Russia’s FinMin triples budget deficit target to 0.6% in 2014, keeps borrowings unchanged.

By bne IntelliNews May 23, 2013

FinMin Anton Siluanov told the press that his ministry is increasing the budget deficit forecast for 2014-2015 due to worse outlook on economic growth and on other indicators that will negatively influence fiscal performance. Budget deficit for 2014 is expected at 0.6% of GDP in 2014 and 0.7% in 2015 (0.2% and balanced budget previously, respectively). At the same time state debt is expected to remain unchanged at 11% of GDP, with about USD 7bn of annual foreign borrowings and RUB 1tn of domestic ones until 2016.

At the same time Siluanov expressed confidence that the situation was not critical and that the government still has sufficient reserves at about 8% of GDP in the Reserve and National Welfare Fund (4% each). Shortfall in revenues of about RUB 660bn in 2014 is going to be covered by lower transfers of oil and gas revenues to reserves, as well as curbing some conditionally approved spending. Contributing to the on-going debate with EconMin that urges to unlock the Reserve Fund for infrastructural spending in order to facilitate investment and growth, Siluanov said that FinMin is not going to revise downwards the “budget rule” which stipulates that the fund will remain untapped until it reached 7% of GDP. However, given that transfers to the fund will be spent this year, it is unlikely that it reaches 7% of GDP target by 2016-2017.

In 2013 budget deficit might increase to 0.6%-0.8% of GDP vs. previously planned 0.2%. Federal budget deficit was estimated at RUB 72bn (USD 2.3bn) or 0.4% of GDP in Jan-Apr 2013 by FinMin. To remind, in Q1/13 federal budget deficit was estimated RUB 141.06bn or 0.9% of GDP, which makes April’s surplus of about RUB 69bn vs. surplus of RUB 128.7bn seen in March. To compare, in y/y terms federal budget deficit in Q1/13 doubled vs. RUB 70.1bn or 0.5% of GDP seen in Q1/12.

Previously FinMin Anton Siluanov announced approving a number of budget amendments for 2013, that could raise up to RUB 700bn (USD 22.5bn) to cover various social and infrastructure spending. This includes social and agriculture payments, FIFA WC 2018 preparations, and Russian Railways support.  At the same time the revenues and expenditures for 2013 will remain unchanged at RUB 12.87tn and RUB 13.39tn (budget deficit of 0.8% of GDP).

The measures include saving RUB 124bn in spending cuts, and using RUB 42bn out of RUB 200bn reserved in the budget on possible anti-crisis measures. Should the targeted privatization income of RUB 427bn not be reached this year, it will be compensated to the federal budget on the account of additional oil and gas revenues that otherwise would go to the Reserve Fund. Currently RUB 516bn are targeted from additional oil and gas revenues in 2013, out of which FinMin expects RUB 367bn to go to budget and RUB 149b to be transferred to the reserve fund, however, the proportion will change in accordance to the realisation of the privatization program.

Most recent proposal by FinMin designed to improve the fiscal balance this year included increasing the dividends paid by state-controlled companies from current 25% to 35% of IFRS net profit. The measure could also improve investment attractiveness of state companies. However, it is not clear whether the proposal (which is yet to be ran by other ministries and approved) will help improve the balance significantly. In 2013 RUB 172bn in dividend revenues are planned, amounting to 1.3% of total revenues. An increase could yield another RUB 70bn to the budget, but the resulting burden on state-controlled majors with large investment programs is likely to cause some resistance.    

To remind, FinMin was alarmed by usually profitable beginning of the year posting budget revenues falling short of targets due to unexpected VAT refunds on large investment projects, lower oil and gas revenues, and lower excise duties on imports. FinMin Anton Siluanov admitted that additional RUB 500bn might be required for social and infrastructure projects.

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