Page 52 - bne IntelliNews Russia Country report May 2017

which should result in additional non-oil and gas revenues of RUB 0.4 trln.
● Planned expenditures were boosted by RUB 0.3 trln – to RUB 16.6 trln , which now implies an increase of 1.0% YoY. The expected budget deficit was cut by RUB 0.8 trln to RUB 1.9 trln (from 3.2% of GDP to 2.1% of GDP).
● The reduction of the planned deficit has no impact on projected borrowings , in line with earlier comments by MinFin officials: in 2017, the government still plans net borrowings of RUB 1.1 trln via OFZ placements. However, the planned spending from sovereign funds was only reduced: now the government intends to spend RUB 1.1 trln from the Reserve Fund and National Welfare Fund vs. an initially planned RUB 1.8 trln
The MinFin plans on a federal budget deficit and its financing structure factored in amendments that virtually correspond with our current expectations. That said, certain details should be highlighted.
Firstly, although the oil price forecast looks conservative, the potential for further increase in oil and gas revenues should be limited , as a positive effect from higher oil prices will be partly offset by a higher RUB/USD FX rate, as well as by limited physical volumes of hydrocarbon output and exports under the agreement signed with OPEC member states.
Secondly, a proposed increase in non-oil and gas revenues (up 11% compared with the 2016 figures net of Rosneft privatization effects) looks aggressive amid just a 2% YoY increase in April and due to uncertainty over dividends of state-controlled dividends. To recap, the previous budget parameters, which implied that non-oil and gas revenues would be up by just 6%, factored in an increase in the dividend payout ratio to 50% of IFRS net income for all state-run companies. According to media reports, this estimate remained unchanged with a caveat, that the number is still under discussion. An increase in planned non-oil and gas revenues was fully attributable to the upgraded GDP growth forecast. That said, the country’s GDP grew by just 0.5% YoY in 1Q17 and further acceleration to 2.0% is not evident (see the following comment in our today’s Markets Navigator).
Thirdly, an increase in planned budget expenditures by RUB 300 bln looks quite modest compared with earlier statements by MinFin officials that expenditures could be enhanced by RUB 800 bln. In our opinion, this moderate increase reflects the regulator’s intention to preserve macro stability, as well as its doubts about the ability to fully receive the projected additional non-oil and gas revenues. To recap, MinFin earlier said that only additional non-oil and gas revenues could be used to cover extra expenditures. The commitment to a cautious approach towards budget expenditures eliminates a part of short-term inflationary risks, and as a result our expectation of higher inflation (to 4.5% in 2H17) becomes overly pessimistic. At the same time, we should not rule out the possibility that the planned expenditures could be revised again toward end 2017, especially in case of growing doubts that economic growth will reach the planned level of 2.0%.
52 RUSSIA Country Report May 2017 www.intellinews.com