Budget and growth: Russia’s 2020 budget spending depends on its ability to borrow
Rosstat reported that Russia's GDP was down by 8% in 2Q20 and provided the GDP sectoral breakdown by production. A month ago, when Rosstat announced its flash estimate of 2Q20 GDP, the decline was a bit deeper – 8.5%. Ongoing upward revisions are generally in line with our long-standing view that Russia’s economic performance was not as bad as previously reported. Rosstat’s current thinking suggests that the economy contracted by a mere 3.4% y-o-y in 1H20. This strongly supports our view that Russia's GDP may contract by less than 4% for full-year 2020.
Amid a better economic performance Russia’s fiscal performance will also look better than the government estimated in spring – not only on the revenue side but also in terms of expenditures, as the latter would not increase this year to the extent previously discussed by the government, given that the improvement in the economy occurred without a major increase in government spending. The economy has largely adjusted on its own. That is why it looks questionable whether the economy indeed needs over R2 trln in various support measures, as was suggested earlier. It looks as though the additional federal budgetary spending this year will be stipulated not only by various measures to support the economy that were proposed in spring and early summer, but also by Minfin’s ability to raise funds domestically.
* The government was generally quite cautious in spending its reserves, as financing of the budget deficit from reserves adds to the country’s inflation. Our view is that federal budget expenditures are unlikely to exceed R20.7 trln in 2020, i. e., not more than R1.0 trln will be added to the initial spending plan. The deficit will stay at around R3.8 trln this year (3.5% of GDP).
* The government has already exceeded its initial borrowing target (it planned to raise domestically R2.325 trln in gross terms and R1.740 trln net) as the gross domestic borrowing surpassed R2.0 trln in 8M20 and year to date the government managed to borrow R2.4 trln. However, while working on the 2021 budget plan, the Finance Ministry developed an updated draft borrowing program for 2020-2021. According to last Friday’s release, the new annual 2020 target is now set at R5.4 trln (in gross terms).
* This target does not look very realistic, especially taking into account that international investors are keeping their positions in OFZ flat, and almost all the demand is coming from domestic commercial banks.
* We estimate the total OFZ issuance this year at R3.2-3.4 trln assuming no major economic shocks or radical changes in the sanctions regime.
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