Inflation and weak economy may force CBR to cut early

RUSSIA ENERGY / FINANCE - Forecast 22 Apr 2019 by Leonid Grigoriev and Marcel Salikhov

1Q19 data shows that Russian economy slowed down considerably after surprise pick-up in 4Q18. GDP growth was probably below 1% y-o-y, according to our GDP nowcast. Weaker industrial production and weak household demand weigh on the economy.

At the same time inflation quickly is fading out after January VAT shock. In March monthly increase in prices was only +0.32% m-o-m after 0.44% in February. April weekly data is pointing out to further disinflation. It’s possible that inflation has already peaked at 5.3% y-o-y. With favorable conditions in agriculture it may fall below 5% in summer. With high oil prices and stronger RUB, such scenario will force CBR to cut early, already in summer. We expect that the key rate will reach 7% by the of 2019. The current consensus is 7.5% as estimated by the Reuters poll.

Two significant factors can change this rosy scenario. First, in the case of significant new sanctions implemented and following FX shock CBR will be forced to keep rates or even hike. Another contrarian reason is that CBR sees high growth of household credit as a significant threat to financial stability and tries to cool it with administrative tools. However, lower rates will fuel credit growth again.

The Ministry of Economic Development (MED) published its update of the official forecast up to 2024. The most noteworthy change is the projected investment boom in 2020 (+7% growth in capital investments). Even with fiscal stimulus starting to kick in we see it unlikely. Lower investments of Gazprom and expected decline in the housing sector will balance an increase in public capex.

Russian fiscal stance is still very tight. In 1Q19 surplus of the federal budget was +2.2% GDP, higher than last year. Higher VAT and excise rates support non-oil & gas revenues. Oil prices helped to increase oil & gas revenues. At the same time, massive fiscal stimulus linked to May’18 decrees (“national projects”) is still under development. We do not expect that financing of major significant projects will start in 2019. At the very best it’s 2020. So this year the federal budget has all the chances to stay in large surplus (+1.6% GDP).

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