Emerging

Sluggish economic growth

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10  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
Russia  
Sluggish economic growth  
Economic growth slowed sharply in the first 5 months of the year and the central bank has revised downward its forecasts. To  
boost activity, the monetary authorities lowered their key rates by 25bp in June at a time when inflationary pressures had eased  
slightly. The government also took major steps to stimulate the potential growth rate, which has declined constantly since 2008-09.  
Despite the increase in public spending, the government continued to generate a big fiscal surplus in the first 5 months of the year.  
Although these measures are a step in the right direction, they must be accompanied by the state’s disengagement from the  
economy and better corporate governance to generate a substantial increase in potential growth.  
Economic growth slowed sharply in Q1 2019  
1- Forecasts  
The economy slowed sharply in Q1 2019, with growth of only 0.5%  
year-on-year (y/y), down from 1.9% in the year-earlier period.  
2
017  
2018 2019e 2020e  
Real GDP growth (%)  
1.6  
2.3  
1.2  
1.8  
This slowdown can be attributed to two factors: 1) the decline in oil  
production, in compliance with its OPEC commitments (renewed in  
early July for another 9 months), and 2) a slowdown in household  
consumption, triggered by a 2-point increase in the VAT rate on 1  
January 2019. Investment growth also decelerated to 0.5% y/y in  
Q1 2019, from 3.8% in Q1 2018, especially in the real estate and  
hydrocarbon transport sectors.  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
3.7  
2.9  
2.9  
5.0  
1.7  
4.0  
1.0  
-1.5  
15.5  
2.1  
14.3  
6.9  
14.8  
5.9  
15.1  
4.3  
Current account balance / GDP (%)  
External debt / GDP (%)  
32.8  
356  
27.2  
375  
26.6  
428  
23.8  
445  
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  
Although activity rebounded slightly in April, the economy slowed  
sharply again in May, and growth prospects are still looking  
downbeat. In May, automobile sales contracted for the fourth  
consecutive month (-2.2% y/y) and in June, manufacturing PMI,  
which reflects business leaders’ expectations, was below 50 for the  
second straight month.  
e: estimates and forecasts BNP Paribas Group Economic Research  
2
- Price increases are expected to peak in March  
Year-on-year, %  
Headline inflation  
▪▪ Core inflation (excluding energy and food prices)  
A boost from monetary policy  
After peaking at 5.3% in March, inflation has eased. Prices rose  
.1% y/y in May. The monetary authorities lowered their inflation  
1
8
6
4
2
0
8
6
4
2
0
18  
16  
14  
12  
10  
8
5
1
outlook by 0.5 pp and are now forecasting inflation of between 4.2%  
and 4.7% at the end of the year (close to the 4% inflation target).  
1
1
1
To stimulate domestic demand, the central bank took advantage of  
this environment to lower its key rates by 25 basis points (bp) to  
7.5% at its June monetary policy committee meeting. Monetary  
6
policy should remain accommodating in the months ahead.  
4
Activity is expected to accelerate in H2 2019, buoyed by monetary  
easing and the increase in government investment. For the full year,  
however, economic growth should remain sluggish, and the central  
bank has revised downwards its growth forecast by 0.2 pp to 1-1.5%.  
Growth will fall short of its long-term potential, which has declined  
over the past 10 years.  
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0
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: CBR, CEIC  
Following his re-election, President Putin announced several major  
reforms (May Decree) to stimulate potential growth. According to  
World Bank estimates, they could boost the potential growth rate by  
Growth potential continues to decline  
Russia’s potential growth rate has fallen sharply, from 3.8% in 2008-  
009 to only 1.5% in 2018. According to the World Bank, it could  
2
1.2 percentage points by 2028. These measures include a gradual  
shrink to only 1.3% by 2022 unless the government manages to  
reverse this trend.  
increase in the legal retirement age, an 11 pp increase in the  
investment rate to 34% of GDP by 2028, increased spending on  
healthcare, education and the quality of environment, and a more  
favourable demographic and migratory policy to counter population  
decline (first reported in Russia in 2018).  
The slowdown in Russia’s growth potential can be attributed to: 1)  
insufficient productive investment and 2) the decline in the labour  
force.  
rd  
11  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
On 1 January 2019, the government began to raise the legal  
retirement age, a reform that should increase the potential growth  
rate by 0.3 to 0.4 pp according to the World Bank. In the first  
3
- Decline in the correlation between the rouble and oil prices  
 Oil prices (USD)  
5
months of 2019, spending on infrastructure, environmental  
▪▪▪ Rouble per USD (rhs, inversed)  
protection and healthcare increased sharply, albeit without raising  
the total amount of public spending.  
140  
0
February 2017 : new fiscal rule  
10  
20  
30  
40  
1
20  
00  
To stimulate private investment, however, the government must  
take its reform efforts much further by disengaging the state from  
the economy and improving the quality of governance. Although the  
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80  
1
overall business climate has improved , this mainly reflects  
60  
50  
60  
70  
80  
90  
improvements in the quality of infrastructure. In terms of governance,  
in contrast, Russia still scores fairly poorly. It ranked 162nd out of  
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0
0
2
211 countries in 2018 (which is only 5 ranks better than its score  
5
years ago). Corruption, its main source of weakness, is still  
th  
rampant: Russia ranks 138 out of 180 countries and is rated  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
2
8/100 by Transparency International. The World Bank estimates  
Source: Datastream  
that an improvement in the business environment and state  
disengagement from the economy would boost Russia’s growth  
potential by 0.3 pp.  
At the end of May, foreign reserves amounted to USD 405 bn, just  
USD 20 bn less than before the imposition of international sanctions  
in April 2014. They account for nearly 13 months of imports of  
goods and services, and cover 5.6 times the external debt maturing  
in less than one year.  
Strong rise in the fiscal surplus  
After reaching 2.6% of GDP in 2018, the fiscal surplus rose to 2.7%  
of GDP in the first 5 months of 2019. Increased spending as part of  
the economic development programme was partially offset by a  
decline in interest charges, which limited the total increase in  
spending to 5.3%, less than the nominal GDP growth rate.  
After reaching 6.9% of GDP in 2018, the current account surplus  
rose to 8.9% of GDP in Q1 2019. It has increased rapidly over the  
past five quarters due not only to the increase in oil & gas exports  
At the same time, government revenues increased strongly, at an  
average annual rate of 13.7%, thanks to the increase in VAT  
revenue (+15.7%). The share of non-oil & gas revenues rose to  
(
(
+0.7 pp to 15.9% of GDP), but also to other exported products  
+0.7pp to 10.9% of GDP).  
Total external debt was reduced by USD 52 bn over the past 12  
months due to bank deleveraging and corporate debt reduction. The  
government’s external debt increased but remains moderate, at  
56.8%, 3pp more than in 2018. Oil & gas revenues only increased a  
moderate 6.9% due to cutbacks in oil production (in compliance with  
the OPEC+Russia agreement) and the decline in oil prices  
converted into roubles (-1.3% y/y in May). The government should  
continue to report a large fiscal surplus in 2019, albeit a smaller one  
than in 2018.  
3.3% of GDP in Q1 2019.  
The correlation between the rouble and oil prices has declined  
sharply, due notably to central bank purchases of foreign currency.  
In 2018, the rouble depreciated by 18% against the dollar, while oil  
prices rose 30.5%. The reduction in the correlation is also due in  
part to capital outflows between April and October 2018. In the first  
six months of 2019, the rouble appreciated by only 9% (despite  
portfolio investment inflows in Q1 and the central bank’s foreign  
currency purchases), while oil prices rose by more than 17%.  
Government debt declined by 1.2 percentage points to only 14.3%  
of GDP in 2018.  
Moreover, thanks to the central bank’s foreign currency purchases  
on behalf of the Ministry of Finance ministry, the National Wealth  
Fund (NWF) should end the year at USD 124.6 bn (up from USD  
58.7 bn at the end of May 2019). By the end of the year, USD 66 bn  
in foreign currencies purchased in 2018 will be transferred to the  
NWF.  
Consolidation of external accounts  
The Russian economy is still highly dependent on commodity price  
trends and is vulnerable to a tightening of US sanctions.  
Nonetheless, its resilience has been strengthened significantly since  
2017. Foreign reserves have been partially rebuilt, the external debt  
has diminished sharply and the correlation between the rouble and  
oil prices is not as strong as it was two years ago.  
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st  
Based on the Ease of Doing Business, Russia ranks 31 out of 189 countries  
ahead of India and Indonesia).  
(
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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