Euromoney’s survey shows the balance of risk still tipping in a more favourable direction, despite the political risks and uncertainties posed by pump-priming.
Russian president Vladimir Putin’s decision to start the new year by removing his cabinet, appointing a new one and embarking on wholesale constitutional reform was unexpected.
His choice of Mikhail Mishustin, the head of Russia’s tax service as prime minister, even more so.
However, there is undoubtedly method to the madness, and by redistributing powers towards parliament and the state council, Putin is clearly aiming for substantial influence over his successor, and to protect his legacy beyond the next elections in 2024.
The move is also an attempt to address his own declining poll ratings, blamed on the failings of Mishustin’s predecessor Dmitry Medvedev, and reinvigorating the domestic agenda through more public spending aimed at lower-income families, and faster implementation of infrastructure projects.
The appointment of Mishustin also hints at a bigger drive for public sector efficiency and transparency, with new younger technocrats promoted to domestic responsibilities, though top officials were also retained, including Anton Siluanov (finance), Sergei Lavrov (foreign affairs), Alexander Novak (energy) and Sergei Shoigu (defence).
Russia’s investor risk score improved before the announcement, as analysts upgraded their assessments in the final months of 2019. It was one of the emerging markets showing the biggest improvement in Euromoney’s survey for the fourth quarter of last year.
Russia rose three places in the global risk rankings, to 68th from 174 countries, putting a little distance between it and Indonesia, South Africa and Turkey, the riskier investor favourites not far below.
The higher price of oil helped boost oil company revenue and produce a surplus on the government’s finances along with spending cuts, better tax collection and pension reforms. With greater exchange-rate stability and wage rises, personal incomes increased and consumption.
A ministry of economy and development estimate indicates GDP increased on a real terms basis by 1.4% in 2019. The IMF is currently forecasting 1.9% growth for 2020, though it may be higher given that its 2019 estimate is 1.1% and it went to print before the additional fiscal stimulus was unveiled.
Meanwhile, Euromoney’s survey contributors provided a fairly positive report card for the latest Q4 survey, including Dmitry Izotov, a senior researcher at the economic research institute FEB RAS.
He noted, among other factors, the improvement in bank stability arising from moves to address bad debt.
“From October last year, banks have been required to calculate the level of debt burden for each client who wants to take on a consumer loan, which means obtaining a loan is more difficult,” he says.
“Moreover, the banks have no problems with liquidity, and do not need to attract deposits on a large scale.”
Panayotis Gavras, another Russian expert and head of policy and strategy at Black Sea Trade and Development Bank (BSTDB), highlighted areas of vulnerability in terms of debt, excessive credit growth and non-performing loans, leaving Russia exposed in the event of an economic shock.
Yet he also pointed out: “The government has been assiduous in keeping such key indicators under control and/or trending in the right direction for several years.
“The budget balance is positive, somewhere between 2% to 3% of GDP, public debt levels are in the order of 15% of GDP, of which less than half is external debt, and private external debt is also trending downward, in no small part due to government policies and incentives for Russian banks and firms.”
If anything, there is more upside than downside to this move, especially over 12 to 36 months, but the likeliest scenario is more of the same- Panayotis Gavras, Black Sea Trade and Development Bank
Dmitry Dolgin, ING’s chief economist for Russia, mentioned these points as well as noting that higher oil prices and “subsiding sanctions rhetoric” have allowed Russia to accumulate substantial reserves close to historical highs. Inflation has been lower than expected, too, he added, allowing the central bank to reduce borrowing rates.
As for the changes in January, the jury is out on how they will affect assets, including bonds. Several risk exerts have refused to comment so soon, though ING’s Dolgin does not see any notable political risk or irresponsible fiscal easing.
The rouble is considered moderately undervalued, and with global risk sentiment fairly benign after the US-China ‘phase one’ deal, and the government reshuffle quite orderly, he sees little scope for depreciation.
ING has also long held the opinion that fiscal policy would ease.
“This year’s expenditure plan will likely increase by at least 0.6% to 0.7% of GDP, accounting for the social policy measures announced by the president, and the spending backlog from 2019, representing allocations for the national projects [state infrastructure spending],” says Dolgin.
“In addition, some 0.3% of GDP could be invested locally from the national wealth fund, as guided earlier. This should positively affect both consumption and investment growth, and even with some potential offsetting factors from growing imports, this creates a 0.5 percentage point upside potential to our conservative 1.5% GDP growth expectations for 2020.”
The additional stimulus of 0.3% to 0.5% of GDP per annum raises the question of financing, which could be done through additional borrowing or relaxation of the budget rule. However, it is not sufficiently large to alter macro-fiscal dynamics to the extent that it would cause a reversal in foreign holdings of Russian treasury bonds.
BSTDB’s Gavras doesn’t see his risk scores moving much, if at all.
“If the new government delivers as expected and raises standards of transparency and governance, that would obviously be a bit positive, and what the new prime minister did in the tax administration was widely admired,” he says.
“So, if anything, there is more upside than downside to this move, especially over 12 to 36 months, but the likeliest scenario is more of the same.”