Page 40 - bne_Magazine_February_2019

40 I Outlooks 2019 bne February 2019
central banker in the world,” but she has a war mentality. The CBR hiked rates in December by 25bp when it didn't need to in order to shore up the ruble before sanctions in the new year. The CBR is running a tighter monetary policy geared to protection not expansion. The current low growth is “good enough”, and for President Vladimir Putin low debt and large reserves are a question of national security, not macroeconomic policy.
The same is true for debt: Russia has one of the lowest levels of external sovereign debt in the world at 15% of GDP. The Kremlin could choose to simply “buy” some more growth by borrowing more, but it has chosen austerity instead as
it makes Russia impervious to external pressure. The cost is going to be sub- potential economic growth for as long as the showdown with the west is running – mostly likely until at least the end of Putin’s final term in office in 2024.
Having said that, the government is going to take a tiny risk in the loosening direction and plans to relax the budget rule in 2019-2024. Instead of targeting
a zero federal budget primary deficit (at the benchmark oil price of $40 per bar- rel in 2017 prices), the fiscal rule would now target a deficit of 0.5%. This expen- diture increase of 0.5% of GDP would be financed mainly via domestic debt issuance, according to the World Bank.
Economics
GDP
Russia’s economy is expanding again, but since the petro-driven model was exhausted in 2011-2013 growth is capped at around 2% unless major structural reforms are put in place.
Russia is likely to end 2018 with around 1.8% GDP growth and while the predic- tions for 2019 vary a little, they are all coming in at around the same level for growth for the next few years. This is despite Putin’s May Decrees that call for Russian economic growth that is faster than the global average – a goal Russia is almost certain to miss.
The government started 2018 predict- ing 2.1% of growth, however, it cut its
www.bne.eu
estimate twice during the year to 1.8%. The international financial institu- tions (IFIs) followed the same path.
The wild card in the outlook is the RUB2 trillion a year the government is intending to invest into the social sphere and infrastructure that could boost growth. But analysts bne Intel- liNews spoke to remain sceptical that the state can efficiently carry out such large plans and are waiting to see the details of the national programme before changing their outlooks.
Inflation & rates
GDP growth is slow but most of Russia’s macro indicators have improved substantially and the economy is running if not roaring.
The CBR started tightening mon- etary policy again in the autumn after nearly four years of cuts – but that has more to do with the threat of ruble instability caused by new US sanc- tions than any inflationary pressure.
Bankers are expecting the CBR to go back to cutting rates again in 2019 but they expect very few cuts if any at all.
Industrial production
The lacklustre growth is reflected in Russia’s industrial production which has struggled to gain any momentum in 2018. Russian industrial produc- tion picked up in the last quarter of 2018 and had a few good months as the year came to an end. However, after a strong October with 3.7% y/y
“The wild card in the outlook is the RUB2 trillion a year the government is intending to invest into the social sphere and infrastructure”
Inflation hit record post-Soviet lows in 2018, bottoming out at 3.2%. however, as the summer came to an end inflation began to rise again on the back of rising food and fuel costs to hit 3.9% in Decem- ber – just below the CBR’s 4% target.
In 2019 inflation is expected to pick up again and rise above the 4% target but average 4.5% according to the consensus. The CBR warned that inflation could hit a peak of 5.5-6% in March-April 2019, after which it will fall again in the summer.
growth, industrial output moderated again in November to 2.4% y/y.
In 2019 industry will probably suf- fer from the same weakness as
the economy continues to grow, but well below its potential.
Budget & oil
The higher than expected oil prices in 2018 meant that the federal bud- get ended the year with a 3% of GDP surplus – the first headline surplus
Russia monetary policy rate vs inflation CPI