Page 12 - RusRPTAug23

Ruble moves to the RUB80-90/$band. The other development is a surprise: the ruble lost RUB10/$. As a result, the ruble’s trading corridor moved from RUB70- 80/$to RUB80-90/$. This now appears to be the new reality for the struggling domestic FX market. Ruble devaluation will increase financial instability and is certain to strengthen the already rising inflationary risk in the coming months.
Budget support is now the top priority. The traditional key topic on the government’s mid-summer economic agenda is the budget-planning process.
However, this year the budget discussions are being held in secret. The news that is filtering through shows that the main concern is to bring federal finances into balance without spending much of the accumulated reserves.
Implications for taxes and spending. The discussion is about budget consolidation. This implies the use of all available means to boost revenues, such as additional taxes (all areas) and a search for politically “safe” ways to cut spending.
Strong consumer sector recovery. Another important development is the quick recovery in domestic consumer demand. The expansion of public spending on salaries, pensions, and funding for the military was a prime driver behind the reversal in the real wage growth trend. This trend is also supported by long-term structural shifts in the economy, such as the tightening of the labour market on the back of poor demographics and declining migrant inflows.
Inflationary risks are increasing. The growth in consumer lending has also boosted the recovery in demand. While these developments are met positively by the government, which sees them as key drivers for the new economy, they also trigger growing inflationary concerns among monetary authorities.
Forecast changes. The shifts in the macro dynamic led us to review our forecasts: ▪ Growth upgraded – the faster recovery warrants an upgrade to our estimates of GDP growth, industrial output, retail sales, and real incomes. The tighter labour market means that low unemployment will last longer.
· Ruble downgraded – the recent devaluation, and the reason for it, prompts us to downgrade our 2023 average and YE23 forecasts.
· Inflation is unchanged – we retain our previous estimates for inflation and the key rate in 2023.
· Budget deficit grows – the approach of a new election cycle means that social spending from the budget will remain high and could grow further. That will support local demand but will also lead to a higher budget deficit.
· External accounts deterioration – the recovery in domestic demand has already translated into Y/y growth in imports while export volumes continue to shrink in Y/y terms. This resulted in a significant contraction of the trade and current account surpluses and led us to downgrade our estimates of external accounts.
12 RUSSIA Country Report August 2023 www.intellinews.com