Delayed return to growth for Russia and neighbours, IMF warns

By bne IntelliNews October 6, 2015

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With low oil prices and sanctions, coupled with the conflict in Ukraine hitting Russia’s pocket harder than expected, the International Monetary Fund (IMF) lowered its forecast for the country's economic growth in its latest World Economic Outlook published on October 6.

The IMF now sees the Russian economy contracting by -3.8% y/y in 2015, moderating to a -0.6% decline in 2016, and recovering to modest 1.5% growth by 2020.

Notably, the IMF now expects a postponed return to growth, whereas in the summer the fund still expected a recovery to 0.2% GDP growth in 2016 after a 3.4% y/y contraction in 2015. This is despite broad expectations of growth rebounding in 2016 in emerging market and developing economies.

The IMF forecasts "mostly a less deep recession or a partial normalisation of conditions in countries in economic distress in 2015" (including Russia), spillovers from the stronger pickup in activity in advanced economies, and the easing of Iran sanctions to contribute to 2016 growth.

However, the ongoing conflict in Ukraine has led to larger than expected decline in GDP in Russia over H2/15, as well as deeper than forecasted recession in Ukraine, the report said.

The fund attributed further contraction in Russia in 2015 to the interaction of falling oil prices, international sanctions, and unaddressed pre-existing structural weaknesses. The recession in Russia also results in spillovers for the whole of the CIS, facilitated by a "very sharp" contraction in Ukraine.

Through trade, foreign direct investment, and especially remittances, coupled with lower commodity prices, knock-on effects from Russia will also hold back the Caucasus and Central Asia, the IMF warns. Russia is also among the countries that do not see moderating effects of lower prices for oil, other commodities, and food on inflation, due to sizeable currency depreciation.

The IMF's inflation forecast of 14.5% for 2015 is more pessimistic than the 12-13% forecast by the Central Bank of Russia (CBR), but the fund also sees a considerable moderation to 8.5% in 2016. However, some of the IMF's assumptions in the outlook are outdated: the fund bases its forecast on the oil-price-based fiscal rule introduced in December 2012, which was recently abandoned by the Russian government as it adopted one-year budget planning instead of three amid the current fiscal squeeze.

Russia's Ministry of Economic Development has revised its GDP decline forecast for 2015 to -3.9% y/y from -2.8% y/y, minister Alexei Ulyukayev said at an investment forum in Sochi on October 2. The ministry expects the economy to recover to 0.7% y/y growth in 2016.

The revision is notably more pessimistic than the -3.3% y/y decline that Ulyukayev had previously suggested, and now even exceeds the latest -3.8% contraction forecast by the IMF and the World Bank (WB).

The World Bank worsened Russia's baseline GDP outlook for 2015 to -3.8% in its latest country report published on September 30. The reduction was mainly due to the continued impact of lower oil prices and ongoing international sanctions, the report said.

The WB brought attention to the risk of sharply increasing poverty rates, as recession is having a severe impact on households and double-digit inflation erodes wages and income.

Ukraine plight outpaces forecasts

The IMF sees Ukraine's economic contraction at only -9% in 2015, according to its World Economic Outlook released on October 6 - but the country's current plight rendered the forecast out of date upon its publication on October 6. An IMF press release a day earlier already downgraded the GDP forecast from -9% to -11%.

First the good news: "Following a deep recession, macroeconomic stabilisation is gradually taking hold. The exchange rate has been broadly stable, hryvnia deposits are rising, and inflation is receding," reads the IMF press release of October 5.

"Despite these positive developments, in view of the larger than expected economic decline in the first half of the year, the [Ukraine] mission revised down growth projections for 2015 to -11%. Growth is expected to reach 2% in 2016, supported by recovering consumer and investor confidence, improved export performance, and a gradual easing of credit conditions," the IMF statement said, thereby setting a 2% worse GDP prognosis than in the subsequently published report.

The World Economic Outlook foresees 2% growth in Ukraine in 2016, as does the press release of October 5.

Consumer price inflation will drop from a devaluation-caused 50% in 2015 to 14.2% in 2016, according to the World Economic Outlook figures. Despite the over 50% devaluation in 2015, the current account in 2016 will remain negative at 1.6% of GDP, marginally down from -1.7% predicted for 2015. Unemployment will drop only marginally from 11.5% in 2015 to 11% in 2016, according to the outlook report.

The IMF sees Ukraine being hit over the long term by the decline in global metals prices. "The balance between weaker demand and a steady increase in supply suggests that given the existing cost structure, metal markets are likely to experience a continued glut, leading to a low-for-long price scenario," the WEO finds.

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