Russia on cusp of exiting junk as S&P outlook goes positive

This year’s deficit may be about 2 percent of GDP, Siluanov hopes
This year’s deficit may be about 2 percent of GDP, Siluanov hopes

The outlook on Russia’s junk credit ranking was raised by S&P Global Ratings as the economy shifts into higher gear and the government keeps the budget deficit in check. S&P lifted the outlook to positive from stable, leaving its foreign-currency rating one step short of investment grade at BB+, on par with Indonesia and Bulgaria, according to a statement on Friday. Moody’s Investors Service ranks the country at the same level, while Fitch Ratings has it one step above junk. S&P, which raised Russia’s outlook to stable in September, cited stabilizing growth in gross domestic product for its latest decision.

“External pressures appear to have abated significantly over the last 12-18 months,” S&P said in the statement. “The positive outlook indicates that we may raise our ratings if the Russian economy continues to adapt to the relatively low oil-price environment while maintaining its strong net external asset position and comparatively low net general government debt burden.” The move puts Russia on the verge of regaining the investment status it lost two years ago when the collapse in oil prices, compounded by international sanctions over its involvement in the war in Ukraine, pushed the world’s biggest energy exporter into recession. Helped by stabilizing oil prices, it’s since adjusted by allowing the ruble to trade freely and keeping fiscal and monetary policy tight, reining in inflation from a 13-year high in 2015 to near the central bank’s 4 percent target.

Currency rally

The improving sentiment in Russia is playing out in the market, with the ruble gaining about 7 percent against the dollar in 2017, the best performance in developing Europe. The currency gained for a third day on Friday in Moscow, adding 1 percent against the dollar. While strains on the economy are easing, the Finance Ministry still wants to reduce the budget shortfall by one percentage point each year to balance the books by 2020. This year’s deficit may be about 2 percent of GDP, compared with an initial plan for 3.2 percent, Finance Minister Anton Siluanov said last month. Authorities are also bringing back their three-year fiscal planing process after shifting to a one-year system during the crisis. 

“Consolidation will depend partly on the pace of proposed tax, pension, and labor reforms,” S&P said. “However, since these measures could be unpopular, it is likely that most of them will be launched after the 2018 presidential elections. Even if the government will not, in accordance with our current expectation, fully achieve its ambitious targets, we expect broad control of the fiscal deficit as a result.”

Investment Status

Government measures -- including a so-called budget rule, changes in the tax system and steps to boost economic growth -- will help Russia regain investment-grade ratings, Siluanov said in Baden-Baden, Germany, after S&P’s announcement.

The country also needs to finalize a plan for structural reforms and begin to implement it in order to exit junk status this year, according to Economy Minister Maxim Oreshkin. “The Russian growth story frankly is hardly compelling -- S&P scraping the barrel here a bit,” Timothy Ash, senior strategist at Bluebay Asset Management, said in an emailed note. “Micro and structural reforms have really lagged, and mostly those to do with the business environment where Russia still scores poorly. And these are the kind of policies that drive growth, and therein we have not seen much.”

The rating company said it expects the general government deficit at 2.4 percent by 2019. Inflation “will only slightly” breach the central bank’s target this year and average about 4 percent over 2017-2020.

GDP grew at the start of the year and may expand about 2 percent in 2017 on an annual basis, according to Oreshkin. It shrank 0.2 percent last year after a 2.8 percent contraction in 2015. Economic growth is set to average about 1.7 percent in 2017-2020, S&P predicts. 

“We see a lower risk of large capital outflows, therefore moderating external pressures,” it said. “Nevertheless, relatively low oil prices, structural impediments, and sanctions will continue to impinge upon the rebound in GDP.”

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