27 Aug 2019 09:33

Russian economy could slip into recession in 2021, shrink by 0.6% if consumer lending growth does not slow - minister

MOSCOW. Aug 27 (Interfax) - The Russian economy could slip into a recession in 2021 and even contract by 0.6% if consumer lending continues to grow at the current pace, but this is unlikely, Economic Development Minister Maxim Oreshkin said.

"The baseline scenario of the forecast, which assumes stable development of the Russian economy, factors in the supposition that the growth of the consumer loan portfolio will slow to about 20% year-on-year this year and to about 4% year-on-year by the end of 2020," Oreshkin said at a briefing on Monday.

"Under the baseline scenario it is expected that consumer demand will slow this year. Retail sales growth in this scenario will slow to 0.6% year-on-year in 2020. However, a more rapid reduction of the key interest rate by the Bank of Russia will lead to the growth of other types of credit and decline of the savings rate through other channels, primarily through the speed of retail deposit accumulation, which will partially ease the negative shock on final demand from the slowdown of consumer lending," Oreshkin said.

"If measures to curb the rate of growth of the consumer loan portfolio do not have the necessary effect, the scenario of a 'sudden stop' in consumer lending could be realized due to the dramatic deterioration of borrowers' solvency with the continued growth of the debt burden. The Economic Development Ministry estimates that if the portfolio continues to grow at current rates there could be a sharp turnaround in the trend in 2021," he said.

"In that case, the negative contribution of the deleveraging of households to the rate of consumer spending growth will reach minus 6% year-on-year. This means that, even taking into account other compensating factors [such as] the easing of monetary policy by the Bank of Russia, household spending on final consumption could decrease by up to 4.5% year-on-year in real terms, in which case the economy will slip into a recession. In this scenario, GDP will contract by 0.6% in 2021," Oreshkin said, speaking about the risks of continued rapid growth of consumer lending.

The "current situation in the consumer credit segment is also acquiring the features of a social problem," he said.

"According to Bank of Russia data, the payments/income ratio for new borrowers in the cash loans segment averaged 43.9% in the first quarter of 2019. Furthermore, the payments/income ratio for 15% of borrowers exceeds 70%, which leads to a substantial deterioration in the borrower's living standards. All this is happening against the backdrop of the double blow to households' real disposable incomes from the rapid growth of consumer credit through the slowdown of income growth and increase in the amount of interest payments," Oreshkin said.