Russian Economic Ministry revises 2014 GDP growth forecast down to 1.1%

MOSCOW. April 9 (Interfax) – Russia’s Economic Development Ministry has lowered its 2014 GDP growth forecast in the base scenario from 2.5% to 1.1% and in the conservative scenario to 0.5%, Deputy Economic Development Minister Andrei Klepach said during a Tuesday evening briefing in Moscow.

The main difference between the two scenarios, Klepach said, is the possibility in the base scenario for the modification of the budget rule this year.

“The forecast was sent to the Finance Ministry today. This is still a working version of the forecast. Some updates are possible when we receive observations from them, from the Central Bank and other agencies. The Finance Ministry will in parallel start to evaluation the budget. Consideration of the forecast in the government is slated for April 24 for now,” he said.

Klepach said that “shock scenarios associated with sanctions, with some kind of serious cataclysm in the world economy” are not factored into these scenarios.

“We have three scenarios in all. The third is the so-called ‘accelerated’ scenario, which shows at what rates we should move at in order to meet the macroeconomic guidelines in the president’s orders,” he said.

“But the main thing is the first and second scenarios, which naturally differ from the forced one, although this does not mean that the defined parameters of the president’s social orders cannot be met,” Klepach said.

He said the “first scenario can be treated as conservative” and it projects GDP growth of 0.5% in 2014, 2.4% in 2015, 2.2% in 2016 and 3.1% in 2017. “These rates of growth do not make it possible to meet most of the social and economic development challenges facing the country,” Klepach said.

“Along with this, we’ve prepared a second scenario. This is a scenario where certain stimulus measures are taken that make it possible to break the negative trend, albeit not immediately, and nevertheless support private investment. This is backed also by higher dynamics in lending to nonfinancial organizations,” Klepach said.

“Government capital investment here, unlike the first scenario, is expected to grow, though at fairly low rates of growth – by 1.8% in 2014, and then from 1.2% to 3% in 2017. This is possible in conditions of easing, in other words modification of the fiscal rule this year already,” Klepach said.

The base scenario projects that GDP will grow by 2.6% in 2015 and 3.7% in 2016, compared to respectively 2.8% and 3.3% in the previous forecast.

Klepach said the economic growth forecast for this year has been lowered due to both higher capital outflows, which are now expected to reach $100 billion in 2014 compared to the previously forecast $25 billion, and changes in the scope of exports, including exports of hydrocarbons to Europe and Ukraine.

“Earlier we factored in growth of gas shipments to Ukraine. Ukraine’s request was 30 billion cubic meters, while the initial agreement was altogether for 40 bcm. We were initially forecasting more than 25 bcm. Now shipments are decreasing. Considering ability to pay and current dynamics, we’ve factored in 20 bcm. This is not a question of sanctions or a trade war, this is an acknowledgement of the limits that have arisen,” Klepach said.

He said gas exports to Europe were previously also expected to grow, but now exports are expected to stabilize within the bounds of the conservative scenario. “Considering the fact that the EU cannot after all replace Russian gas, because this requires time, but will try to avoid increasing demand, despite a certain revival of the economy,” Klepach said.

He said the conservative forecast projects a drop in private investment in 2014 that will not be offset by state investment and investment by natural monopolies, which are also decreasing. Under the fiscal rule, state investment will decrease by 2.2% in 2014, he said.

In order to avoid such a steep drop in investment this year, the ministry has proposed to modify the fiscal rule, as well as recapitalize banks with money from the National Welfare Fund (NWF) so as to keep growth of lending to the real sector of the economy at an acceptable level, Klepach said.

“These are proposals of our ministry. They are necessary to move from the conservative scenario to the base one. The final decision will be made by the government,” Klepach said.

“The fiscal rule this year allows additional oil and gas revenues, including revenues related to devaluation, to be used to compensate for lost non-oil and gas revenues, but only within these amounts,” Klepach said. The amount of revenues from devaluation and higher oil prices will be far higher than non-oil and gas revenues lost as a result of the economic slowdown, he added.

“As a result, we expect that a small amount of these expenditures will be used and invested in the economy, both to support Crimea and to tackle urgent challenges in infrastructure and support certain key sectors – this concerns high-tech medical care, measures to support agriculture,” Klepach said.

He said the weakening of the ruble could generate about 800 billion rubles in additional revenue, and the increase of the oil price by $3 compared to the previous forecast would generate about another 200 billion rubles. “It comes to about 1 trillion rubles, but non-oil and gas revenues will decrease by more than 300 billion rubles. About 600 billion rubles in additional revenue remains, but we’re not factoring in that all this money will be spent. Far less is proposed,” Klepach said.

More substantial changes to the fiscal rule might be possible starting in 2015, he said. “The factored in hypothesis is that we increase spending from the base oil price not by 1% but up to 1.5%. In other words, it will turn out to be less than the deficit threshold of 2% of GDP that [Economic Development Minister Alexei Ulyukayev] talked about,” Klepach said, adding that this would mean increasing federal budget spending by about 0.5% of GDP starting in 2015.

“Therefore, this option is actually also a fairly tight fiscal construct. The fiscal rule is not eliminated, but modified, at least for a time in order to support economic growth, tackle new challenges related to Crimea and at least ensure minimal coverage of the structural deficit related to the development of priority sectors and implementation of government programs in transportation and healthcare above all. This provides small growth of state capital investments, but in our view they are critically needed,” Klepach said.

In addition, NWF money needs to be channelled into “expansion of the capital of the banking system, both Vnesheconombank (VEB) and a number of other banks,” in order to support lending to the real sector and facilitate the financial recovery of a number of high-tech companies, he said.

The ministry is proposing that at least 200 billion rubles of NWF money be used for this purpose to form additional capital at various tiers, though there could also be other ways to recapitalize banks, Klepach said.