Macro-Advisory May 2018 Monthly – Now for The Hard(er) Part

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New-old government. As expected, Prime Minister Medvedev is to remain in his job. There are some significant changes amongst deputy PMs, indicating a need for a new approach, which may be interpreted as signaling more spending on health, education and infrastructure.
Note: We will review the government changes and assess their impact for industrial policy and the business environment in a separate report.
Need to focus on the economy. Polls show that while people strongly support the president they are increasingly critical of the economic performance. It is clear that if Putin wants to retain public support during this next term, he will need to focus more on the economy.
May decrees cost $126 bln. Putin signed off on so-called May decrees, which set the new government targets to modernize the economy, upgrade infrastructure and improve social and living conditions by 2024. The $126 bln estimated cost is to be paid for by cutting defense spending and (one assumes) oil wealth earned above $44 p/bbl.
Opportunities for investors. The scale of this program will create significant opportunities for investors. The theme, and the need to work with foreign investors to deliver it, is expected to be a big part of the St. Petersburg Forum (SPIEF) this month.
Counter-sanctions concern. While senior government officials continue to say that any counter-measures which may damage the domestic economy will be avoided, there is a real concern over proposals to criminalize compliance of Western sanctions in Russian territory. This issue is expected to be aired at SPIEF.
GDP consensus slipping. The monthly Interfax survey shows that economists are slowly scaling back GDP growth expectations for this year, to +1.5%, because of an expected slowdown in investment.
Oil strength boost the budget. The Finance Ministry said that the current oil price may lead to an additional $30 bln of budget revenue this year. That would more than compensate for the $3.2 bln it will lose because state corporations are not paying a 50% dividend.
Ruble hit by sanctions. The ruble fell 10% against the US dollar in April after the announcement of sanctions. This is not unwelcome by the government, as it prefers a weaker ruble to help boost industry.
Central Bank errs on side of caution. It was no surprise that the CBR delayed another rate cut until it is better able to assess the impact of the weak ruble and sanctions on inflation and financial stability.
Retail debt is not a big issue. In a new Deep-Dive section, we look at household debt numbers. Despite the recent increase, household debt is only 13% of GDP, against 48% in China and 80% in the US.