funding. Of the USD68.8 billion of foreign exchange debt maturing, only USD2.01 billion is Government debt. Do note - USD611 million of this is old USSR-time debt.

Corporate liabilities maturing in May-December 2015 amounts to USD45.43 billion. Of which USD12.46 billion are liabilities to direct investors and can be easily rolled over. Some USD963 million of the remainder is various trade credits and leases. Also, should the crunch come back, extendable and cross-referenced. Which leaves USD32.07 billion of corporate debt redeemable. Some 20% of the total corporate debt is inter-company debt, which means that - roughly-speaking - the real corporate debt that will have to be rolled over or redeemed in the remaining months of 2015 is around USD26-27 billion. Add to this that Russian companies have been able to roll over debt in the markets recently and there is an ongoing mini-boom in Russian corporate debt and equity, and one can be pretty much certain that the overall net burden on foreign exchange reserves from maturing corporate debt is going to be manageable.

The balance of debt maturing in May-December 2015 involves banks liabilities. All are loans and deposits (except for demand deposits) including debt liabilities to direct investors and to direct investment enterprises. Which means that around 25-33% of the total banks liabilities USD26.57 billion maturing is cross-referenced to group-related debts and investor-related liabilities. Again, should a crunch come, these can be rolled over internally. The balance of USD19.9 billion will have to be funded.

So let's take in the panic USD100 billion of foreign debt claimed to be still maturing in 2015 and recognise that less than USD50 billion of that is likely to be a potential (and I stress, potential) drain on Russian foreign exchange reserves. All of a sudden, panicked references in the likes of The Economist become much less panicked.

Meanwhile, Russian economy continues to post current account surpluses, and as imports continue to shrink, Russian producers' margins are getting stronger just as their balance sheets get healthier (due to some debt redemptions). It's a tough process - deleveraging the economy against adverse headwinds - but it is hardly a calamity. And The Economist, were it to shed its usual anti-Russian biases, would know as much.

That said, significant risks remain, which means that a prudent view of the Russian economy should be somewhere between The Economist's scare crow and the Fortune's and the Economy Ministry's cheerleading. Shall we say to expect, on foot of current data and outlook, the 2015 GDP growth to come in at -3.5-4%, with 2016 economic growth to come in at +1.5-2%?


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