Download 250 KB Russia: Budgetary Aces

SBERBANK OF RUSSIA
Russia: Budgetary Aces
June 16, 2014



In the absence of external shocks, the stability of government finances can’t be
doubted and will be provided even under the conditions of significant
economic deceleration. The federal budget deficit will remain low and the
public debt will increase insignificantly
Even a significant increase of budget expenditures will not result in disastrous
consequences, although, in this scenario, the federal budget deficit expansion
reaches more risky levels of ~4.5-5% of GDP in a medium-term perspective. A
slight acceleration in economic growth with increasing expenditures helps to
slow down the growth of the budget deficit
The fall of oil prices to $80 per barrel is critical for the budget stability. A
serious expansion of the budget deficit, the accumulation of the public debt
and the full use of sovereign wealth funds will cause the necessity of structural
changes in budget policy
Fiscal Sustainability: Risks Can’t be Ignored, but…
Fiscal sustainability is
an important
achievement of the
country…
The stability of government finances is an important element of the economic
stability and a subject of deserved pride of the government. Despite the
significant deceleration in economic growth and the burst of geopolitical risks,
the state of public finances is not a cause for concern. The federal budget deficit
remains low (less than 1% of GDP). The size of the public debt (9.5% of GDP in
total, including 2,9pp of the external public debt) allows us to talk about low risks
of the rising cost of its maintenance. Even the hard consequences of falling oil
prices can be smoothed for 1-2 years with the help of “safety cushion”, i.e. the
sovereign wealth funds which reached $175 billion in total, or more than 9% of
GDP.
…but there are risks
that should be
evaluated under
different scenarios of
economic development
and policy choices
However, the general deterioration of the economic situation has affected a
budgetary sphere as well: the income is not enough to finance all the ambitious
projects and tasks at one time, which demands a careful and scrupulous
management of priorities. New urgent expenses lead to slow growth of the
budget expenditures. Now we more often hear talks about the abolition of socalled “budget rule”, according to which the size of the budget deficit should not
exceed 1% of GDP in case of limiting the use of oil and gas revenues to finance
Federal budget deficit, % GDP
Source: Ministry of Finance of the Russian Federation
© Centre of Macroeconomic Studies of Sberbank of Russia
Public debt, % GDP
Source: Ministry of Finance of the Russian Federation, Bloomberg
1
SBERBANK OF RUSSIA
current budget expenditures. Although the government makes loud statements
about the integrity of “budget rule”, in the past years the authorities
demonstrated a flexible approach modifying the rule and treating it in
accordance with circumstances. Thus, the shortfall of non-oil revenues in 2013
was offset by the use of oil revenues, exceeding the limits, set by the rule (i. e.
exceeding revenues, received under the oil prices $91/bbl).
We shall simulate the
effects of economic
slowdown, growth of
government
expenditures and
possible fall of oil
prices
Now, the risks of further deterioration of the economic situation are high enough
and it can undoubtly have a negative impact on the budgetary sphere. Our
calculations include different economic scenarios and cover the most likely
responses of the fiscal policy to the potential challenges. We shall consider three
scenarios and will test the sustainability of the fiscal policy during their
implementation:
1.
A significant slowdown in economic growth in the next 5-7 years (a long
period of low economic growth) at a very moderate increase in budget
expenditures;
2.
A rapid increase in budget expenditures, which can be necessary for
stimulation of economy, building up the military forces and social welfare
(the annexation of Crimea will also require an increase in government
investments);
3.
A sharp fall in oil prices to $80 per barrel, which in turn will cause a
drastic drop in government revenues (a primary risk of the fiscal policy).
Federal budget revenues, % of GDP
Source: Ministry of Finance of the Russian Federation
Size of sovereign wealth funds, billion USD
Federal budget expenditures, % of GDP
Source: Ministry of Finance of the Russian Federation (2011 requalification)
Crediting oil-and-gas revenues of federal budget to the Reserve
Fund, % of GDP
2,0%
1,5%
1,0%
0,5%
0,0%
2008
Source: Ministry of Finance of the Russian Federation, Haver Analytics
© Centre of Macroeconomic Studies of Sberbank of Russia
2009
2010
2011
Source: Ministry of Finance of the Russian Federation
2
2012
2013
SBERBANK OF RUSSIA
Basic Scenario: Fiscal Stability
Базовый
сценарий:
Basic scenario:
the
продолжение
continuation of
текущей
бюджетной
current fiscal
policy
политики
в условиях
in the context
of the
замедления
economic slowdown
экономики
In the basic scenario of the economy development we assume the stability of oil
prices around $105 per barrel (Urals), a moderate inflation around 5-6%YoY, a
very modest economy growth (around 1,5%YoY after overcoming more
significant slowdown in 2014-15), caused by a low investment demand and by
the deterioration of investment climate in general. According to this scenario,
there is no way to avoid the weakening of the ruble, which still will be quite
smooth.
Share of oil-and-gas
revenues will be
reduced; the role of
non-oil revenues
will increase
Our calculations show that the gap between non-oil and oil-and-gas revenues will
increase, what in turn will lead to a reduction in the proportion of oil-and-gas
revenues in the total revenues of the Federal budget - from 50% in 2013 to 45%
in 2020. Unfortunately, this reduction will not be connected with the growth of
non-oil revenues (they will remain stable in terms of GDP share), but with the
relative decline of oil-and-gas revenues. Indeed, the dynamics of income’s ruble
equivalent at marginally low production growth depends, first of all, on the speed
of ruble’s weakening. If there is no serious weakening of the ruble in real terms
(it is assumed in our basic scenario due to high oil prices), then the difference
between the increase of production in oil and gas sector and the economic
growth will provide the decrease of oil-and-gas revenues as GDP share. The
stability of non-oil income level from GDP provides main taxes: VAT, income tax
and excise tax. The growth of domestic VAT is expected at the level of growth of
nominal GDP, and the ruble equivalent of the foreign VAT will be affected by the
combination of the expected deceleration of import (the decline in revenues) and
some weakening of the ruble (revenue growth). The growth of the return of
profit tax is expected to be roughly proportional to GDP, and the increase of
excise rates, especially on tobacco and alcohol, will continue according to the
preliminary plans of the government.
Stability of budget
expenditures: 2021% from GDP
We supposed that in the basic scenario the current expenditure policy will be
continued: expenditures will increase approximately proportionally to the
nominal GDP, along with this the expenditure on social policy, national security
and defense will grow a little faster than others. The increase of expenditures
connected with the annexation of Crimea is estimated in the amount of 130
billion rubles in 2014. From this perspective, the expenditures of the Federal
budget will remain stable on the level 20-21% of GDP. It means that the nominal
expenditures increase will not lead to their growth in real terms.
Budget deficit can
grow, but will still be
quite moderate
In this scenario it is impossible to avoid the growth of the budget deficit up to 3%
of GDP by 2020. It is, according to our estimates, not critical. This deficit can be
relatively financed by borrowings from domestic and foreign markets (in a 3:1
ratio). Therefore, the annual volume of external borrowings on an average will
not exceed $15-20 billion. With this moderate amount of new borrowings the
rates will not grow significantly, leaving the task of debt service feasible. Under
these assumptions, the volume of public debt will not exceed 20% of GDP by the
end of the forecast period. This figure is way bellow, for example, than
«sustainability level» in 60% of GDP, recommended by the IMF for its borrowers.
© Centre of Macroeconomic Studies of Sberbank of Russia
3
SBERBANK OF RUSSIA
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Federal Budget
Deficit,% from GDP
Proportion –internal
borrowing to external
Macroeconomic
background
Governmental
expenditures
The level of the
government debt by
the end of 2020
2014
0.0%
6.5%
2015
0.5
6.0%
2016-2020
1.5%
5.1%
35.5
35.9
39.0
106
8.5%
5.0%
105
9.0%
5.0%
104
8.4%
5.3%
0.2%
1.2%
2.8%
3:1
Scenario description
Growth rate of GDP up to 1.5% in mid-term; moderate inflation of ~5-6%,
stable oil price of ~$104
Continuation of current tendencies. Increase of expenses due to the
integration of the Crimea to Russia
~19.8% of GDP
Probable Scenario: Increase in Expenditures
Increase in
expenditures is always
tempting for the
government
Believing in the stability of the budgetary sector, we, however, think the
government will not be able to avoid the temptation to increase expenditures.
Expenses, connected with the annexation of Crimea can exceed 130 billion rubles,
pledged by us for year 2014. More large-scale investment programs may result in
an increase in total public expenditures at an average by 1-1.5% per year (0.010.02% of GDP) compared to the basic scenario.
The necessity to fully implement the President’s May decrees will stimulate the
growth of transfers to regional budgets, the financial states of which are even
now worrying and should become the subject of separate consideration. From
our point of view, the increase in transfers would be very difficult to avoid.
Although in 2011 a significant part of articles, related to pension and social
security, were reclassified from intergovernmental transfers in social policy
(which we will discuss below), transfers are still a significant budget item, on
which 670 billion rubles were spent in 2013. In our scenario, we are laying the
increase in transfers to the regions around 20% compared to the basic scenario
(for 0.1-0.2% of GDP), i.e. the increase for this budget item may reach 250 billion
rubles in some years.
The growth of social expenditure looks highly probable, too, especially taking
into consideration the characteristics of the pension system and the demographic
situation in the country. Indeed, according to the intermediate forecast of Rosstat,
the number of pensioners will grow at a rate of 2%YoY in the medium term, and
the number of people of working age, on the contrary, will decrease at a rate of
1%YoY. Thus, the maintenance of the current level of pensions will require the
increase of social expenditures by 3% a year compared to the basic scenario (the
growth for this budget items will reach 200 billion a year).
The current political situation does not allow saving on defense and national
security: we are predicting the 7-9% increase to the basic scenario for these
© Centre of Macroeconomic Studies of Sberbank of Russia
4
SBERBANK OF RUSSIA
budget items (by 0.45-0.6% of GDP, i.e. up to 600 billion rubles in different
years). This corresponds well to the implementation of the modernization
program of 2010-20, which includes the growth of the military department
spendings by 20 trillion rubles.
Therefore, we are predicting the following increase in government spending
additionally to the growth in the basic scenario:
1. The growth of social expenditures (+0.1-0.2% of GDP during the 201520) and intergovernmental transfers (+0.1-0.2% of GDP);
2. The growth of spending on defense and national security (+0.45-0.6% of
GDP during the period 2015-20);
3. The increase in public expenditure (+0.01-0.02% of GDP during the 201520).
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Federal Budget
Deficit,% from GDP
Proportion –internal
borrowing to external
Macroeconomic
background
Governmental
expenditures
2014
0.0%
6.5%
2015
0.5%
6.0%
2016-2020
2.1%
5.1%
35.5
35.9
39.0
106
8.5%
5.0%
105
9.0%
5.0%
104
9.1%
6.0%
0.2%
1.8%
4.1$
3:1
Scenario description
Slowdown of GDP growth rate to 1.5% in mid-term; moderate inflation of
~5-6%; stable oil price of ~$104
Increase of expenses on defense, security, social services and regional
support. Increase of expenses due to the integration of the Crimea to
Russia
The level of the
government debt by
the end of 2020
© Centre of Macroeconomic Studies of Sberbank of Russia
~26% of GDP
5
SBERBANK OF RUSSIA
Higher expenditures
will lead to budget
deficit expansion, but
will help accelerate the
economic growth
Fall in oil prices to $80
per barrel is the biggest
shock to the budget
Higher budget expenditure, as described above, will help to accelerate economic
growth, but the acceleration is unlikely to be serious: from 1.5% to 2-2.3% in
2015-2020. However, this will help to slow down the budget deficit expansion a
little and to limit the growth of the public debt. However, the federal budget
deficit at the end of the reporting period will approach 5% of GDP, which will
increase the cost of its financing. We suggested that the absence of strongly
pronounced shocks in the public sector will help to maintain a balance between
internal and external financing at the level of 3:1. The national debt grows more
significantly than in the basic scenario - to 26% of GDP in 2020.
This is also quite a low level that does not pose a risk to the sustainability of
public finances.
Stress Scenario: Fall in Oil Prices is Extremely Harmful
The fall in oil prices is the most obvious risk for the Russian public finances. The
direct effect from the fall in oil prices is a sharp reduction of oil-and-gas revenues,
and the secondary effect hits all revenues and is connected with the deterioration
of the economic situation. The third wave of deterioration is also probable within
a year after the fall of prices and is invoked by the necessity to increase budget
expenditures for social protection of the population from the crisis.
Economic recession
will be fairly
profound
In this scenario, we simulate the decline in oil prices to $80 per barrel in the
second half of 2015 and the stabilization of prices at this level until the end of
2020. It is obvious that the decline in oil prices would be a shock for the Russian
economy. The economy will decrease in the second half of 2015 and the first half
of 2016 by 3%YoY, and its recovery in subsequent years will be extremely weak.
The inflation will accelerate on the back of the ruble weakening in 2015-16.
Oil and gas revenues will
decline sharply;
sovereign wealth funds
will be spent in a year
and a half
The fall in oil prices will cause an immediate reduction in oil-and-gas revenues by
$32 billion in 2015 relative to the basic scenario, which will extend the budget
deficit by 2.5% of GDP in the same year (total deficit of 3.7% of GDP against 1.2%
in the baseline scenario). This is the first direct effect of the deterioration of oil
prices. Furthermore, our model shows that the interest costs due to the increase
in financing costs and the deficit extension will increase from 0.7% of GDP in
2013-14 to 3.5% of GDP in 2020. It is obvious that the increase in debt service
costs will lead to a higher budget deficit of following periods. Moreover, we
assume that the recession and the slow recovery of the economy will force the
government to change the structure of loans. The possibilities of borrowing on
the domestic market can’t meet the increased demand for financing that, in turn,
will force to borrow more on the international market. Accordingly, the
proportion of loans between the internal and external markets will change from
3:1 as described in our basic scenario to 2:1. The financing of additional growth
of social expenditures in 2015 and 2016 (by 2.8 and 4.7% to the basic scenario,
or 110 and 200 billion, respectively) by new borrowings will also be necessary.
As a result, the expansion of the budget deficit will reach a very alarming level of
7-8% of GDP and the public debt will increase to 39% of GDP by 2020. The level
of debt would be even higher, but we think that the half of the budget deficit in
2015-16 will be financed by sovereign funds. Thereafter, there will be no savings
therein.
© Centre of Macroeconomic Studies of Sberbank of Russia
6
SBERBANK OF RUSSIA
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Federal Budget
Deficit,% from GDP
Proportion –internal
borrowing to external
Macroeconomic
background
Governmental
expenditures
The level of the
government debt by
the end of 2020
Destabilization of the
public finances will
require a radical
revision of approaches
to the budget and tax
policy
2014
0.0%
6.5%
2015
-2.0%
8.5%
2016-2020
-0.3%
4.9%
35.5
37.4
39.3
106
8.5%
5.0%
90
11.8%
5.3%
80
10.4%
7.5%
0.2%
3.7%
7.1%
2:1
Scenario description
GPD growth rate decreased to 0.5% in mid-term; inflation is ~5-8%; oil
price is declining in the second half of 2015 to $80 and remains at this
level. Reserve Fund and National Wealth Fund resources are spent on
budget financing in 2015-2016
Adjustment of expenses in accordance with the change of nominal GDP
growth; growth of social expenses
~39% of GDP
As a result, the high budget deficit, the lack of "safety cushion" and a rapid growth
of the national debt will lead to an exponential increase in risks. In addition to
that, under this scenario Russia is likely to leave the countries club of investment
group of ratings in 2016, which would make the financing of deficit much more
expensive. In any case, this is a situation of chronic budgetary crisis, which may
lead to a complete revision of the budget and tax policy basic principles.
© Centre of Macroeconomic Studies of Sberbank of Russia
7
SBERBANK OF RUSSIA
Application 1: Basic Scenario Description
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Proportion –internal
borrowing to external
2014
0.0%
6.5%
2015
0.5%
6.0%
2016
1.5%
5.5%
2017
1.5%
5.0%
2018
1.5%
5.0%
2019
1.5%
5.0%
2020
1.5%
5.0%
35.5
35.9
36.5
38.0
39.5
40.0
41.2
106
8.5%
5.0%
105
9.0%
5.0%
104
8.5%
5.0%
104
8.2%
5.2%
104
8.3%
5.3%
104
8.4%
5.4%
104
8.5%
5.5%
3:1
Scenario description
Macroeconomic
background
Governmental
expenditures
Indicator, % from GDP
Total governmental
expenditures, of them
Social policy
Defense and national
security
National economy
Intergovernmental
transfers
Budget deficit
National debt level
GDP growth rate changes to 1.5% in mid-term; moderate inflation of ~5-6%; stable oil price of ~$104
Continuation of current tendencies. Increase of expenses due to the integration of the Crimea to Russia
2014
2015
2016
2017
2018
2019
2020
20.0%
20.2%
20.4%
20.6%
20.9%
20.6%
20.4%
5.1%
5.2%
5.3%
5.4%
5.4%
5.4%
5.4%
6.4%
6.5%
6.5%
6.6%
6.6%
6.2%
5.9%
3.2%
3.2%
3.2%
3.2%
3.1%
3.1%
3.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
0.2%
9.6%
1.2%
10.2%
1.9%
11.4%
2.4%
13.1%
3.0%
15.3%
3.2%
17.6%
3.3%
19.8%
© Center of Macroeconomic Studies of Sberbank of Russia
8
SBERBANK OF RUSSIA
Application 2: Description of the Growing Expenses Scenario
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Proportion –internal
borrowing to external
2014
0.0%
6.5%
2015
0.5%
6.0%
2016
1.8%
5.5%
2017
2.0%
5.0%
2018
2.1%
5.0%
2019
2.1%
5.0%
2020
2.3%
5.0%
35.5
35.9
36.5
38.0
39.5
40.0
41.2
106
8.5%
5.0%
105
9.0%
5.0%
104
9.0%
5.0%
104
8.9%
5.2%
104
9.0%
5.3%
104
9.2%
5.4%
104
9.3%
5.5%
3:1
Scenario description
Macroeconomic
background
Governmental
expenditures
Indicator, % from GDP
Total governmental
expenditures, of them
Social policy
Defense and national
security
National economy
Intergovernmental
transfers
Budget deficit
National debt level
GDP growth rate slowdown to 1.5% in mid-term; moderate inflation of ~5-6%; stable oil price of ~$104
Growth of expenses on defense, security, social services and regional support. Increase of expenses due to the
integration of the Crimea to Russia
2014
2015
2016
2017
2018
2019
2020
20.0%
20.9%
21.4%
21.7%
22.0%
21.7%
21.4%
5.1%
5.3%
5.4%
5.5%
5.5%
5.5%
5.5%
6.4%
6.9%
7.1%
7.1%
7.1%
6.7%
6.2%
3.2%
3.2%
3.2%
3.1%
3.1%
3.1%
3.0%
1.1%
1.2%
1.3%
1.3%
1.3%
1.3%
1.3%
0.2%
9.6%
1.8%
10.8%
3.0%
13.1%
3.7%
15.9%
4.3%
19.2%
4.7%
22.6%
4.8%
25.8%
© Center of Macroeconomic Studies of Sberbank of Russia
9
SBERBANK OF RUSSIA
Application 3: Description of the Growing Expenses Scenario
Indicator
GDP growth
Inflation
Dollar exchange rate,
rub
Price Urals,$
Rate on internal debt
Rate on external debt
Proportion –internal
borrowing to external
Macroeconomic
background
Governmental
expenditures
Indicator, % from GDP
Total governmental
expenditures, of them
Social policy
Defense and national
security
National economy
Intergovernmental
transfers
Budget deficit
National debt level
2014
0.0%
6.5%
2015
-2.0%
8.5%
2016
-3.0%
6.5%
2017
0.0%
4.0%
2018
0.5%
4.0%
2019
0.5%
5.0%
2020
0.5%
5.0%
35.5
37.4
38.0
38.0
39.5
40.0
41.2
106
8.5%
5.0%
90
11.8%
5.3%
80
10.9%
6.4%
80
9.5%
7.5%
80
9.6%
7.6%
80
10.8%
7.8%
80
11.1%
8.1%
2:1
Scenario description
GDP growth rate changes to 0.5% in mid-term; inflation is ~5-8%; oil price declines in the second half of 2015 to $80 and
remains at this level. Reserve Fund and National Wealth Fund resources are spent on budget financing in 2015-16
Adjustment of expenses in accordance with change of the nominal GDP growth; increase of social expenses
2014
2015
2016
2017
2018
2019
2020
20.0%
20.6%
21.3%
21.8%
22.5%
23.0%
23.3%
5.1%
5.4%
5.7%
5.9%
6.1%
6.1%
6.1%
6.4%
6.5%
6.5%
6.6%
6.7%
6.3%
6.0%
3.2%
3.2%
3.2%
3.2%
3.1%
3.1%
3.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
0.2%
9.6%
3.7%
10.9%
5.9%
13.9%
6.3%
19.7%
7.0%
25.8%
7.8%
32.3%
8.4%
39.0%
© Center of Macroeconomic Studies of Sberbank of Russia
10
SBERBANK OF RUSSIA
Overview prepared by
Yulia Tseplyaeva
Director of Center of
Macroeconomic Studies
[email protected]
Aleksey Kiselev
Leading analyst
[email protected]
You can direct your questions to the CMS via phone number (495) 747–38–79 or the aforementioned Email.
Standard disclaimer that is attached compulsorily to all analytical products
Disclaimer
The data presented herein should not be considered a recommendation of investment. The information is provided solely for
educational purposes. Any information contained herein is exploratory in its nature and is not an offer, request, requirement or
recommendation to buy, sell, or provide (directly or indirectly) the securities, or their derivatives. The sale or purchase of securities
cannot be carried out on the basis of the information and prices contained herein. The information contained in this document may not
be used as the basis for any legally binding commitments or agreements, including, but not limited to an obligation to update this
information. It may not be reproduced, distributed or published by any person for the purpose of any proposals, motivations,
requirements or recommendations to subscribe, purchase or sale any securities or derivatives thereof. It is assumed that everyone who
received this information, has conducted their own investigation and made their own assessment of the prospects of investments in the
instruments mentioned in this document. Sberbank of Russia does not assume any liability for any direct or consequential loss, damage
or costs incurred in connection with the use of the information contained in this document, including the submitted data. Information
may not be considered recommendatory for specific investment policy or as a recommendation of any other sort. The information
cannot be regarded as liability, warranty claim, commitment, offer, advice, counseling, etc.
The Bank is not liable for the consequences incurred by third parties using the information contained in this document. The Bank has the
right to change the information contained in this document at any time and without notice. Third parties (investors, shareholders, etc.)
must independently assess the economic risks and benefits of the transaction (services), tax, legal, accounting consequences and
opportunities to take such risks. The Bank does not guarantee the accuracy, completeness or adequacy of reproducing information by
third parties and disclaims responsibility for errors or omissions committed by them while reproducing the information. The
information contained herein cannot be interpreted as a bid/offer or as a recommendation/advice on investment, legal, tax, banking and
other issues. Please contact a specialist for professional advice.
© Center of Macroeconomic Studies of Sberbank of Russia
11