Russia Economy – August 2012

The Russian economy expanded by 4.9% in first quarter y-o-y above its long-term trend. This has been supported by a 15% surge in gross fixed investment and a 7.2% rise in household consumption. Consumer confidence has also been firm. Unemployment fell to 5.4%, its lowest level since 1999, while industrial output picked up and grew 3.4% in May. The manufacturing PMI in July was almost 52 (51.99) compared to 50.97 in June, indicating an ongoing expansion of industrial activities in recent months.

High oil prices have caused a surplus in the first half of 2012. Government revenues reached $203 bn yielding a surplus of $7.7 bn in this period. Currently the falling crude price has been offset by a weakening ruble, but lower commodity and oil prices could deteriorate the prospects for economic growth. Fiscal policy for the coming years will be based on new fiscal rules, which will limit budgetary spending in line with oil prices movements. Budget spending in 2013-15 will be based on an average of oil prices. The new rule allows planned spending to rise by 5% in 2013. This would not help to reduce the dependence of government expenditure on oil prices as it is projected that the non-oil deficit will shrink to 1% of GDP in 2014 from 11.3% in 2012.

Monetary policy, on the other hand, has been more prudent as the central bank has left the key refinancing interest rate unchanged at 8% at its latest meeting in July. Rising inflationary expectations have been the main reason for keeping interest rates on hold over the last six months. After higher than expected inflation in June and the increase in utilities tariffs in early July, the central bank is expected to wait for a clear indication of inflation before it considers changes to monetary policy. There is an official commitment to move towards a floating exchange rate with Russian Central Bank (RCB) intervention confined to preventing excessive currency volatility (EIU, July 2012).

Russian GDP growth in the second half of the year will be influenced by global commodity and oil prices. It is expected to decelerate as the global economy slows down. One channel of transmission of global financial turbulences to the Russian economy would be inflows of capital and direct investments in Russia. Although a slowdown in economic activity in response to a deceleration of global economic growth is possible, a sharp decline in economic growth is not expected.

We forecast 3.7% GDP growth in Russia in 2012 and 3.4% in 2013. Inflation in Korea slid South Korean inflation in July slid far more than expected to a 12-year low as the economy cooled, reinforcing the market's growing view for a back-to-back interest rate cut next week. Indonesia, meanwhile, reported a slight pick-up in inflation for July due to a jump in food prices ahead of the Muslim fasting month, adding pressure on the central bank to keep its policy rate steady despite slumping exports. The Bank of Thailand revised down its forecasts for economic growth and inflation, and said downside risks and uncertainty emanating from the global economy are likely to increase this time.

The IMF now expects the MENA region to grow at a rate of 5.5% in 2012, on par with the average for emerging economies. This is up 1.3% after its April forecast of just 4.3%, and is by far the largest positive revision for any region or country. The IMF forecasts strong growth of around 6% for most GCC countries. The regional average was dragged down by oil importing countries, with growth rates forecast at around 2-3% for most countries, but with a contraction in Yemen and Syria.

FDI flows into Sub-Saharan Africa (SSA) shot to a record high of $35 billion in 2011 from $27.4 billion posted in 2010. West Africa received the bulk of this with 46%. Ghana, Nigeria and South Africa collectively attracted half of the 2011 FDI that flowed into the area. Ghana and Nigeria together made up 75% of the sub-region’s inflows, which were concentrated in the petroleum industry. The continent's powerhouse, South Africa, is among the slower performers, with growth estimates of 2.5%, with its more integrated economy vulnerable to global tremors.