October 2018 Russia: Macro Outlook for 2019 Natalia Orlova Head of Alfa Bank Macro Insights +7 495 795 36 77 norlova@alfabank.ru
Egypt Saudi Arabia Brazil S. Africa UAE Iraq China Japan US Mexico UK Russia 2017 EU Russia Japan US EU UK Germany Brazil S. Africa China Norway Indonesia Turkey Russia Russia runs a low level of macro risk 25 20 22 State debt, % of GDP Russia has a low level of macroeconomic risk: it runs one of the world s lowest debt-to-gdp ratios, a modest budget deficit, and its leverage is under control 15 10 108% 87% 88% 77% 7 Total debt by country, % GDP 5 5 36% 37% 33% 3 13% 35 Households Government Budget deficit, % of GDP 30 Corporate 1,5% 25 123% - - -6% -8% -1-1 -9,5% -8,9% -8,9% -0,9% -1,8%-1, -4, -3,9% -3,8% -3,5% -3, -2,9% -3,7% 20 15 10 5 16 108% 5 36% 7 6 77% 49% 13% 19% 1 US China Brazil Russia Sources: Bloomberg, CIA, OECD, Russian Economy Ministry, Alfa-Bank 2
2007 2009 2011 2013 2015 2017 2019F 2020F 2021F 2007 2009 2011 2013 2015 2017 2019F 2020F 2021F Budget breakeven to oil to decline to $50/bbl Budget breakeven oil price is projected to go to $50/bbl The current budget breakeven oil price is still $67/bbl, justifying the necessity for tax reforms through (1) tax collection improvements and (2) tax rate hikes 160 140 Breakeven oil price, $/bbl Federal budget expenditures, % y/y (RHS) 4 35% Government savings are projected to go to 1 of GDP 120 100 99 109 110 114 102 104 3 25% 300 250 $ bn State savings, $ bn State savings, % GDP % GDP 18% 16% 1 80 60 62 70 78 67 58 50 50 50 2 15% 200 150 1 1 8% 40 34 1 100 6% 20 0 5% 50 0-20 -5% Sources: Finance Ministry, Rosstat, Alfa-Bank 3
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17 Aug-18 Low inflation may support growth 12 10 Ruble exchange rate and inflation in Russia Due to tight CBR monetary policy, 2017 inflation decelerated 18% to just 2.5% y/y and remains below target. For the moment it s sensitivity to ruble exchange rate volatility is depressed Ruble exchange rate, % y/y Inflation, % y/y (RHS) 16% 8 1 6 1 Components of CPI, % y/y 4 2 1 8% 6% 1 1 8% Food Non-food Services -2 6% -4 Policy rate cut cycle ended at 7.5% The external environment plays against a hike in local rates sanctions risk boosts risk premium and rising US rates reduce the rate differential Sources: CBR, Rosstat, Alfa-Bank - 4
2006 2007 2009 2011 2013 2015 2017 Russian growth story by phase 120 110 GDP, investment and consumption, =100 +1 +7% Russian economy up only 7% from levels, reflecting a potential growth constraint 100 90-1% At the moment we estimate the potential growth rate for Russia at 0.7-1., the low level due to demographic and investment constraints 80 70 GDP Investment Consumption Russian growth case remains driven by consumption; investments are just recovering to levels and are experiencing stronger negative downturn during times of crisis 60 Sources: Rosstat, Alfa-Bank 5
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 2000 2002 2004 2006 2020F 2022F 2024F 2026F 2028F 2030F 2032F 2034F Consumption growth to come under pressure Real salaries in 2011-2013 and 2017-2019F, % y/y 45 Number of pensioners is projected at 34 mn by 2034 mn ppl 43 40 36 35 34 30 31 25 Without reform With reform, 1st version With reform, 2nd version 20-1 -2 Mortgage and non-mortgage retail lending growth, % y/y 8 7 6 5 4 3 2 1 % y/y Non-mortgage, % y/y Mortgage, % y/y Electoral cycle is over, which will lead to a deceleration in salary growth, similar to how it was in 2011-13 Increase in VAT and pension reform will hurt consumption in 2019 CBR intends to slow the non-mortgage market growth rate, which is above 2 y/y at the moment Sources: Rosstat, CBR, Alfa-Bank 6
Concluding comments Russia is back to a consumption-driven cycle, with a very weak potential growth rate, assessed at around 0.7-1. per year The cabinet is focused on maintaining budget stability: a reduction in the budget s oil-price breakeven to $50/bbl will be implemented by optimizing tax collections, increasing the tax burden and tightening control over expenditures Consumption remains the driving force of growth, however in 2019 consumption growth will not be as strong as previously expected due to the VAT increase and pension reform Unlike a number of EM countries, local financial markets are protected by stable macroeconomic policy however, new sanctions may bring additional cost 7