MBS Blog

This update is from www.rgemonitor.com. They are one of the more accurate forecasters…

“While Russia is unlikely to default on its sovereign debt, its corporate and financial sector debts now outstrip its stock of foreign exchange reserves ($386 bn in mid-January 2008). Although 2008 refinancing was accomplished, more than $110 bn in foreign debt will come due in 2009 and the depreciation of the rouble raises the risk of a cascade of non-payments. Russia’s economic indicators have quickly reversed along with oil prices and the country is likely to run its first ‘twin deficit’ in a decade in the midst of a sharp economic contraction in 2009. The fall in the value of the rouble, lack of finance, and the plunge in consumption (jobs are being shed at a faster pace than during the 1998 financial crisis) are also causing imports to contract which may limit the deterioration of the current account. Yet, the rapid depletion of reserves and use of the assets in its wealth and reserve funds to finance its fiscal deficit (a deficit of as much as 10% of GDP is possible in 2009) may trigger further ratings downgrades. All of this is likely to weigh on the rouble which has crashed through the new trading band. 

Like Russia, Kazakhstan saved the bulk of its oil windfall, but Kazakh banks and companies borrowed heavily and have now turned to the government for funds. Kazakhstan will thus be left with little cushion if commodity prices continue to be weak through 2009-10. Further capital flight is possible if oil prices remain at current levels - uncertainty about the value of the tenge, which is likely to be devalued, could trigger a speculative attack putting pressure on the fragile banking system that is struggling to meet or roll over the foreign debts due for repayment in 2009. Kazakhstan was one of few oil exporters to run a current account deficit routinely during the boom years, and this deficit will widen in 2009. 

Ukraine will see the sharpest slowdown in Eastern Europe in 2009 with a growth contraction of at least 6%. Its terms of trade is set to deteriorate further due to weak external demand and prices for key exports, especially metals. With steel exports falling along with the slowdown in FDI inflows, balancing the current account will be a major challenge in 2009. Yields on Ukraine’s $105.4 bn of government and corporate debt are amongst the highest for any country with dollar-denominated debt. If the hryvnia-dollar exchange rate widens further, mass loan defaults are expected. The latest gas accord with Russia increases Ukraine’s spending on gas by almost 7% at a time when Ukraine’s economy is surviving on the first installment of the IMFs $16.4 bn bailout. The IMF fiscal conditions are likely to rein in social expenditure including likely public sector wage arrears in 2009, deepening the Ukraine’s political divisions.”