MBS Blog

As with many emerging markets, Russia should continue to grow despite the Global Economic situation. The direct link between oil price levels and economic growth is key.

This from  www.themoscowtimes.ru:

GDP Posts Weakest Growth in 3 Years

10 December 2008By Maria Levina / Special to The Moscow Times

Economic growth fell to its slowest rate in three years in the third quarter, at 6.2 percent, the State Statistics Service reported Tuesday, and economists say even lower growth is in store for 2009.

Actual GDP growth in the quarter missed the Economic Development Ministry’s forecast of 7.1 percent, driven by significantly slower growth in the construction, retail, transport and communications sectors.

The decline continued a slide from 8.5 percent GDP growth in the first quarter and 7.5 percent in the second, and if the trend continues the final number for the year could be in the 6 percent range.

“Next year’s GDP growth could range from negative 5 percent to plus 5 percent, depending on what happens to oil prices and the steps taken by the Russian government,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog. “If it continues to throw away currency reserves to defend the ruble, Russia may face a fiscal deficit and zero economic growth.”

He said allowing the ruble to depreciate is one step that could be taken to prop up growth numbers. 

“In the past, the Russian economy grew even with oil prices of $30, $40 and $50 per barrel but at a different exchange rate,” he said. “In the current environment, Russia’s goal should be to achieve positive economic growth and avoid a fiscal deficit.”

In year-on-year terms, growth in the fourth quarter could end up at zero, partly as a result of slower production growth and partly because the number was strong in the final quarter of last year, said Yekaterina Malofeyeva, chief economist at Renaissance Capital.

She said she expects growth this year to finish above the 6 percent mark — at 6.2 percent — and that next year’s figure could range from zero to 3 percent.

“If oil prices average $70 a barrel next year and the ruble is allowed to depreciate, GDP growth could reach 3 percent,” Malofeyeva said. “Otherwise, it could be flat.”

Although the Economic Development Ministry has yet to release an official forecast, in recent informal comments it has put the number at 3 percent to 3.5 percent if oil prices average $50 per barrel for the year.

But economists say conditions have been shifting so rapidly that providing anything resembling an accurate forecast for 2009 would be difficult until all the numbers for the final quarter of this year have been released.

The Economic Development Ministry said Monday that it was revising its forecast for manufacturing growth for the year downward, from 5.2 percent to 2.9 percent. The figure for the first 10 months of this year was 4.9 percent, so the ministry’s forecast suggests that it is expecting disastrous results in November and December, with production dropping by over 10 percent. 

Gavrilenkov said he believed that a 2.9 percent production forecast was overly pessimistic but, if accurate, would mean that the country is entering a severe depression.

He added that losses on the manufacturing side could be balanced somewhat by growth in the service sector, as consumer spending has remained relatively strong. As such, he said he expected GDP growth of 6.8 percent to 6.9 percent this year.

Natalya Orlova, chief economist at Alfa Bank, said she was surprised by how low the production numbers were.

“Given that the October numbers showed there was essentially no growth (0.6 percent), we originally assumed a drop in production of 2 to 3 percent in November and December, which would still imply a growth rate of around 5 percent for the year,” Orlova said. “But if we are to believe the numbers from [Economic Development Minister] Nabiullina, with a drop of more than 10 percent in November and December, then the situation seems more serious.”

Technorati Tags: emerging markets, Russia, Natalya Orlova, Alfa Bank, Moscow, Yekaterina Malofeyeva, Renaissance Capital, exchange rate, Russian Government, oil prices, ruble, devaluation, Yevgeny Gavrilenkov, Troika Dialog, State Statistics Service, Economic Development Ministry, construction, retail, transport, communications, Anton Olff, GDP, Maria Levina, www.themoscowtimes.ru, economic growth,

Two articles of interest. The first is a currency update from www.businessneweurope.eu  The consensus on “the street,” in Odessa and Kyiv, is that the hryvnia will continue its slide as the Ukrainian government will not have the resources to intervene in the currency markets.

The second is from www.ukrnews.com This article deals with the anticipated temporary rise in the hryvnia that occurs around holidays. Anyone visiting Ukraine during this summer will recall that the hryvnia was pegged at a seemingly unrealistic 4.60 to the U.S. dollar, only to depreciate significantly once the season had ended.

After the holidays, may come the hangover!!

Ukraine moves to flexible exchange rate as hryvnia slides 50%

James Marson in Kyiv
December 3, 2008

With Ukraine’s central bank curtailing moves to support the free-falling hryvnia, the local currency has slid further from 5.79 to the dollar on November 18 to 7.24 on December 3, marking an almost 50% drop in value since the start of the year. The central bank now believes the market has almost found the “satisfactory” rate.

After massive currency interventions in October caused the country’s foreign exchange reserves to drop by $6bn, the National Bank of Ukraine (NBU) has started to move towards a flexible exchange rate, a condition of the $16.4bn loan the country got from the International Monetary Fund. “Without a flexible exchange rate, we can’t overcome the crisis. No amount of currency reserves would be sufficient,” Oleksandr Savchenko, deputy chairman of the NBU, told a conference organized by Fitch Ratings on November 27.

Currency auctions have been introduced to smooth the hryvnia’s slide to its equilibrium rate. “The market is looking for the satisfactory rate,” Savchenko said. “We believe it has almost been found.”

The hryvnia has come under pressure from all sides as the country’s exports plummeted, demand for dollars shot up to repay dollar loans and people converted their savings out of the national currency. “People have been rapidly converting into dollars - there’s low trust in the hryvnia,” says Olena Bilan, an analyst at Dragon Capital. “When the hryvnia started to fall in October, people rushed to get rid of their hryvnia holdings.” NBU figures show that Ukrainians bought $2bn more in foreign currency in November than they sold.

On the positive side, the hryvnia’s fall is a boost to struggling exporters and should help Ukraine close its current account deficit, which reached 7% of GDP in the second quarter of 2008. “The implications of a weak hryvnia are huge,” says Oleksandr Klymchuk, an analyst at Concorde Capital. “It raises the competitiveness of exporters and gives locally produced goods a price advantage over imports.”

But it’s also a threat to banks, as Ukrainians struggle to pay back their loans, 50% of which are denominated in dollars. Fitch on Friday downgraded the outlook for 11 of the country’s banks, citing concerns about the deterioration in asset quality and the threat to confidence in the currency. “The devaluation pressure will persist into next year. It’s difficult to predict where the exchange rate will move, as it’s a question of confidence,” Bilan said.

A recovery of the hryvnia next year is likely, analysts say, as people convert their money back into hryvnia to spend, and a tight monetary policy from the NBU restricts hryvnia supply. If currency inflows from foreign direct investment and privatization pick up, the hryvnia should stabilise around 7.5, Klymchuk believes. If not, he predicts the rate could slide as far down as 9 or 10 hryvnia against the dollar.

Bankers Expecting Traditional Strengthening Of Hryvnia On Eve Of New Year (16:09, Wednesday, December 3, 2008)

Bankers are expecting the traditional strengthening of the hryvnia on the cash market on the eve of New Year to take place this year.

“I think that there will be a situational strengthening,” said Viacheslav Utkin, a member of the supervisory board of Enerhobank.

According to Utkin, the hryvnia will strengthen because of winter holidays and vacations.

“There will be large expenditures ahead of the holidays, the vacations,” Utkin said.

According to him, the hryvnia’s cash rate could reach 7 UAH/USD.

Erik Naiman, the head of the department of financial instruments at Ukrsotsbank, is also not ruling out the possibility of the cash rate of the hryvnia rising before New Year.

“That happens [traditionally] because people sell dollars in order to have a good holiday,” he said.

Naiman declined to forecast the margin by which the hryvnia with strengthen, but he said that it would be insignificant.

AvtoZAZbank’s Board Chairman Vladyslav Bairak was unable to forecast a possible strengthening of the hryvnia on the eve of New Year.

“At present, I do not have such confidence,” Bairak said.

According to him, citizens have shown a lack of confidence in the hryvnia in the past month.

As Ukrainian News earlier reported, the hryvnia fell by 5 kopecks to 7.45 UAH/USD on the inter-bank currency market on December 2.

Technorati Tags: currency, bankers, AvtoZAZbank, Vladyslav Bairak, cash, Erik Naiman, Ukrotsbank, Viacheslav Utkin, Enerhobank, monetary policy, devaluation, current account deficit, GDP, Oleksander Klymchuk, Concorde Capital, Dragon Capital, Olena Bilan, National Bank of Ukraine, NBU, International Monetary Fund, IMF, Oleksandr Savchenko, flexible exchange rate, www.businessneweurope.eu, Odessa, Kyiv, Ukraine, www.ukrnews.com, Anton Olff, hyrvnia,

Feeling the effects of the current Global Economic Crisis, there is little doubt that Russian and Ukrainian Governments are preparing to let their currencies slide even further. The question remains as to how low they will go and what effect they will have on these emerging market economies.

In Ukraine, the hryvna is now hovering around 6 to $1USD, having lost more than 20% over the last 60 days.  The Russian ruble is also getting battered and could see levels against the U.S. dollar that it has not experienced since the financial crisis of the late 1990s.

Devaluations in either economy could exascerbate already high levels of inflation. Russia is particularly vulnerable as it relies on imports of basic food products, plus it derives a significant portion of its revenues for oil and natural gas exports. As oil revenue has declined, and subsequent market interventions have depleted Russia’s foreign currency reserves, Russia could be hit with a higher degree of stagnation than Ukraine. In fact, Ukraine may be able to weather a devaluation better than Russia.

The industrial sector located in Eastern Ukraine could benefit from the lower prices of their steel and chemical products, making their products competitive with China and South Korea. The Ukrainian agricultural sector could also benefit from devaluation.  The fomer “bread basket” of Imperial Russia and the Soviet Union, could regain this title, but with exports to Europe and Asia. This vastly under utilized sector could see a surge in foreign investment next year, or whenever the global credit markets become unfrozen.

In the meantime, businesses and individuals are going to have to adjust to the new reality.

Anton Olff

Technorati Tags: Global Economic Crisis, Ukraine, devaluation, currency reserves, hryvna, Russia, ruble, dollar, Eastern Ukraine, China, South Korea, Soviet Union, exports, Europe, Asia,