goldman sachs - east capital · 2014-10-22 · goldman sachs global investment research 2 russia:...

Goldman Sachs

Clemens Grafe

Chief Russian Economist and Co-Head of New Markets Economic Research

Goldman Sachs Global Investment Research 2

Russia: Economics under uncertainty

Clemens Grafe +7 495 645 41 98

[email protected]

October 2014

Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure

Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

Goldman Sachs Research


Global


Global growth set to accelerate, led by U.S.

Global growth set to accelerate to 3.5% after 3% in 2012-14, driven by above-

trend U.S. growth, gradual recovery in euro area in emerging markets

Inflation to remain benign, due to output gap and downside to commodities

Fed to hike rates in 2015Q3, UST yields rising slowly: 10y at 3% at end-2015

Real GDP growth: GS vs. Consensus

GS Consensus GS Consensus GS

USA 1.6 2.3 2.2 2.2 2.1 3.2 3.1 3.0

Euro area 1.6 -0.6 -0.4 0.7 0.9 1.0 1.4 1.7

Japan -0.5 1.5 1.5 1.0 1.2 1.2 1.3 1.5

UK 1.6 0.7 1.7 3.2 3.1 3.0 2.6 3.0

Brazil 2.7 1.0 2.5 0.2 0.4 1.3 1.1 2.6

China 9.3 7.7 7.7 7.3 7.4 7.1 7.1 6.8

India 7.7 4.8 4.7 5.3 5.5 6.3 6.2 6.6

Russia 4.2 3.5 1.3 0.5 0.1 1.5 0.8 4.8

BRICS 7.6 5.9 5.9 5.4 5.0 5.8 5.3 6.2

Emerging Markets 7.0 5.4 5.2 4.5 4.5 5.0 5.1 5.7

Advanced Economies 1.7 1.2 1.4 1.9 1.9 2.4 2.4 2.5

World 3.8 3.0 3.0 3.0 3.0 3.5 3.6 3.9

*Consensus Economics September 2014

Source: Goldman Sachs Global Investment Research

2015 2016%yoy 2011 2012

20142013


CEEMEA outlook more mixed

CEEMEA growth only to rise modestly

– Russia and South Africa to recover somewhat

– Turkey to slow down (below consensus)

– CE-3 growth to remain close to unchanged

Inflation pressures to remain subdued across most of the region

Real GDP growth: GS vs. Consensus

2016

GS Consensus GS Consensus GS

Czech Republic 1.8 -0.9 -0.9 2.6 2.6 2.4 2.6 2.6

Hungary 1.6 -1.7 1.2 2.2 3.1 2.0 2.3 2.2

Israel 4.6 3.4 3.4 2.8 2.8 4.0 3.4 3.6

Poland 4.5 2.1 1.6 3.4 3.2 3.3 3.4 3.5

Romania 2.2 0.7 2.4 3.1 2.5 3.4 3.2 3.5

Russia 4.2 3.5 1.3 0.5 0.1 1.5 0.8 4.8

South Africa 3.6 2.5 1.9 1.3 1.7 2.8 2.8 3.6

Turkey 8.8 2.1 4.1 3.0 3.0 2.2 3.5 5.8

Ukraine 5.1 0.2 -0.1 -8.0 -6.5 1.0 0.6 3.4

BRICS 7.6 5.9 5.9 5.4 5.0 5.8 5.3 6.2

CEEMEA 4.9 2.7 2.4 2.2 1.2 2.5 2.5 4.5

Advanced Economies 1.7 1.2 1.4 1.9 1.9 2.4 2.4 2.5

World 3.8 3.0 3.0 3.0 3.0 3.5 3.6 3.9

*Consensus Economics September 2014

Source: Goldman Sachs Global Investment Research

20152013%yoy

20142011 2012


Diverging inflation trends in CEEMEA

Inflation is above target in Russia, Turkey and SA, but below in CEE and Israel

Momentum negative across the region, with exception of Czech and Romania

Upside risks in Turkey, Russia and SA from inflation expectations and FX

Downside risks across region from lower commodity/oil prices and demand

Broadly benign inflation outlook due to disinflationary pressure from output gaps

Headline Momentum Core Momentum TRIM Surprise GS Consensus

Czech Republic 2.0 +/- 1.0 0.6 + (+) 0.9 + (+) 1.7 + (+ +) 0.8 0.5

Hungary 0.2 unch. (+) 2.4 - (+) 1.0 (+) 1.1 0.2

Israel 2.0 +/- 1.0 0.0 - (+) 0.0 - (unch.) 0.2 - (-) 0.4 1.0

Poland 2.5 +/- 1.0 -0.3 unch. (+) 0.5 unch. (unch.) 0.8 ( ) 0.2 0.3

Romania 2.5 +/- 1.0 0.8 - (-) 0.5 + (-) 1.7 - - - (-) 1.8 n/a

Russia 5.0 +/- 1.5 7.6 - (-) 8.0 - (-) 7.3 ( ) 8.0 7.5

South Africa 6.4 unch. (unch.) 5.8 unch. (unch.) 6.5 + + (-) 6.9 6.3

Turkey 5.0 +/- 2.0 9.5 - (unch.) 9.7 unch. (unch.) 9.3 + (+ +) 10.1 8.8

Notes: (1) Core inflation from national sources (SA for Czech Republic, Hungary, Turkey; NSA elsewhere); (2) Objective is midpoint of central bank target

range; (3) Momentum is 3mma annualised inflation, threshold for being "unchanged" is change of less than 10% of target midpoint; (4) Surprise is to

Bloomberg consensus forecast (+ indicates headline inflation up to 1 s.d. above consensus); (5) Momentum/surprise from previous month in parentheses.

Forecast, %yoy (end-2014)Objective

2014

Realised inflation, %yoy (Aug-14)

3.0 - 6.0

3.0


Russia


Russia: Main views

Growth has weakened due to sanctions and slowdown in consumer, but

set to bottom out around zero in late 2014 and recover gradually in 2015

Inflation has risen sharply due to food import bans, but should decline

next year on a widening output gap, enabling the CBR to ease policy

Current account has been improving (to c. 3.7% of GDP in Q3) with

slowing domestic demand and weaker Ruble; may need to rise further

to cover external refinancing needs as well as capital outflows

Ruble will remain weak, how weak depends on oil prices

Outlook hinges on sanctions/geopolitical situation not worsening further

and also on oil price dynamics (we continue expect stabilization)


Weak growth but gradual recovery in 2015

Cyclical slowdown in growth in 2012-2013H1, driven by withdrawal of fiscal

stimulus, slower external demand, and rising real rates (falling inflation)

Growth recovered to 2% in Q4-2013 and was set to rise to 3% in 2014, and we

expected rebalancing away from consumption toward investment

Instead, the economy was hit with a geopolitical shock, causing investment to

fall, accelerating slowdown in consumer and tightening financial conditions

We see growth and consumption bottoming out in H2-2014 and rising gradually

in 2015 to 1.5%, with stronger investment and lower inflation/policy easing

We continue to see trend growth at 3-3.5%, on oil and gas volume growth driven

by changes to tax structure designed to incentive exploration and production

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Russia

Emerging Markets

Advanced Economies

World-4%

-2%

0%

2%

4%

6%

8%Household consumptionGovernment consumptionInvestmentChange in inventoriesNet exportsGDPFinal domestic demand


Financial conditions have tightened significantly potentially costing

150bps of growth on 4 quarter ahead basis.

RUB ZAR ILS CZK PLN HUF TRY RON

Real (ex ante) 3-month interbank rate 28% 34% 33% 45% 38% 27% 40% 38%

Real (ex ante) 5-year sw ap rate 49% 34% 33% 19% 33% 45% 31% 33%

Private interest spread 14% 17% 16% 23% 19% 13% 20% 19%

5-year CDS spread 0.3% 0.6% 0.6% 0.6% 0.7% 0.6% 0.7% 0.6%

REER 8% 9% 9% 12% 10% 14% 9% 10%

House price grow th (past tw o years) 0% 6% 8% 0% 0% 0% 0% 0%

- Financial conditions tightened by about 300bps in March, possibly lowering growth by 150 bps 4 quarters

ahead.

- The private credit spread continues to decline, indicating no significant impact on liquidity yet.

- Financial conditions in Russia are disproportionately dependent on the long end of the yield curve.

- Fiscal policy has been tightened as well by about 0.5% of GDP, explaining another 0.5ppt slowdown

-14.0%

-13.0%

-12.0%

-11.0%

-10.0%

-9.0%

-8.0%

-7.0%

-6.0%

01

-11

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-11

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01

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09

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01

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-14

Non oil deficit


Sanctions: Progressive tightening

Measures so far 1. Asset freeze/travel bans on individual entities

2. Restrictions on debt (and in some cases equity) issuance in financial and energy sectors

3. Restrictions on oil/gas exploration and dual-use technology exports

Possible next steps (in growing degree of severity, with the latter two unlikely) 1. Restrictions on sovereign financing

2. Move into derivative products and restrictions on financing for <30 days

3. Restrictions on USD settlement and/or access to SWIFT

4. Restrictions on oil/gas or other sector exports

Effects so far – Generate uncertainty among businesses/consumers, spurring Russian and foreign capital outflows

– Restrict access (de jure and de facto) to external financing

– Tighten financial conditions -- both domestic, due to rate hikes and tighter liquidity, and foreign

– Long-run impact on oil and gas volume growth (post-2018), if sanctions remain in place

Impact: 300bp of FCI tightening ~= -1.5ppt on growth + effect of outflows


The shock of sanctions

-20

-15

-10

-5

0

5

10

15

20

2011 -Q1

2011 -Q2

2011 -Q3

2011 -Q4

2012 -Q1

2012 -Q2

2012 -Q3

2012 -Q4

2013 -Q1

2013 -Q2

2013 -Q3

2013 -Q4

2014 -Q1

2014 -Q2

2014 -Q3

Financial account Assets Liabilities

% of GDP sa

- Counterintuitively, the sanctions so are have triggered a reduction in the deficit on the

captial account.

- However this is unlikely to be sustainable. The adjustment has been smoothed by the

banking system re investing some of their external assets domestically. With external

assets being a limited resource the inflows are unlikely to last.

-4

-3

-2

-1

0

1

2

3

4

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6

2011- Q1

2011- Q2

2011- Q3

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2012- Q1

2012- Q2

2012- Q3

2012- Q4

2013- Q1

2013- Q2

2013- Q3

2013- Q4

2014- Q1

2014- Q2

2014- Q3

Banks assets Banks liabilities Banks net

% of GDP sa

Financial account improved in Q2/Q3 Driven by inflows through the banks


The sanction shock ctd.

-20

-15

-10

-5

0

5

10

15

2011 -Q1

2011 -Q2

2011 -Q3

2011 -Q4

2012 -Q1

2012 -Q2

2012 -Q3

2012 -Q4

2013 -Q1

2013 -Q2

2013 -Q3

2013 -Q4

2014 -Q1

2014 -Q2

2014 -Q3

Other assets

Other liabilities

Other net

Large oil M&A transaction

%GDP

- On the corporate and household side, there is instead relatively little change, while the

corporates are deleveraging, the main drag comes from the change in external assets,

which always shows a 5% of GDP outflow.

- We think Russia will need to have a current account of close to 5% of GDP in 2015 to

balance the impact of the sanctions.

- This adjustment is well underway with the current account surplus at 3.7% of GDP s.a. in

Q3-14, up from 1% of GDP in mid 2013.

-10%

-5%

0%

5%

10%

15%

20%

10 11 12 13 14

Trade Services

Income Other

Current account

%GDP sa


Fiscal benefits

- Given the pressure on the BOP that translates into a weaker Ruble, there is relatively

little impact on the budget.

- What matters for the budget is primarily the price of oil in Ruble not in USD.

60

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-14

Brent (Rub/bbl) Brent (US$/bbl)


Russia Potential growth in our view is still 3-3.5% but

under risk from domestic policy/escalation of sanctions

0

0.5

1

1.5

2

2.5

3

3.5

00.10.20.30.40.50.60.70.80.9

1

Fin

ance

/Re

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stat

e

Uti

litie

s

Pu

blic

Ad

min

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ense

Tran

spo

rt/C

om

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Man

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ctu

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/Co

mm

un

ity

Serv

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Agr

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on

Min

ing

and

Qu

arry

ing

Labor productivity index in 2004 (blue) and 2013 (red), mining on rhs axis

Russia grew by raising productivity in private driven sectors, risk is it will grow by reallocating resources to energy


Food import bans have driven inflation higher

Inflation rose in the past 12 months due to food shock related to import bans

(periodic bans from Q4-2013 through to Aug. 2014 counter-sanctions)

Our narrow measure of core inflation is up 1ppt in past year, with 20%

depreciation vs. basket (16% depreciation vs. EUR), consistent with below 10%

and relatively well behaved FX pass-through

Food inflation should peak in Q4 and see end-year inflation at around 8%

6.1

8.0

1.8

0.3 0.3

5.5

6.0

6.5

7.0

7.5

8.0

8.5

CPI Sep-13 Food Goods (non-food) Services CPI Sep-140.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

10 11 12 13 14 15

CPI

Core (GS narrow measure)

Food

Goods (non-food)

Services

%y oy


Disinflationary impulse from output gap

We are now seeing declining momentum in all categories but food, linked to

disinflationary impulses from lower wage growth and widening output gap

Tight fiscal policy has caused public wage growth to fall in line with average

wages, while private sector wage growth is now negative in real terms

Inflation expectations have remained relatively well-behaved, considering the

dynamics in realized inflation and FX depreciation

We expect inflation to decline toward the CBR’s 4.5% inflation target in 2015

0

1

2

3

4

5

6

7

8

9

10

70

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Last month

Next month

Headline infla tion (rhs)

%y oyIndex

Q: In y our opinion, in the last (next) month the prices of basic products, goods and serv ices in general increased, decreased or remained unchanged?

0

5

10

15

20

25

09 10 11 12 13 14

Tota lPrivatePublicCore inflation (Rosstat)

%y oy , 3mma


Monetary policy: Easing cycle in 2015

Inflation target of 4.5%+/-1.5% next year (4% thereafter) and floating Ruble

CBR has hiked rates by 250bp this year and we forecast one further 50bp hike

Ruble liquidity has recently loosened somewhat and the interbank rate has

fallen away from the FX swap rate, perhaps due to slowing loan growth

We forecast 250bp of rate cuts next year bringing the policy rate to 6% and

reversing the tightening of financial conditions this year

0.00

2.00

4.00

6.00

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10.00

10 11 12 13 14 15

Deposit RepoFX swap InterbankCPI CPI forecastRepo forecast Target

92

94

96

98

100

102

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110

10 11 12 13 14 15

Russia FCI

Average post-crisis

Average 2012-13

300bp


Disclaimer

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goldman sachs - east capital · 2014-10-22 · goldman sachs global investment research 2 russia:...

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