Russia Economic Report September 2014 | Edition No. 32 Russia - PowerPoint PPT Presentation

Policy Uncertainty Clouds Medium-Term Prospects Russia Economic Report September 2014 | Edition No. 32

Russia Economic Report No. 32 1. Recent Economic Developments 2. Outlook and Risks 3. Paths to Diversified Development in Russia

Main messages 1 • Seasonally adjusted growth for the first two quarters was near zero. Russia’s economy is • Structural impediments slowed economic expansion even before the impact of stagnating and increased policy uncertainty amid increased geopolitical tensions. uncertainty is impacting • The economy needed to internalize several rounds of sanctions, investor and consumer countersanctions and measures to stabilize the economy: this meant operating decisions in an environment of higher risk, which depressed domestic demand. • Macroeconomic stability prevails and Russia remains in possession of large 2 buffers to uphold stability in the near future. There are substantial • It is now policy uncertainty about the economic course the country will take risks to Russia’s that is casting the longest shadow on Russia’s medium -term prospects. medium-term outlook • Our baseline projection is one of near stagnation with growth of 0.5 percent in 2014, 0.3 percent in 2015, and 0.4 percent and 2016. 3 • The stabilization effort should go hand in hand with renewed focus on Economic recovery will improving the economy’s microeconomic fundamentals . need a predictable • A more balanced portfolio of national assets will help overcome structural policy environment and constraints to growth. a new model of • Stabilization, transparent rules, better quality of public investment, and diversified development competition should be the reform priorities for the next decade. 4 • Restrained investment makes it less likely that well-paying jobs will be created, Prospects for future which could counterbalance the slowdown in income growth. poverty reduction and • Unless addressed, high inflation will hurt consumption growth, dimming the shared prosperity are likelihood for further poverty reduction. limited

Russia’s Quarterly Growth GDP growth, y-o-y and q-o-q sa, percent 6 5 4 3 2 1.4 1.0 0.4 0.8 0.7 1 0.4 0.0 1.3 1.0 0 0.2 0.3 0.3 0.4 0.1 -1 GDP growth, y-o-y GDP growth, q-o-q, sa

Russia’s Growth Outlook GDP growth, percent, y-o-y 3 2 1 0 -1 -2 2012 2013 2014 2015 2016 Pessimistic scenario Optimistic scenario Low risk scenario (March 2014) High risk scenario (March 2014) Baseline scenario

Russia’s current asset base: abundant natural resources, good human capital, improving infrastructure, but weak institutions Russia’s asset portfolio is heavy on natural resources: distribution of wealth by assets, 2005, in percent. 100% 90% 33 80% 70% 60% 24 50% 40% 30% 43 20% 10% 0% AUS AZE CAN KAZ MYS NLD NOR RUS SAU TKM UKR ARE USA UZB VEN Natural capital Produced capital Intangibles

→ Development Challenges Poverty and Shared Prosperity 16 0.424 0.422 15 0.420 14 0.418 13 0.416 12 0.414 11 0.412 10 0.410 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Poverty rate, % Baseline scenario Optimistic scenario Pessimistic scenario Gini (rhs)

Recent Economic Developments: An Economy on the Threshold of Recession

→ Weak Domestic Demand Growth composition, percent, y-o-y 17 9 1 -7 -15 -23 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Consumption GFCF Change in stock Export Import Discrepancy GDP growth Note: Q2 2014: World Bank estimate

→ Increasing Borrowing Cost Depress Investment Central Banks Key Policy Rate (percent) and Russia’s CDS spreads ( bps) for 5 year bonds 300 8.5 8 280 7.5 260 7 6.5 240 6 220 5.5 200 5 4.5 180 4 11.01.2011 15.03.2011 10.05.2011 05.07.2011 30.08.2011 25.10.2011 20.12.2011 28.02.2012 24.04.2012 19.06.2012 14.08.2012 09.10.2012 04.12.2012 12.02.2013 09.04.2013 04.06.2013 30.07.2013 24.09.2013 19.11.2013 04.02.2014 01.04.2014 27.05.2014 22.07.2014 16.09.2014 160 140

→ Depreciation and Inflation Dampen Consumption Exchange rate dynamics (Euro- Dollar basket) and Russia’s CPI inflation by components 12 0.0265 0.026 10 0.0255 8 0.025 6 0.0245 4 0.024 0.0235 2 0.023 0 2011 2012 2013 2014 0.0225 Food Non-Food Services CPI

→ Consumption H eld Back by Stagnating Real Wages Real wage growth, percent, y-o-y 15 10 5 0 -5 -10 2009 2010 2011 2012 2013 2014 non-Market non-Tradables Tradables Total

→ … and by Households’ Debt Obligations Non-performing Loans as a share of total credit, y-o-y, percent 10 9 8 7 6 5 2010 2011 2012 2013 2014 Nonperforming Loans:Total Loans Loan Loss Provisions:Total Loans Nonperforming HH Loans: Total HH Loans

→ Output Growth by Sectors Non-tradable and tradable sector growth, y-o-y 14 4 3.5 3 9 2.5 2 4 1.5 1 -1 2013 Q1 2014 Q2 2014 0.5 0 -6 2013 Q1 2014 Q2 2014 -0.5 Electricity, gas, and water Construction -1 Retail trade Transport Agriculture Mineral extraction Manufacturing Financial services Real estate

→ Limited Import Substitution Potential Capacity utilization rate in manufacturing in percent and unit labor cost (2005=100) 70 300 280 65 260 60 240 55 220 200 50 180 45 160 140 40 120 100 Electronic and Optical Equip Food Transport Vehicles Machinery & Equip Textile & Clothing Manufacturing

World Bank Outlook for Russia: Stagnation in the Face of Policy Uncertainty

Russia’s Growth Outlook GDP growth, percent, y-o-y 3 2 1 0 -1 -2 2012 2013 2014 2015 2016 Pessimistic scenario Optimistic scenario Low risk scenario (March 2014) High risk scenario (March 2014) Baseline scenario

Benchmarking Russia’s Growth Global GDP growth, percent, y-o-y 12 8 4 0 -4 -8 -12 Russia OECD HI EU Emerging Other Emerging

Subdued Global Growth Outlook Global real GDP growth, percent, y-o-y 2009 2010 2011 2012 2013 2014f 2015f 2016f World -1.9 4.3 3.1 2.5 2.4 2.6 3.2 3.4 High Income -3.6 3.0 1.8 1.5 1.2 1.8 2.4 2.5 Developing Countries 3.0 7.8 6.3 4.8 4.8 4.5 5.0 5.3 Euro Area -4.4 1.9 1.6 -0.6 -0.4 0.9 1.4 1.8 Russia -7.8 4.5 4.3 3.4 1.3 0.5 0.3 0.4

→ Development Challenges Poverty and Shared prosperity 16 0.424 0.422 15 0.420 14 0.418 13 0.416 12 0.414 11 0.412 10 0.410 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Poverty rate, % Baseline scenario Optimistic scenario Pessimistic scenario Gini (rhs)

Policy Risks The stalling of structural reforms represents a down- side risk to Russia’s medium- and long-term outlook. Structural constraints in the economy could diminish the effectiveness of the Central Bank’s disinflation policy. In the current environment of elevated inflation risk, it will be particularly important to adhere to fiscal prudency.

Special Focus Note Paths to Diversified Development in Russia

Russia reached its potential output Russia’s potential growth (in percent) may be slowing. 7 6 5 4 3 2 Russia 1 BRICS Average (excluding Russia) EU11 Average (excluding Croatia, Latvia and Luthuania) Resource Rich* Average 0 2009 2010 2011 2012 2013

How to reverse the slowdown in potential output? In the boom years growth became gradually less driven by productivity increases. Total factor productivity growth growth slowed as productivity gains from first generation reforms wore off 15 10 5 Percent 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -5 Total Factor Productivity -10 Capital Labor GDP Growth -15

The National Asset Approach Assets can be classified into three categories: natural resources, built capital, and national institutions. Natural resources - minerals, arable land, and forests - are largely endowed, but technological progress and better management can radically alter their economic value. Built capital - physical and human capital, in the form of adequate infrastructure and a healthy and skilled labor force. National institutions - the regulations and mechanisms that a country has put in place to manage resource rents, deliver public services - such as roads, security, health care, and education - and regulate private enterprise. Three ways to integrate and grow: export product share, by factor intensity

Russia’s current asset base: abundant natural resources, good human capital, improving infrastructure, but weak institutions Russia’s asset portfolio is heavy on natural resources: distribution of wealth by assets, 2005, in percent. 100% 90% 33 80% 70% 60% 24 50% 40% 30% 43 20% 10% 0% AUS AZE CAN KAZ MYS NLD NOR RUS SAU TKM UKR ARE USA UZB VEN Natural capital Produced capital Intangibles