World Bank worsens Russian 2015 GDP decline estimate to 3.8% from 2.7%
MOSCOW. Sept 30 (Interfax) - The World Bank has worsened its Russian 2015 GDP decline estimate to 3.8%, from the 2.7% it was forecasting in June.
The World Bank published the latest estimate, which matches the forecast it gave back in April, in its Russia Economic Report 34: Balancing Economic Adjustment and Transformation, on Wednesday.
The World Bank is also less optimistic than it was in June about the prospects for the Russian economy in 2016. The forecasts have swung from 0.3% decline in April to 0.7% growth in June and now 0.6% decline next year. But the economy might grow 1.5% in 2017, still less than the 2.5% the World Bank was expecting in June.
"Low oil and gas prices, geopolitical tensions and ongoing international sanctions deepened Russia's recession in the first half of 2015. A significant increase in the poverty rate, decreased consumer demand and sharp contraction in real wages have had a severe impact on households. However, the policy response by finance authorities has managed to stabilize the economy. Country growth perspectives remain negative. The outlook hinges not only on the evolution of external factors, but also on Russia's internal capacity to adapt to an increasingly difficult macro-fiscal context," the World Bank said in the report.
"Adverse external conditions pose a serious challenge to Russia's short-term growth prospects. The continued impact of the adjustment to lower oil prices in a context of ongoing international sanctions will cause the Russian economy to contract in 2015. Medium-term growth prospects depend on how Russia will brave the difficult adjustment to this new economic reality, but high policy uncertainty prevails. In the longer term, there is an opportunity for Russia to benefit from a structural transformation of its economy," it said.
Given renewed concerns regarding oil-price volatility compounded by downside risks to the global economic outlook, Russia's upper-bound and lower-bound oil price scenarios differ markedly, it said.
Baseline scenario
In this scenario, oil will trade $53 a barrel in 2015 and 2016 and $55 in 2017.
Inflation is expected to be 15.5% in 2015, 7.5% in 2016 and 5% in 2017.
"While the central bank is expected to adhere to its inflation-targeting regime, continuing fallout from the ruble devaluations in end-2014 and mid-2015 is expected to keep both headline and core inflation in double digits through the second half of 2015, resulting in an average inflation rate of 15.5 percent for the year. This will limit the pace of monetary easing in 2015. Devaluation concerns are projected to wane in 2016 as oil prices stabilize, and low consumer demand is expected to slow the inflation rate to an average of 7.5%. In 2017, the inflation rate is expected to drop to 5%, in line with the central bank's medium-term target," the World Bank said.
"Low international commodity prices and the impact of sanctions will continue to affect Russia's external accounts. Adjustments in the current account will continue during the second half of 2015. Despite the declining value of merchandise exports (due to low commodity prices) the trade balance is likely to increase as imports continue to fall. The current account will also be supported by further improvements in the investment income and service accounts. As a result, the baseline scenario projects that the current account will strengthen in 2015 to $97.3 billion (8.1% of GDP), up from $58.4 billion (3.2% of GDP) in 2014. In 2016, a modest acceleration in import growth in a context of stable exports will cause the current account to deteriorate to $90.3 billion (6.9% of GDP). Economic sanctions are expected to limit roll-over capacity and access to external financing among Russia's major banks and corporations. However, pressure on the capital account should gradually subside as the debt service profile improves in 2015-2017 following the already significant deleveraging of external obligations by the private sector. The expected exchange-rate stabilization would help to curb capital flight and slow the acquisition of foreign exchange by the general public, moderating net capital outflows," the World Bank said.
The capital account deficit is projected to decrease from $113 billion (9.5% of GDP) in 2015 to $82.4 billion (6.3% of GDP) in 2016 and $67 billion (4.6% of GDP) in 2017.
The ruble/USD exchange rate will fluctuate around the 60-ruble mark in the next three years and average at 62.3 rubles/$1 in 2015, 61 rubles/$1 in 2016 and 58.2 rubles/$1 in 2017.
"Russia's consolidated fiscal balance is projected to deteriorate from 1.3% of GDP in 2014 to 4.3% in 2015. Because the projected reduction in expenditures in 2015 would not compensate for the concurrent decline in revenues, the government is expected to drawdown the Reserve Fund substantially. The overall government deficit is projected to decrease in 2016 and 2017 due to an expected significant fiscal consolidation," the World Bank said.
Consumption could fall 7.5% in 2015 and 1.7% in 2016 but rise 1% in 2017. "Only in 2017, when inflation is projected to fall to an average of 5%, are real incomes expected to increase modestly, supporting a recovery in private consumption and helping to build growth momentum in the economy," the World Bank said. "Tight government budgets and high import prices for investment goods and construction materials suggest that large public infrastructure projects may be delayed or scaled down. As a result, the baseline scenario estimates a contraction in gross capital formation of 15.5% in 2015 and 2% in 2016, partly driven by inventory destocking," it said, adding that 6.8% growth was possible in 2017.
Lower-bound scenario
The lower-bound scenario, in which oil prices fall well below the baseline projection, estimates that GDP could contract as much as 4.3% in 2015 and another 2.8% in 2016. Zero growth might be expected for 2017.
This scenario assumes that oil prices will continue to drop in the second half of 2015, averaging $43 in the latter six months. This would yield an overall average of $50 per barrel in 2015, which would slide further to an average of $40 per barrel in 2016 and 2017. "Falling oil prices would cause a sharper contraction in both consumption and investment than predicted in the baseline, resulting in significantly worse growth outcomes in 2015 and 2016," the World Bank said.
The ruble would continue to depreciate moderately in response to lower oil prices. Elevated inflationary expectations would accelerate the erosion of real incomes and increase interest rates on consumer and commercial credit. Inflation would average at 15.8% in 2015, 8% in 2016 and 5% in 2017, and the ruble would average at 63 rubles/$1 in 2015, 67.1 rubles/$1 in 2016 and 63.8 rubles/$1 in 2017. As a result, consumption would contract by 8.4% in 2015, 3.8% in 2016 and 1.8% in 2017, and gross capital formation by 20.6% in 2015 and 5.1% in 2016, rising 3.2% in 2017.
The general government deficit would amount to 4.6% of GDP in 2015, 4% in 2016 and 2.9% in 2017. "Larger deficits are expected to be financed by a more rapid drawdown of the Reserve Fund combined with an increase in external borrowing," the World Bank said.
The current account would be $97.8 billion (8.3% of GDP) in 2015, $97.7 billion (8.5% of GDP) in 2016 and $90.3 billion (7.1% of GDP) in 2017. The capital account deficit might be $112.9 billion (9.6% of GDP) in 2015, $99.4 billion (8.6% of GDP) in 2016 and $92.1 billion (7.2% of GDP) in 2017.
Upper-Bound Scenario
In the upper-bound scenario, real GDP would contract by 3.1% in 2015, followed by 1.3% growth in 2016 and 1.7% growth in 2017.
As in the lower-bound scenario, these growth projections are primarily driven by oil prices, which in this case are expected to rise to $58 per barrel in 2015, $63 per barrel in 2016 and $67 per barrel in 2017. "Higher oil prices are expected to have a positive spillover effect on economic activity. As oil prices rise from the second half of 2015 through 2017 the ruble is expected to strengthen, which would ease inflationary expectations," the World Bank said.
Inflation would average at 15.2% in 2015 and 7% in 2016 before returning to the target range of 5% in 2017; and the ruble at 58 rubles/$1, 63.6 rubles/$1 and 67.1 rubles/$1, respectively. Consumption would fall 7% in 2015 but rise 2.1% in 2016 and 2.8% in 2018.
The general government deficit would be 4.5% of GDP this year, 3.2% in 2016 and 2.9% in 2017.
The current account would be $81.9 billion (6.3% of GDP) in 2015, $68.9 billion (4.4%) in 2016 and $50.8 billion (2.8%) in 2017; and the capital account deficit would be $92.5 billion (7.1%), $72.5 billion (4.7%) and $42.5 billion (2.3%) in the respective years.