Russia's MinFin confidently cuts domestic borrowing plan for 2018-2019 on bank of good economic performance

Russia's MinFin confidently cuts domestic borrowing plan for 2018-2019 on bank of good economic performance
By Vadim Dumes in Paris September 19, 2017

Russia’s economic recovery is going better than expected – so well that Russia's Finance Ministry has cut the net domestic borrowing program from RUB1.05 trillion (€15bn) annually to RUB0.87 trillion, according to the draft federal budget approved by the government on September 18.

The new budget forecasts that the federal budget deficit will be only 2.1% of GDP and fall to 1.4% in 2018 and under 1% for the two years after that. The Ministry of Finance only has to raise an estimated RUB1.9 trillion this year to close the gap - all of which can be raised on the domestic bond market. Consistently prudent, the MinFin has decided to reduce the amount it borrows, which will also leave more room for Russian companies to tap the local bond market to raise capital.

The government appears confident about its 2018-2020 budget, after weathering an unprecedented fiscal squeeze in 2015-2016. Then MinFin needed to come up with RUB2 trillion to cover the budget hole and with falling reserves it simply didn't have enough money. That lead to the murky privatisation deal of state oil major Rosneft that in the meantime turned out to be more of a loan than a true privatisation. But crisis passed, now the state’s finances are looking a lot more healthy. In another sign of progress the breakeven cost of oil for the budget has fallen from $115 in the boom years, to $70 in the last two years, to $50 in the new budget. 

According to to the new budget the federal budget deficit is expected to be reduced from RUB1.9 trillion (2.1% of GDP) in 2017 to RUB1.3 trillion (1.4% of GDP) in 2018 and RUB870bn (0.8% of GDP) in 2019.

"Compared with the three-year draft budget released one year ago, the government lowered its federal budget deficit forecasts for 2018 by RUB0.7 trillion (0.8% of GDP) and for 2019 by RUB0.5 trillion (0.4% of GDP)," Gazprombank commented on September 19.

Moreover, the 2017-2019 budgeting is to be covered almost entirely by net issues of domestic OFZ bonds. In these conditions, the privatisation of large state assets appears to be off the agenda.

With an improving fiscal outlook the OFZ placement program was also reduced by RUB180bn per year for 2018-2019, which is good news for local borrowers who will have more room on the domestic debt market.

Lowering the deficit outlook will also mean that many ministries will have to deal with few resources in the coming three years.

The discrepancy between the spending bids by Russian ministries and the actual Finance Ministry planning in the presidential election year of 2018 will be at a record high, Kommersant daily reported on September 8 citing internal ministry memos.

In 2018, according to Kommersant, RUB1.8 trillion ($26bn) worth of spending bids remain unapproved by the MinFin, rising to RUB2.2 trillion in 2019 and to RUB2.4 trillion to 2020. The social spending pressure on the government could increase even more ahead of the presidential elections in 2018.

Reportedly the main segments to be left short of requested spending are military salaries, road builders, and healthcare workers. Out of RUB1.8 trillion spending not approved, RUB1.27 trillion accounts for "current" expenditures such as public salaries and maintenance and RUB0.56 trillion for "investment" spending.

Out of the investment spending, the transportation segment is the largest missing out in 2018, requesting RUB320bn the MinFin cannot afford, out of which RUB231bn accounts for the Federal Regional Road Agency.