Page 53 - bne_August 2023_20230802

bne August 2023
Opinion 53
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.
Budget consolidation takes priority.
Currency stability was on top of the government’s economic agenda ... In previous reports, we wrote that the Russian monetary authorities will probably make efforts aimed at stabilising the ruble exchange rate in the RUB70-80/$ range. We therefore chose to retain our FX rate forecast at a level of an average of RUB75.7/$ in 2023. We reasoned that for
“Russia’s economy has surprised everyone by being a lot more robust than analysts expected and has been able to shrug off even the most extreme sanctions”
the Kremlin, the government and the CBR, the top priority of their monetary and FX policies will be to protect stability – that should include the economy as well as the financial market, inflation and the currency rate. Since any significant weakness in the currency always triggers – usually after a 1-2-month delay – a spike in retail prices for imported goods and services, we thought that the authorities would be hesitant to see a
weaker ruble, as this could ultimately undermine their efforts aimed at controlling inflation and at ensuring continued macro and financial stability in the country.
... but that is not the case any longer. The events of recent weeks have shown clearly that the top priority of the Kremlin and the government has now changed. While it is still about stability, the notion of stability seems to be now centred around maintaining a fiscal balance and protecting the government’s FX reserves. According to data from MinFin, in June the government’s National Welfare Fund saw a monthly drop of $9.2bn, while the fund’s liquid assets fell by $4.1bn. From this perspective, any fluctuations in the FX exchange rate and even the inflation trend become secondary. But
it would be incorrect to say that control over inflation has been completely taken off the policy agenda. That is not the case, but in the new reality such a goal is now left sole at the Central Bank’s discretion. At the same time, the government for its part seems to be prioritising the budget execution.
Budget consolidation has now become the main policy priority. The task of budget consolidation has been voiced recently by many government officials. Over the past
6-8 months their views have significantly evolved. Back
in October-November 2022, government speakers were
shrugging off any possible negative implications that the Western oil embargo and export oil price caps might have on state finances. Their view was supported by budget statistics which showed that in October-November the Russian federal budget was still running a hefty monthly surplus. Then in December 2022 Russia suddenly recorded
a massive deficit of almost RUB4 trillion, which was again presented as no cause for concern and interpreted as a one-off due to a forward dispatch of federal funds from
next year’s budget with the aim to ensure a more balanced approach to spending throughout 2023. Budget deficits were again reported in January-February 2023 but speakers from Russia’s Finance Ministry kept a brave face, arguing in their public communications that the budgetary situation should improve dramatically as the year proceeds.
Cabinet debates taxes and other means to increase the revenue flow. Around April-May 2023 the bullish mood started to gradually change when, following the start of the budget-planning process for 2024, as Russian government
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