Standard & Poor’s: Russia’s real GDP to rise 2% in 2010

Standard & Poor’s: Russia’s real GDP to rise 2% in 2010
# 01 September 2009 13:56 (UTC +04:00)
Baku. Vahab Rzayev – APA-Economics. The prospect of the BRIC countries (Brazil, Russia, India, and China) collectively sustaining their rapid economic expansion through the global slowdown has been blown off course by the severity of the downturn in Russia, says a report titled "European Economic Forecast: For Russia, Recovery May Be A Commodity In Short Supply," published Aug. 31, 2009, by Standard & Poor’s.
"Until the middle of 2008, it looked as if the four BRIC economies would continue to sustain their growth paths despite strong headwinds," said Jean-Michel Six, Standard & Poor’s chief economist for Europe. "Then the Russian economy took a dramatic dive on the back of plummeting oil prices. In our view, Russia’s hard landing reveals the major weaknesses of an economic growth model based on commodity exports and massive foreign loan inflows."
Economic growth started to take a downturn in Russia in the middle of last year, and became sharply negative in the first quarter of 2009. Oil prices dropped to about $40 per barrel last December from a peak of $150 per barrel in July 2008, and metal prices also took a tumble. Meanwhile, the global credit crunch narrowed Russia’s external debt financing channel, making it far more difficult for Russian banks to refinance themselves.
Government projections indicate a dramatic shift from a large budget surplus to a significant deficit of about 8.50%, according to official Russian estimates (Standard & Poor’s forecasts a general government deficit of 8.65%). In our opinion, these projections pose important questions regarding Russia’s macroeconomic outlook:
-- First, despite sharp increases in public spending in past years, the government has been able to avoid having to issue new debt on the international markets, thanks in part to its reserve fund. Looking forward, the official projections assume a rapid depletion of this fund and external borrowings of up to $17.8 billion in 2010. Although Russia should in our view have little difficulty borrowing such an amount on international markets, it will have to compete with other large sovereign borrowers. This means that the costs of financing are likely to rise in coming years.
-- Second, we understand that the government will be injecting the equivalent of about 8% of GDP into an economy that is little monetized we believe is bound to fuel medium-term inflation pressures, as well as exercise short-term downward pressure on the ruble exchange rate. Russia’s past struggle with persistently high domestic inflation (7.5% in the 12 months to July 2009, 13% in 2008) suggests further constraints on monetary policies in the future on the back of a fresh surge in inflation.
-- Third, we note that the government expects to withdraw from the economy the equivalent of about 1.5% of GDP of fiscal stimulus as early as next year. It projects the fiscal deficit to fall to 6.5% of GDP in 2010 (although we anticipate a deficit close to 8.5% of GDP next year, given plans for further hikes to pensions, unless oil prices stabilize above $65 per barrel). Barring a windfall surge in revenues, we believe that cut would have to be generated mainly through lower expenditures. In our opinion, it’s unclear whether the authorities will be ready for such a move at a still very early stage of the economic recovery.
Overall, we believe a more diversified and self-reliant domestic economy needs to emerge to ensure more balanced and resilient long-term growth; such diversity may very well be stimulated by further weakening of the real effective exchange rate, a process that would set in motion import substitution. Meanwhile, we expect Russia’s real GDP to decline 8% in 2009 and to recover 2% next year.