Sector

Regions & Municipalities, Credit Institutions, Corporates

Activities

Machinery & Equipment, Construction & Real Estate

Type

Research

  • Plummeting demand and growing interest rates are the key barriers to economic recovery. The crisis response measures addressing these problems yield maximum effect for bolstering GDP today.
  • Preferential home mortgage will uphold economy in 2016 by 0.4% of GDP (unless the terms are revised). As in 2015, subsidizing the mortgage will be the most effective measure for boosting the economy.
  • The efficiency of supporting the automobile market is flagging. In 2009-2010 supporting the automotive industry was the most effective measure in boosting the real sector. In 2015 the measures aimed at backing the automotive sector did not spur the demand for automobiles because of the drop in income and the accumulated past effect of these programs.
  • For the first time social measures dominate the antirecessionary plan. More than half of financing in the antirecessionary plan will be used to sustain social stability. This is caused by cutbacks to funding (the antirecessionary plan for 2016 is only half of the previous one) and growing poverty.

The current antirecessionary plan is only half of the previous one

The antirecessionary plan must be adopted by the Russian Government in the second half of February 2016. The current antirecessionary draft plan anticipates financing to the tune of up to RUB 1 tr (1% of GDP), which is 2.0-2.5 times less than the antirecessionary plan of 2009 (RUB 2.2 tr or 6% of GDP) and of 2015 (RUB 2.3 tr or 3% of GDP). The key contingency measures were approved: the support of regional budgets (RUR 310 bln), bolstering the automotive industry (RUR 137.6 bln), procurement of the rolling stock for Russian Railways (RUR 39.8 bln), and subsidizing the home mortgage (RUR 16.5 bln).

Figure 1. The antirecessionary plan for 2016 accounts for 1% of GDP, whereas in 2009 it constituted 5% of GDP 

Source: ACRA estimates, regulatory documents of the Russian Government 

For a third of the antirecessionary plan under review no sources of financing have been indicated. The budget gap can be as high as RUB 3.6 tr under the average annual oil price of USD 45 / barrel and RUB 5.2 tr under USD 30 / barrel. The Reserve Fund currently has RUB 3.7 tr. Different mechanisms to offset the given imbalance are considered, each having its own shortcomings: cutting the costs may amplify short-term negative macroeconomic trends, mounting borrowings will cause the surge of inflation and interest rates, the exhaustion of the Reserve Fund is undesirable, while the privatization of state companies on the current volatile market won’t yield maximum financial effect.

Figure 2. No sources of financing for 33% of the plan are available 

Source: ACRA estimates, regulatory documents of the Russian Government 

The budget has lost its countercyclical function

In 2009 the fiscal policy played a markedly countercyclical role, with government spending grown by 8% of GDP and taxes reduced (in particular, the income tax and export tariffs). The budget balancing problems and costly crisis response measures scaled down the countercyclical role of the fiscal policy in 2015-2016. The budget expenditures won’t directly bolster the demand for goods and services to the extent they did in 2009 (the ratio of consolidated budget spending to GDP in 2016 will be 2.5-3.0 pps GDP lower than in 2009).

Figure 3. Budget expenditures will not make up for the contraction of private domestic demand 

Source: ACRA estimates 

Social measures as the top priority

For the first time the antirecessionary plan is dominated by measures aimed at backing social stability, including the support of regional budgets (where social expenditures account for 60-65% of the entire spending). Deteriorating living standards and growing arrears of regional budgets are the main problems in 2016-2017, with threats to financial stability receding into the background (the banking crisis is very unlikely). The real disposable income may drop as much during these two years, as it did in 2015 (-4.5%). This will inevitably increase the poverty rate.

Preferential home mortgage yields maximum effect

Subsidizing the mortgage in 2016 can potentially add up to 0.4% to GDP, although the economy will remain stagnant. The ACRA forecast for the Russian GDP dynamics in 2016: -1.7%.

The drop of real earnings brought about the contraction of demand for residential real estate in 2015 by 28%, with preferential home loans offsetting 10% of the potential slump in demand. Mortgage loans totaled RUB 370 bln, with two thirds of this amount being directly responsible for the generation of extra demand. This proved to be the most effective measure to boost the national economy in 2015. ACRA expects that if the mortgage subsidizing policy continues in 2016 this will sustain the housing construction program and maintain the volumes of commissioned housing at the level of 2015. Housing per capita in Russia remains at a low level – 30% lower than the primary market saturation level. The efficiency of housing construction backing as a general economic measure can be explained by a high multiplicative effect of growing demand in the construction industry on contiguous sectors.

Figure 4. Already by mid-2015 the interest rates on mortgage loans went back to the pre-crisis level 

Source: ACRA estimates, Bank of Russia 

The government backing of the residential real estate market did not trigger the growth of housing prices, which is normally the case whenever consumer incentive schemes are launched (this trend could be seen in the automotive industry).

The plans to cut the interest rate subsidizing from 2% to 1.25% threaten the program implementation in 2016.

Backing the automotive industry is far from being effective

The draft crisis intervention plan for 2016 anticipates similar levels of the real sector support to those of 2015. We expect that implementation of the planned measures (mortgage backing inclusive) will add 0.5% to the national GDP, the key targets for backing being the automotive industry and transport engineering. The latter will take the form of subsidies transferred to Russian Railways for rolling stock procurement, with risks of default on this measure being negligible. The automotive industry will be backed via consumer support measures already tested in the previous years: the scrappage and trade-in scheme, preferential car loans and leasing. Yet their effect will be limited against the backdrop of sinking real disposable income, a respective slump in the share of consumer spending on durable goods, and lower age of the car fleet due to previous programs. The best evidence is the actual setback of the share of car sales in retail turnover in April 2015 to the level of August 2014 (before the program was launched), despite the ongoing support measures. Booming car sales at the end of 2014 could only partly be attributed (actually by one third) to the support program; these were mainly caused by consumer savings against the background of steep ruble devaluation, durable goods serving as the saving vehicles).

The government is now contemplating the allocation of RUB 138 bln for backing the automobile market in 2016 – three times more than in 2015. But under a further fall of disposable income the effectiveness of this measure will be low. Higher subsidies relative to car prices could be a more efficient measure.

Figure 5. By April 2015 the effect of the automobile market support program had faded away 

Source: ACRA estimates, AEB 
 
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Analysts

Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
Dmitry Kulikov
Director, Sovereign Ratings and Macroeconomic Analysis Group
+7 (495) 139 04 80, ext. 122
Maria Mukhina
Operating Director
+7 (495) 139 04 80, ext. 107
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