10 Nov 2009 13:55

World Bank not expecting private sector default by Russia in 2009

MOSCOW. Nov 10 (Interfax) - The World Bank is not expecting Russia's private sector to default on its debt commitments this year, despite ongoing refinancing risks, however the balance sheets of banks are likely to deteriorate and non-performing loans could exceed 10%, the World Bank said in an economic review.

Despite persisting risks through the end of 2009 relative to debt repayment and refinancing and the fact the private sector must repay roughly $33.2 billion in debt in the fourth quarter (of which banks must repay $10.1 billion), the World Bank does not expect any substantial defaults by either banks or corporations, the report says.

The World Bank also expects that the Central Bank of Russia will continue to lower the refinancing rate in order to stimulate lending to the real sector of the economy. However, it believes the effect will be quite limited, as the Central Bank rate remains a benchmark only, while the cost of borrowing remains prohibitively high, the report says.

Despite certain improvements in the situation with liquidity, lending in Russia remains limited, and the number of overdue loans will continue to grow in the rest of the year. The overdue loan rate was 5.8% as of August 2009, according to Central Bank data and the share of restructured loans was 23.8% (July 2009).

Bank balance sheets will continue to deteriorate with the increase in the number of bad loans, which may rise above 10% by the end of the year, the report says.

Bank lending will remain limited for the rest of the year as the credit risks banks face continue to rise, despite the improvements in liquidity and fiscal easing. Growth in lending to the private sector fell to 10.7% in August 2009 compared with growth of 43.8% in August 2008, and lending to consumers actually declined in that month.

Overall foreign sovereign and private sector debt totaled $487.4 billion as of the end of September 2009 compared with $480.5 billion at the end of 2008.

World Bank economist Sergei Ulatov said at a press conference on Tuesday that the forecast for a 10% bad loan rate at the end of the year was calculated based on Central Bank reporting methodology, which does not fully correspond to international practice in that it does not incorporate restructured loans into the non-performing loan rate. If those loans were included, the overdue rate would be much higher. The overdue rate reported by the Central Bank should be adjusted upward by a factor of 1.5-3, he said. For example, the 10% rate should be multiplied by a factor of at least 1.5, he said.

As for 2010, the World Bank does not expect the overdue loan rate to increase given that the current macroeconomic forecasts are accurate. The World Bank forecasts Russian GDP to grow 3.2% in 2010. The risk from bad debts will remain, but will diminish as time passes, Ulatov said.