2012-11-15 00:26:56 - Russia Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
The Russian economy continues to face significant challenges of weakening external demand and uncertainty over the policy environment, which affects business sentiment. However, we still believe that the government will pursue a more business-friendly approach and seek to attract financing for major infrastructure projects, which should help to sustain a solid longer-term growth outlook for Russia´s economy.
Attention will shift away from protesters to policy trajectory under the new government. While, initially, a period of power consolidation may ensue, we believe that efforts to insulate the economy from global oil price shocks and weaker demand will keep reforms high on the government´s agenda. Growing spending requirements and plans to generate higher investment will see Russia´s fiscal position slip into a moderate
deficit, while the government will accumulate a higher debt pile over the coming years. However, this is unlikely substantially to unsettle investors, and we believe that higher spending will be evaluated more on its quality and degree of contribution to modernisation of the economy than on its size, with government debt not set to exceed 12.1% of GDP over our 10-year forecast period to 2021.
A calming political environment and growing foreign investor interest in Russia will see the trend in large private-sector capital outflows gradually reverse over the coming quarters. In addition to higher oil prices and improving political stability, we view the domestic bond market liberalisation as an important event, which will eventually attract significant foreign capital inflows.
Major Forecast Changes
We have downgraded our medium-term RUB/US$ and exchange rate forecasts this quarter, as the currency has failed to make up lost ground despite elevated oil prices. Combined with what has become a much more bearish global growth outlook in recent months, we have now opted to lower our average 2012 currency forecast from RUB30.30/US$ to RUB31.72/US$, implying the unit will trade around current levels for the remainder of this year.
Moreover, since we expect appreciatory pressure to stay subdued beyond 2012, this translates into a more sizeable downward revision to our 2013 forecast, from RUB28.95/US$ to RUB33.00/US$. Our new end-2012 and end-2013 forecasts of RUB33.00/US$ puts us slightly below consensus estimates for 2012 (Bloomberg forecasts consensus to be at RUB32.00/US$ for 2012) and significantly below consensus for 2013 (RUB31.55/US$).
Key Risks To Outlook
Russia´s economic outlook has become more uncertain on account of the ongoing crisis in its main export market, Europe. An escalation in the eurozone cannot be ruled out, and risk of a eurozone exit by a larger member, such as Italy or Spain, as well as a major shake-up to banking-sector stability, would have serious repercussions for Russia.
Not only would this see liquidity tighten domestically, but exports would end up getting hit more than we our forecasts currently imply. Finally, we also caution that the hard landing scenario we are calling for in China is the third main risk factor to our growth outlook for Russia. A sharp drop in demand and a concomitant decline in global commodity prices would force a more abrupt rebalancing of the Russian economy towards the non-energy sector economy, which could foster several years of very weak economic growth.
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