PARIS (Standard & Poor’s) Oct. 15, 2015–Standard & Poor’s has revised its GDP growth forecast for Russia down to –3.6% in 2015 from -2.6% previously, and for 2016 to 0.3% from 1.9%, Standard & Poor’s said in a report published today, “The Weaker Outlook For Oil Prices Is Taking A Toll On Russia’s
“The change reflects our expectations of a more prolonged weakness in domestic demand due to lower–and more volatile–oil prices, and tighter fiscal and monetary policies through end-2016, compared with our previous assumptions,” said Standard & Poor’s senior economist Tatiana Lysenko. “We now anticipate a weakness in private consumption to extend into 2016, and an only marginal recovery in capital spending next year, helped by improved corporate profit margins and a slowdown in deleveraging.”
Foreign trade is unlikely to boost growth next year, in our view. Net exports rose strongly in the first half of 2015, making for a less severe 3.5% decline in headline GDP than in domestic demand that fell by almost 10%. This occurred mainly because of a sharp decline in import volumes, by almost 30%, inresponse to falling demand and currency depreciation.
Imports are unlikely to fall further from today’s depressed levels, however. In fact, our baseline assumes imports will rise gradually after the Russian ruble’s exchange rate stabilizes in nominal terms, which would imply appreciation in real effective terms next year.
We previously expected a gradual recovery in domestic demand starting in the second half of this year, against the backdrop of a stabilizing exchange rate, slowing inflation, and declining interest rates, with support from a recovery in oil prices. However, renewed weakness in oil prices, which declined by 25% over July-September, and changing expectations about their medium-term outlook are taking a toll on recovery prospects.
The ruble lost about 20% of its value against the U.S. dollar over July-September, returning to levels last seen in February, and inflation accelerated again, climbing to 15.8% year on year in August, compared with 15.3% in June.
Exchange rate and inflationary pressures prompted the central bank to pause the easing cycle in September, when it kept the key rate unchanged at 11%. While the ruble has since regained some strength and inflationary pressures have eased, we believe that elevated uncertainty will keep the CBR from lowering rates until 2016.
We now anticipate oil prices to stay lower for longer. Standard & Poor’s revised its oil price assumptions, and now expects Brent to average $50 a barrel in fourth-quarter 2015, and $55 in 2016 (versus $55 for 2015 and $65 for 2016 previously; see “Standard & Poor’s Revises Its Crude Oil And Natural Gas Price Assumptions,” published on Sept. 24, 2015). This would translate into lower export revenues, a weaker exchange rate, and a higher inflation rate in Russia, compared with our previous expectations.
What’s more, fiscal policy is likely to be pro-cyclical next year. In anticipation of the hit to oil revenues from lower-than-previously-expected oil prices, the Russian government has proposed several measures to contain the budget deficit, including limiting pension indexation and freezing public wages, as well as increasing energy taxes.
“Those measures are likely to further depress demand in the short term, though may also help to contain inflation, and allow the central bank to resume the reduction in interest rates sooner rather than later,” said Ms. Lysenko.