Russian can survive 2010 without seeking sovereign loans
Discussions about Russia's forthcoming Sovereign Eurobond issuance have intensified once again. The consensus, however, no longer anticipates that Russia's appetite for foreign borrowing will be anywhere close to the upper borrowing limit of $17.8bln set out in the nation’s 2010 budget. Troika Dialog’s view on this issue has always been at the other extreme, and that is the Russian government does not need to borrow externally this year, at least in the first half of 2010, and now we are even more convinced of that.
Over the past few days, there have been several important Russia-related news events. First, the Finance Ministry reported that the state’s revenues exceeded 7.3trln rubles last year, well above the 2009 target of 6.7trln rubles. Also, the Finance Ministry spent slightly less than planned; hence the last year’s budget deficit of 2.3trln rubles was significantly lower than the 3.1trln rubles initially anticipated by the government. The budget deficit should come in well below 6% of GDP, as opposed to the 8-9% that the government had expected.
As a result, the Finance Ministry has retained more money in the Reserve Fund, estimated at about 1.8trln rubles, or $60bln. Meanwhile, about 2.8trln rubles, or over $92bln, remain in the National Wealth Fund. Combined, these two funds, in our view, represent a sizable cushion, large enough to ensure financial stability throughout 2010. The Reserve Fund contracted last year by about $77bln, a figure exactly equivalent to the size of the budget deficit of 2.3trln rubles, while the National Wealth Fund grew by around $4bln. This better-than-expected fiscal performance resulted not only from a slightly higher oil price, as the 2009 revenue target assumed a $57/bbl Urals oil price, while the real price averaged slightly more than $61/bbl, but from much better economic performance and, therefore, better tax collections from the non-oil sectors of the economy.
Overall economic outlook in 2010 positive
The Economics Ministry has raised its economic outlook for 2010, but the budget figures are based on a $58/bbl oil price and 1.6% GDP growth. As a result, federal budget revenues are expected to remain at just below 7trln rubles. This would appear to be well below the last year's actual revenue collection figure and looks quite conservative, unless the oil price falls dramatically from current levels during the year. Even if the latter scenario were to happen, revenues may not fall that dramatically if the ruble were to weaken proportionally to the oil price correction. To move, say, to an average oil price of $57-58/bbl this year, as assumed in the budget, the oil market would need to undergo a correction of about 20% from the current level of $70/bbl and remain there for the rest of the year. A proportional adjustment of the exchange rate of around 20% would means that the U.S. dollar should cost 36 rubles, a 20% move from the current rate of 30 rubles to the dollar, the same level as the rate registered a year ago, and hence does not constitute a dramatic adjustment.
“Troika Dialog’s view on this issue has always been at the other extreme, and that is the government does not need to borrow externally this year, at least in the first half of 2010.”
That said, it looks increasingly likely that if the oil price stays at around $60/bbl this year, federal budget revenues would come in closer to 8trln rubles, a forecast that envisages an average monthly revenue collection of 670bln rubles, a level similar to that registered in the second half of 2009. A higher oil price would obviously increase budget revenues, but not proportionally, as in this case, the net capital inflow, accompanied by ruble appreciation, would look increasingly likely. Meanwhile, in case of a lower oil price, the net capital outflow and, therefore, a weaker ruble would look more realistic. We expect at least 5% GDP growth this year, and we have not changed our outlook for 2010 since May-June 2009, when the consensus was gloomier. But these days, the consensus is moving closer to our forecast: for example, the IMF recently raised its 2010 GDP growth forecast for Russia to 3.9%.
Non-oil economic sectors expected to do better
All in all, it looks like the non-oil parts of the Russian economy will deliver better results in 2010 than in 2009, which should broaden the tax base. If so, the budget deficit this year should not exceed the size of cash remaining in the Reserve Fund, computed under a rather conservative $60/bbl oil price scenario. In fact, the budget deficit could be significantly lower in 2010. On January 25, the government decided to tap the Reserve Fund for 1.1trln rubles to finance the budget deficit in the first half of 2010, which, in fact, may be sufficient for the full year. Meanwhile, the closer the oil price moves to the $80/bbl level, then the closer the budget will be to balance.
That said, Russia does not appear to be in urgent need of foreign borrowing, at least in the first half of 2010. Moreover, the country's economic reputation was sullied last year as the overall economic contraction appeared to be deeper, at least, according to the official statistics, than in many other countries, despite the massive fiscal and monetary stimulus, which clearly pointed to a lack of economic policy efficiency. Due to the base effect, we expect much stronger economic performance in the first half of 2010, which will positively affect the fiscal situation and positively change the sentiment toward Russia.
From this viewpoint, borrowing, if there will be any at all, will be more rational in the second half of 2010. As mentioned above, we believe that the fiscal balance will come in well above the consensus expectations, and thus render external borrowing unnecessary. Moreover, Russia's economic track record indicates that over the past two decades, the country has been able to grow the most in the years in which it ran a budget surplus. For instance, a small budget deficit was recorded in 1999, when the economy expanded by 6.4%, right after the 1998 crisis, and in 1997, when, despite a massive budget deficit, the economy expanded by just over 1% after being stimulated by massive and expensive government short-term borrowing.
“Borrowing, if there will be any at all, will be more rational in the second half of 2010. As mentioned above, we believe that the fiscal balance will come in well above the consensus expectations, and thus render external borrowing unnecessary.”
That said, if the economy is going to expand this year, the budget deficit will be rather modest, and should turn into a surplus in 2011. As already noted, we cannot rule out the possibility of the budget being nearly balanced this year, if the oil price moves slightly higher from the current levels. Government borrowing on the global markets, if it, indeed, does occur, would be used to finance the least efficient, but quite sizable expenditures, such as on the national economy that contracted last year, despite massive stimulus, and on the bureaucracy. That said, Russia's Sovereign borrowing, which is a point of discussion now, is aimed at reducing the overall efficiency of the economy.
Excessive borrowing is not always a panacea
There are plenty of examples in the economic history, which illustrate that too much government spending weighs negatively on economic performance, as governments usually care about many issues, such as geopolitics, security, etc, and not economic efficiency. The falling economic effectiveness of the U.S. government spending over the past decade coupled with a stimulatory monetary policy led to a situation, where the government deficit is expected to remain close to 10% of GDP to maintain growth of about 2-3% this year, which is where the consensus is now. Last year, a contraction of about 2.5% in the United States was accompanied by a deficit of almost 10% of GDP. That said, no cumulative growth in two years amid a 10% budget deficit each year, combined with the uncertainty over how the "exit strategy" will evolve and what its economic impact will be, may appear to be a too high price to be paid by those financing such deficits.
Meanwhile, Russia's three-year budget for 2010-12 suggests no major increase in government spending in 2010, to be followed by some contraction in later years. In the past, we have stated that if the budget plan is not amended upward, the economy will grow much faster than the government anticipates in the years to come, while the budget itself will remain at least balanced. This would mean that the government has learned its lessons from the 1990s. However, if spending is inflated and financed by greater borrowing, growth will come to a halt. We will discuss this issue and Russia's long-term growth prospects more thoroughly in our forthcoming Russia Economic Monthly.
* The author is Troika Dialog’s chief economist
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