Evgeny Gavrilenkov September 2016 Unlike many countries, Russian - - PowerPoint PPT Presentation

▶
evgeny gavrilenkov september 2016 unlike many countries
SMART_READER_LITE
LIVE PREVIEW

Evgeny Gavrilenkov September 2016 Unlike many countries, Russian - - PowerPoint PPT Presentation

Apr 14, 2023 320 likes •515 views

THE M ETAMORPHOSIS OF RUSSIAS MONETARY POLICY AND ECONOMIC GROWTH Evgeny Gavrilenkov September 2016 Unlike many countries, Russian economic growth is not limited by macroeconomic factors, while economic policy has enormous potential to

slide-1
SLIDE 1

THE METAMORPHOSIS OF RUSSIA’S MONETARY POLICY AND ECONOMIC GROWTH

Evgeny Gavrilenkov

September 2016

slide-2
SLIDE 2

Unlike many countries, Russian economic growth is not limited by macroeconomic factors, while economic policy has enormous potential to improve

  • External factors will not be favorable for Russia in the next few years. Global economic growth will

remain tempered, as will global demand for Russian exports. A revival in economic growth will require improving the quality of economic policy and business decisions made.

  • The debt problems in advanced economies have not been solved. Quantitative easing, though it

has helped avoid a global economic collapse, does not provide for a transition to sustainable high growth – partly because it provides support for areas of business that are not the most effective in financial and non-financial entities.

  • In addition, one of the results of quantitative easing has been that global wealth disparity has
  • risen. This, in particular, is illustrated by the fact that amid sluggish economic growth, stock indexes

have grown significantly over the past few years. A result of quantitative easing is asset inflation amid low consumer inflation. Extremely low levels of inflation in advanced economies are a result of limited demand due to persistent debt problems. Sluggish demand complicates investment decisions and limits investment, despite the availability of financial resources.

  • The situation in Russia is similar in some ways. Consumer demand contracted in 2015-16, and

investors struggled to make decisions. Artificially supporting demand is not just pointless, but impossible given the government’s limited access to financial resources. Economic policy should be focused on achieving stably low inflation, which will require a more consistent and reasonable policy from the CBR.

  • Russia’s most important advantage is its lack of significant debt – both external and domestic.

But at the same time, this is a weakness, as the undeveloped domestic debt market limits CBR refinancing under market collateral.

slide-3
SLIDE 3

Financial sector far outstripped GDP growth for too long

2008 2009 2010 2011 2012 2013 2014 2015

GDP (market prices)

5,2

  • 7,8

4,5 4,3 3,5 1,3 0,7

  • 3,7

GDP (basic prices)

5,2

  • 6,7

4,1 3,8 3,5 1,3 0,9

  • 3,3
  • f which:

Agriculture

6,4 1,5

  • 12,1

14,7

  • 1,5

4,8 2,0 3,1

Fishing and fish farming

  • 5,8

5,6

  • 9,1

4,1 6,9 3,2 1,8

  • 0,7

Mining

1,0

  • 2,4

6,6 3,4 2,0

  • 3,5

2,0 1,1

Manufacturing

  • 2,1
  • 14,6

8,6 6,3 5,4 4,4 0,6

  • 5,1

Gas, electricity, water

0,7

  • 4,7

4,0 0,0 1,6

  • 1,9
  • 1,1
  • 1,4

Construction

11,1

  • 14,7

4,4 7,6 4,0 0,1

  • 2,8
  • 7,4

Trade, repair of household appliances

9,9

  • 5,8

5,8 3,2 3,4 0,4 1,4 -10,0

Hotels, restaurants

10,1

  • 14,9

6,5 6,6 4,5 2,3 0,1

  • 5,3

Transport, communications

5,2

  • 8,6

5,5 6,5 4,0 2,1

  • 0,8
  • 1,5

Finance

13,5 1,5 0,3 3,5 19,6 12,0 10,5

  • 3,6

Real estate, letting

10,9

  • 4,5

6,0 2,2 2,8 0,9

  • 0,2
  • 0,9

State administration, defence

3,0

  • 0,1
  • 0,3
  • 3,2

0,9 1,0 0,5

  • 0,8

Education

  • 0,1
  • 1,4
  • 1,8
  • 0,8
  • 2,9
  • 2,1

1,9

  • 4,1

Healthcare, social services

0,9

  • 0,2

0,3 1,1 2,4 0,7 1,7 0,4

Utilities, other social services

1,4

  • 20,0

2,2

  • 0,4

0,8

  • 0,1
  • 2,3
  • 1,4

Activities of households

NA NA NA

  • 8,0

4,7 1,8 1,5 1,4

Net taxes

5,4

  • 14,0

7,3 7,0 3,5 1,0

  • 0,3
  • 6,8
slide-4
SLIDE 4

The State Statistics Service more fully brought its methodology in line with IMF standards. While this had little effect on real GDP dynamics, the nominal figures grew by 8-9% over 2014-2015

2011 2012 2013 2014 2015 Nominal GDP, new methodogy, R bln 59,698 66,927 71,017 77,945 80,804 Nominal GDP, old methodogy, R bln 55,967 62,176 66,190 71,406

  • Real GDP, new methodogy, y-o-y

4.3 3.5 1.3 0.7

  • 3.7

Real GDP, old methodogy, y-o-y 4.3 3.4 1.3 0.6

  • Source: State Statistics Service
slide-5
SLIDE 5

Industrial production and basic sector output y-o-y growth turned negative in 2015 (after moderate growth in 2014) but has bottomed in mid-2015, and largely remain flat since then

Even though the economy demonstrated quite strong resilience to external shocks it has yet to demonstrate equally strong ability to grow.

“Low” oil prices, institutional bottlenecks and some peculiarities of the investment climate cannot take all the blame for Russia’s poor economic performance.

Russia’s poor performance largely stems from weak domestic demand, which is suppressed by excessively high real interest rates.

Macroeconomic policy, which keeps evolving in an unknown direction, can in principle be corrected relatively quickly, and thus help to unlock Russia’s growth potential.

90% 100% 110% 120% 130% 140% 150% 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 Basic sector output S easonally adjusted 90% 100% 110% 120% 130% 140% 150%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Industrial output Seasonally adjusted

slide-6
SLIDE 6

Oil price itself does not affect the Russian economy – it is the change in the price and the rate of that change that is most important.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

  • 10%
  • 5%

0% 5% 10% 15% 30 60 90 120 GDP, y-o-y $/ bbl Urals

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

  • 10%
  • 5%

0% 5% 10% 15%

  • 60%
  • 40%
  • 20%

0% 20% 40% 60% GDP, y-o-y $/ bbl Urals, y-o-y

Source: State Statistics Service

slide-7
SLIDE 7

Russia’s financial account was almost symmetrically inflated on both sides (i.e. assets and liabilities), implying that on a net basis foreign borrowing was largely used to acquire foreign assets

  • 50
  • 25

25 50 75 100 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 Thousands Assets Liabilities

Note: “+” - increase, “-" - reduction Source: CBR

slide-8
SLIDE 8

Sanctions helped to prepare the economy for the oil price shock, an effective macroprudential measure that forced deleveraging, kept foreign debt to GDP ratio relatively stable amid weaker ruble

100 200 300 400 500 600 700 800 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Public debt Bank debt Non-bank debt

Total foreign debt as of April 1, $ bln

Source: CBR

slide-9
SLIDE 9

Monetary policy is in the spotlight as budgetary policy offered no surprises and was relatively stable and predictable

  • Economic policy is an essential factor for economic growth, which has a huge potential to

improve in Russia. Economic growth almost evaporated already in 2013 amid high oil prices, the economy nearly stagnated in 2014 before going into recession in 2015. Economic growth is not guaranteed even in 2017 unless the CBR corrects its policy.

  • Despite lip-servicing on inflation targeting inflation remained high and unstable. Hence, unlike

many countries interest rates in Russia remain high not only in nominal terms but in real as well, which impedes economic growth despite low debt levels.

  • Few years ago the Russian Central bank attempted to imitate quantitative easing policies of

global major central banks. As Russia’s key policy rate was never close to zero, this “easing” became very expensive as refinancing to banks was provided on almost exponential scale against junk collateral

  • n a relatively long-term basis. After the crash of the ruble the regulator was forced to change its policy.
  • A combination of policy tools which the Central Bank applied while conducting its experiments,

such as the aforementioned generous but expensive easing, interventions on the FX market (which have been finally abolished) etc., reduced the effectiveness of its interest policy. As a result the CBR remained behind the curve and it is still there.

  • The Central bank temporary lost its role of a lender of last resort. Amid high rates the Ministry of

Finance became the major supplier of liquidity as it finances the budget deficit from the Reserve fund (sold off-market to the CBR) and is not willing to borrow. Russia’s bond market remains thin as a result. What happens after Minfin’s savings evaporate, and how refinancing mechanism is going to work is just

  • ne of many questions to be answered.
slide-10
SLIDE 10

Apart from 2009-10, consumer lending inflated retail and GDP growth in the 2000es (albeit from low base). It no longer supports growth as combination of low debt and high rates became toxic

Consumer lending growth increased too quickly in 2011-13; it started to decelerate sharply in 2014-15 amid deleveraging.

Consumer debt to GDP ratio is still below 15% of GDP and as nominal terms it is not growing its ratio to GDP is sent to decrease in 2016.

Corporate loans to GDP ratio in Russia is also low relative to many other countries.

0% 10% 20% 30% 40% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Retail loans, % of GDP Corporate loans, % of GDP

  • 10%

0% 10% 20% 30% 40% 50%

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

Retail loans Corporate loans Total loans

slide-11
SLIDE 11

Even though consumer lending rates declined recently, they are still prohibitively high – particularly as nominal income growth moderated

Hence the country doesn’t need deleveraging – it needs re-leveraging amid lower rates to eliminate disconnect between the financial sector and the rest of the economy.

Expensive debt still servicing eats significant part of the current income of households and is similarly a heavy burden to businesses.

Credit growth is negative in real terms as a result.

  • 3%
  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 3,0 4,0 5,0 6,0 7,0 8,0 9,0 10,0 11,0 12,0

Loan growth, m-o-m Consumer lending starting from January 2009, R trln

16 18 20 22 24 26 28 30

Consumer lending rates remain high, %

up to 1Y maturity Over 1Y maturity

slide-12
SLIDE 12

Since 1H13, the CBR has increased its efforts to refinance banks but has also absorbed liquidity by buying FX; inflation accelerated and rates jumped as a result of the CBR’s key rate hike

4% 7% 10% 13% 16% 19% 22% 25% 28% 31%

  • 4 500
  • 3 000
  • 1 500

1 500 3 000 4 500 6 000 7 500 9 000

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

Central Bank credit to banks via repo, R bln Central Bank credit to banks excl. repo, R bln Accumulated Central Bank interventions, R mln (minus= selling) 1d RUONIA (rhs)

slide-13
SLIDE 13

Due to chaotic CBR interventions starting in mid-2013, the ruble has deviated far from equilibrium; and the exchange rate became much more sensitive to the oil price fluctuations

27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 20 30 40 50 60 70 80 90 100 110 120 130 RUB/ US D Brent, $/ bbl.

01.01.2010-31.10.2010 1.11.2010-31.08.2011 1.10.2011-30.04.2013 15.05.2014-21.06.2016 15.05.2015-21.06.2016

slide-14
SLIDE 14

Regression line has flattened in 2Q16

60 65 70 75 80 85 25 30 35 40 45 50 55 US D/ RUB Brent, $/ bbl January 1- February 29 October 1 - December 31 Mar 1- Jun 21

slide-15
SLIDE 15

The CBR was always late with moving its key policy rate, %

5 10 15 20 25 30 Jan2013 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan2014 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan2015 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan2016 Feb Mar Apr May Jun Jul

Inflation 6m MA, annualized Inflation y-o-y Key rate

slide-16
SLIDE 16

Vicious circle: Inflation remains high, CBR keeps key rate high, Minfin as a result monetizes its deficit and injects cheap money

1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16

Cumulative budget deficit since January 2015 CBR refinancing

slide-17
SLIDE 17

CBR provided refinancing in FX, which was unnecessary for the economy and distortive for the markets

The bulk of refinancing in FX the CBR provided to banks in the early 2015 when the current account massively widened which later caused various distortions on all market segments, including the Russian Eurobond market.

At some point refinancing in FX and refinancing in rubles became more or less comparable, which increased risks for banks in the case of another sharp fluctuation of the currency.

As long as this refinancing exists and is a possibility in the future the ruble cannot be treated as fully floating currency.

30 40 50 60 70 80 90 2,000 4,000 6,000 8,000 10,000 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 CBR FX refinancing in RUB, R bln CBR RUB refinancing, R bln RUB/ US D (rhs)

5 10 15 20 25 30 35 40 Nov ’14 Dec ’14 Jan ’15 Feb ’15 Mar ’15 Apr ’15 May ’15 Jun ’15 Jul ’15 Aug ’15 S ep ’15 Oct ’15 Nov ’15 Dec ’15 Jan ’16 Feb ’16 Mar ’16 Apr ’16 May ’16 Jun ’16 Jul ’16 Aug ’16 S ep ’16 Minfin FX deposits CBR non-market FX CBR FX credits CBR FX RE PO (including amortization)

slide-18
SLIDE 18

Despite talking about inflation targeting, until November 2014 the CBR had in fact two incompatible targets – currency band and band for the overnight rate

On November 10, 2014 the CBR eliminated the bi-currency band (it was designed in such a way that the CBR could only spend reserves), allowing the ruble to move more freely, which it eventually did.

The band still exists for the overnight rate, and after rate hikes it in fact narrowed on a relative basis.

Meanwhile, due to asymmetrical pass through effects (inflation is up if ruble weakens, but its appreciation brings no deflation) more volatile ruble means higher inflation (assuming other factors equal).

29 34 39 44 49 54 59 64 69 74 79 84 89 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 4% 8% 12% 16% 20% 24% 28% 32% Oct ’14 Jan ’15 Apr ’15 Jul ’15 Oct ’15 Jan ’16 Apr ’16 CPI, y-o-y CBR deposit rate CBR fixed lending rate RUONIA