Fitch: Fiscal Plans Will be Key Focus Following Russia Election
Central Election Commission figures on Monday showed that, with counting nearly complete, the United Russia party had secured 54% of votes for party lists and won 203 of the 225 single-member constituencies, significantly increasing its majority. This was in line with our expectation that United Russia would remain the largest party. All parties represented in the Duma broadly support President Vladimir Putin.
We think the government is sensitive to popular disenchantment over fiscal consolidation that was introduced in response to lower oil prices. It included real wage and pension cuts and reduced discretionary spending and subsidies. This sentiment may have been reflected in a low turnout (below 50%) at the polls. Suspending the three-year fiscal framework last year, and the absence of a 2016 budget, gave the government flexibility to respond to popular concerns, although fiscal policy was not loosened significantly in the run-up to the election.
The government has said it will reintroduce the three-year framework in its 2017 budget due in October. This should provide more clarity on fiscal reforms in support of the authorities' target of balancing the budget by 2020 (assuming an oil price of USD50/b), and on deficit financing plans once the Reserve Fund has been depleted (which we expect in 2017, although the National Wealth Fund will remain a source of liquid assets). Fitch forecasts oil to average USD45/b in 2017 and USD55/b in 2018.
We think significant fiscal savings are achievable, although some measures, such as further pension and social payment reforms, lower subsidies and higher income taxes, would have social costs. Discussions about a new budget rule, which would save oil revenue when prices are above a certain level, may also resume.
However, we think budget tightening measures will be less aggressive than in 2014-2015 and there are implementation risks ahead of the March 2018 Presidential elections. We forecast a federal government deficit of 3.9% of GDP in 2016 and 2.8% in 2017.
Tight fiscal policy has contributed to weak growth, but high frequency data point to an improvement in 2Q16. A more stable rouble and falling inflation has facilitated monetary easing, with the Central Bank of Russia (CBR) cutting its key rate by 50bp to 10% on Friday following a 50bp cut in June. The CBR said it would not cut again this year, reinforcing our view that it will build its inflation-targeting credibility, and bolstering confidence that the Russian authorities can continue to manage the adjustment of external finances to cheaper oil.
The risk to Russia's 'BBB-'/Negative sovereign rating has shifted from external finances towards public finances. Continued commitment to contain expenditure and implementation of a credible medium-term fiscal framework could result in positive rating action. Failure to recover from recession, coupled with significant deviation from stated macroeconomic and fiscal policy aims, would be negative.