Thursday, April 27, 2017

27/4/17: Russian Economy Update, Part 2: Two Key Sectors

Two key sectors to watch

Now, looking at some sectors across the Russian economy

Manufacturing:

  • In 2015, total volume of manufacturing output dropped 5.4% and in 2016 it was basically unchanged on foot of robust growth in the chemical sector (+5.6% growth) and food sector (ca 2% growth)
  • Other positive growth sectors were Pulp & Paper and Rubber & plastics, Wood products and Machinery and Equipment. The latter sector has been in a free-fall since 2012
  • Negative growth continued in Transport vehicles (negative growth since 2014), Metals and products (also in decline since 2014)
  • Production of oil products fell, ending years of growth starting even before 2007
  • Construction materials experienced their second year of declining output
  • Electrical machinery & equipment continued to contract for the fourth year in a row
  • Corporate Leverage:
    • Overall, economy continued to deleverage out of debt, especially external debt. CBR data shows that by the end of 2016, private sector external debt stood at USD470 billion, of which more than ¾ was held by non-financial corporates and ¼ held by the banks.
    • The external debt/GDP ratio was stable and benign at 36%
    • Corporate debt is largely - 80% - non-ruble denominated, while the same number for the banks was around 87%
    • Corporate deleveraging slowed down substantially in 2016 as debt rollovers fell and debt renegotiations/restructurings declined
    • Changes in ruble valuations had positive effect on debt burden in the oil and gas sector (forex earnings) and negative effect on debt burden in domestic producers
    • If in 2014-2015, companies used receipts of funds from parent holding enterprises to roll over maturing debt, in 2016 these funds were increasingly used to pay down debt. In effect this means that the first part of the deleveraging cycle has swapped external debt for internal debt, while current phase of the cycle is witnessing overall debt levels reductions.



Banking sector:

  • In contrast to 2014-2015, the ruble valuations acted largely to reduce debt burdens in the banks, as ruble appreciation in 2016 supported the forex valuation of the foreign debt 
  • Banks deleveraging continued in 2016, at a pace that is roughly ½ the rate of 2015 and 2014 
  • Data from the CBR show total banking sector assets fell last year by 3.5% in nominal terms
  • Controlling for FX effects (ruble appreciation), total assets were up ca 2% at the end of 2016, compared to the end of 2015
    • Stock of loans outstanding to the corporate sector was down roughly 4%, while stock of loans to households rose by more than 1%
    • However, overall household credit contracted 7% in 2015, making 2016 recovery weak 
  • Non-performing loans (NPLs) are declining as a share of the assets base, with decline accelerating in recent months
    • NPL ratio for corporate loans still exceeded 6%
    • Household credit NPL ratio was about 8%
  • Aggregate banking sector 2016 profits rose five-fold to $15 billion y/y
  • Three large SOE banks (Sberbank, VTB and Gazprombank) accounted for over half of the banking sector profits
  • The CBR has continued to weed-out poorly run and non-performing banks using tools ranging from full shut down to forced mergers 
    • At the start of 2017 there were 623 active credit institutions in Russia, of which 205 institutions had general banking licenses
    • At the same time in 2016 there were 733 active credit institutions


Post a Comment