Charles Robertson of Renaissance Capital -
After meetings in the grey November chill of Moscow, we have to put our optimistic "mortgage boom" scenario for Russian GDP and asset price growth over 2014-2018 onto the "may happen" shelf. We still think it is possible for Russia to echo Hungary in 2001, or the UK today; but we see insufficient evidence that the authorities are targeting a strong consumption boom to improve President Vladimir Putin's popularity ratings. Mortgage growth was up 40% in the first half - but this is off such a small base (3.6% of GDP) that for 2014 at least, we reluctantly join the consensus expectation of around 3% GDP growth.
Putin's departure from the political scene might have grave economic implications. Economy Minister Alexei Ulyukayev recently forecast that Russia's average GDP growth until 2030 would be 2.5% under his cautious base-case scenario. Few noticed, however, that Ulyukavev sees 3-4% until 2018, over which time Putin is sure to be president; a lower 2-3% over 2019-2024, when Putin might be president; and just 2% or less when the constitutional term limit means Putin can no longer be president. Coincidence? It's hard to say; but perhaps some loyal patriots might beg Putin to remain in office for as long as possible to avoid this slowdown - even as others might argue excessive political longevity may be a contributing factor.
We saw a Russian mortgage boom as likely because: 1) such trends tend to help incumbent politicians get re-elected; 2) it has been done in the Baltics, where there is a similar high level of home ownership; 3) governments can risk a boom when mortgages are just 3-4% of GDP (and today less than 4% of mortgages are overdue by a day or more); 4) it helped explain the freeze in utility tariffs, and why the Central Bank of Russia (CBR) has not cut rates, because driving down inflation would cut mortgage borrowing costs (12.6% in June 2013); and 5) it also explained the longer-tenure CBR lending to banks, and modest reforms like the introduction of escrow accounts. The risk was that a housing boom in 2014-2018 might become a bust by 2020-2024...but an outgoing politician could take this risk.
However, we believe Russian officials currently: 1) see no rival to Putin in 2018; 2) believe mortgage growth of 1 ppt a year is already high; and 3) have no plans to aggressively expand the AHML, which is the Fannie Mae/Freddie Mac equivalent for mortgage support outside Moscow. We believe a mortgage boom could be stimulated if a combination of lower bond yields and government subsidy (e.g. worth 3-4 ppts) were to cut mortgage rates to 4-5%. But Sberbank's five-year strategy sees its mortgage book shrinking slightly from 40% of total retail lending to 37%. These factors are not consistent with a significant boom.
This is arguably good for Russia, if not for investors, as it implies steady medium-term growth of 3-4% and a lower risk of boom-bust. It might mean that the 2018 elections prove more competitive than if our mortgage boom 5%-plus growth scenario unfolds.
Consensus expects just 2.6% GDP growth in 2014, after 1.6% in 2013. We see the main headwinds in 2014 coming from public sector wages. Military pay will not rise in 2014 (after big rises around 2011-2012), and the jump in regional wages for healthcare and education officials to align their pay with the private sector is now complete. These public sector workers have used higher pay to justify higher borrowing, and that may now slow, too. CBR regulation of the consumer credit sector may also dampen consumption. We think the better news is on the investment side The completion of Nord Stream investments by Gazprom, and other large projects by other companies, mean 2013 has been a negative year for investment. New projects in 2014 - from the infrastructure plans announced by Putin in the summer, to Gazprom's South Stream pipeline - mean officials no longer expect investment to be a drag on growth. For now, we assume 1.5% eurozone growth (vs 1% consensus) can support Russian growth of 3.5% in 2014, although we admit to feeling a little precarious in this assumption today.
Reform appears most obvious in central bank policy, as the currency bands are now a wide RUB7, and these are due to be abolished in 2015. The CBR has also introduced new instruments that its interest rates more relevant to market rates. It believes it has prevented the seasonally typical year-end 50-bpt rise in money market rates; and therefore that it has effectively cut rates by 50 bpts. The CBR expects money market rates to fall from 6.0% to 5.5% in 1H14, providing more easing. We note that a number of investors expect a little rouble weakness in early 2014 as a result. We have no strong view today. PS reform was also evident on the Airport Express train, where it looks like you can now buy your ticket with your contactless visa debit card.
All in all, not so much to get excited about. Russia is more about incremental, steady reform than big-bang policy changes.
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