Emerging

Resilience but no growth

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9
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Russia  
Resilience but no growth  
In August, the rating agency Fitch upgraded Russia’s sovereign rating based on its greater resilience to the external environment.  
The timing might seem surprising considering that Russian GDP growth slowed sharply in H1 2019 and the central bank had to  
revise its outlook for 2019-2021 downwards again. Even so, the consolidation of Russian fundamentals is undeniable. Currently the  
main sources of concern are the sharp increase in household lending and the delays in implementing public spending programmes,  
which should stimulate growth in the medium term.  
Economic growth slowed sharply in H1 2019  
1-Forecasts  
In first-half 2019, GDP growth slowed sharply to 0.7% year-on-year  
y/y), compared to 2% in H1 2018. This slowdown can be attributed  
2017  
2018 2019e 2020e  
(
Real GDP growth (%)  
1.6  
2.3  
0.9  
1.5  
to the decline in domestic and foreign demand. Exports contracted  
due to the decline in global demand and the adoption of new oil  
output quotas as part of the OPEC agreements. Household  
consumption slowed sharply following a 2-point increase in the VAT  
rate as of 1 January. Investment also slowed. Public investment  
projects announced for 2019 were postponed, and by August they  
still had not been implemented. Moreover, the monetary  
environment is not favourable for an upturn in private investment,  
although the decline in interest rates since June should reverse this  
trend.  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
3.7  
2.9  
2.9  
4.7  
1.7  
3.8  
1.0  
-1.5  
15.5  
2.1  
14.3  
6.9  
14.8  
5.3  
15.1  
3.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
32.8  
356  
27.2  
375  
26.6  
424  
23.8  
440  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDRUB (year end)  
10.3  
58.3  
12.8  
69.4  
13.0  
67.0  
13.2  
66.0  
e: BNP Paribas Group Economic Research estimates and forecasts  
The Central Bank of Russia (CBR) proceeded with three 25bp rate  
cuts between June and September. Monetary easing was facilitated  
by price inflation that was not quite as high as the monetary  
authorities expected, and close to the target rate of 4% (prices rose  
2
- Price inflation is close to target  
Year-on-year, %  
Headline inflation  
▪▪ Core inflation (excluding food and energy prices)  
4.3% y/y in August). By the end of July, more than 80% of this  
1
monetary easing had carried over to corporate lending rates.  
8
18  
16  
14  
12  
10  
8
Even so, growth prospects are still sluggish. The central bank has  
revised its outlook for 2019, 2020 and 2021 downwards again.  
Growth is only expected to accelerate by 2% to 3% in 2022 if the  
government manages to remove some of the structural impediments  
to growth (notably by increasing expenditure on education,  
healthcare and infrastructure as planned in the national spending  
programme of May 2018).  
16  
1
1
1
4
2
0
8
6
4
2
0
6
4
Banking sector: increase in household loans is a new  
source of risk  
2
0
2013  
2014  
2015  
2016  
2017  
2018  
2019  
The banking sector continues to consolidate but the economic  
slowdown could undermine the quality of assets. The sharp  
increase in household lending is a new source of risk, even though  
the central bank tightened its prudential regulations again on 1  
October.  
Sources: CBR, CEIC  
year. This consolidation reflects the deleveraging of non-financial  
companies on the one hand, and on the other, the transfer of the  
risky assets of three private banks (Otkritie, B&N and  
Promsvyazbank) to Trust Bank, a defeasance structure, as part of  
the rescue package set up by the central bank. At the same time,  
the capital adequacy ratio improved slightly to 12.3% in July.  
The monetary authorities have continued to clean up the banking  
system over the past twelve months. In September 2019, there were  
4
54 banks, down from 1,344 in 2000.  
The quality of bank assets has also improved since mid-2018, even  
though it is still fragile. In July 2019, the doubtful loan ratio was  
The dollarization of the banking sector continued to decline. In July  
2019, 20% of loans and 25% of deposits were denominated in  
9.9% of all loans, while the share of risky assets (non-performing  
foreign currencies, compared to 35% and 42%, respectively, in 2015.  
Moreover, at the end of March 2019, the external position of all  
and restructured loans) declined to 17.9%, from 19.1% the previous  
th  
10  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
banks was still largely positive, with external assets covering  
3
The dollarization of the banking sector has declined  
1
.5 times external commitments. The external debt of banks was  
down by 61.5% compared to 2014 and accounted for only 4.9% of  
GDP in Q2 2019. Payments due by March 2020 were limited to  
USD 18.1 bn.  
% of loans denominated in foreign currency  
▪▪▪ % of deposits denominated in foreign currency  
50  
50  
The banking sector’s profitability has picked up with a 50% y/y  
increase in profits in August 2019. The return on equity (ROE) and  
assets (ROA) were 17.3% and 1.9%, respectively, in July 2019  
45  
45  
40  
35  
30  
25  
20  
15  
4
0
5
3
(
compared to 6.8% and 0.8%, respectively, in the year-earlier  
period).  
30  
25  
Although the banking sector is generally more solid than it was a  
year ago, the sharp increase in household loans is a new source of  
concern. Up 21.9% y/y in July 2019, household loans grew at a  
much faster pace than wage growth (+9% y/y). Moreover, interest  
rates on household loans are still high (13% on loans maturing in  
more than one year in July 2019). Contrary to corporate rates, they  
have only declined by 17bp since the beginning of the year.  
2
0
5
1
2011 2012 2013 2014 2015 2016 2017 2018 2019  
Source: CBR  
So far, household debt has only increased by 3 percentage points to  
 External vulnerability declines  
1
6.3% of GDP in Q2 2019. According to the central bank, the debt  
Russia has consolidated its external position through the  
accumulation of foreign reserves (USD 423.1 bn at the end of  
September 2019, a USD 39 bn increase from the previous year), the  
decline in the external debt (29.5% of GDP in Q2 2019 vs. 41% in  
ratio is still moderate at 25% of revenues at end-2018. Household  
loans as a share of bank portfolios is also moderate (26% of total  
loans) and the doubtful loan ratio was limited to 5% at the end of  
July. The situation nonetheless needs to be watched, especially for  
loans without collateral (50.4% of household loans), which have a  
doubtful loan ratio of 8.4%. To encourage banks to reduce this type  
of household lending, the central bank has increased the weighting  
of loans without collateral in the calculation of risky assets on four  
occasions since 1 March 2017. Moreover, as of 1 October 2019, a  
new weighting will be introduced for loans whose debt servicing  
exceeds 50% of revenue.  
2016) and the partial uncoupling of oil prices and the rouble’s  
exchange rate. The external position amounted to USD 370 bn in  
Q1 2019, the equivalent of 22% of GDP.  
Debt payments due over the next twelve months, estimated at  
USD 50 bn by the central bank, should be covered by the current  
account surplus, which reached an annualised rate of USD 91 bn in  
H1 2019. It is expected to remain solid, even though it has declined  
somewhat compared to 2018.  
US Congress tightens sanctions  
Foreign exchange reserves should continue to swell, buoyed by the  
current account surplus on the one hand and by the central bank’s  
foreign currency purchases on behalf of the ministry of finance on  
the other. In the first 8 months of the year, they amounted to  
USD 32.8 bn.  
On 2 August 2019, the US government adopted new sanctions  
against Russia in application of the 1991 Chemical and Biological  
Weapons Control and Warfare Elimination Act, but they are unlikely  
to have much of an impact. The main measure forbids American  
banks from participating in foreign currency bond issues by the  
Russian government and to grant foreign currency loans to any  
Russian public organisation. The new sanctions do not cover local  
currency government bonds (OFZ) and do not prevent American  
banks from purchasing foreign currency bonds in the secondary  
market.  
In September 2019, the stock of Eurobonds held by foreign  
investors amounted to only USD 22.5 bn (11.5% of Russian bonds,  
i.e. 1.4% of GDP) and all external public debt amounted to only  
USD 49 bn, the equivalent of 11.7% of foreign exchange reserves.  
Moreover, in full-year 2019, the government only issued USD 5.5 bn  
and EUR 750 m in Eurobonds. It had no trouble placing the bonds  
at high yields (5.1% for USD bonds maturing in 2035). Even if new  
sanctions were implemented against the Russian state, the  
government still has the capacity to face up to the situation given its  
low debt level (14.6% of GDP) and mild financing needs (equivalent  
to an annual average of 0.8% of GDP over the next 5 years).  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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