Borrowing in advance – a too cautious strategy, which may turn costly

RUSSIA ECONOMICS - In Brief 12 Nov 2020 by Alexander Kudrin

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This week the Finance Ministry borrowed another R313 bln on the OFZ market and in such a way reached the annual target to borrow R5.09 trln. This target was announced during the hearing of the 2021-2023 budget in the Russian parliament in early October. On top of that, the Government has also placed dual-tranche sovereign Eurobonds worth to EUR2 bln. Meanwhile, chances are high that the Finance Ministry will continue regularly issuing more OFZ until the year-end. Of course, placement premiums are likely to diminish, potentially even to zero, but still, some funds will be raised. GKEM Analytica estimates that 2020 annual borrowing plan will be exceeded by at least R375-400 bln.The worst-case scenario assumes that the Finance Ministry will continue to pay high premiums and borrow massively. In this case, the yield curve may shift upwards and the cost of funding for corporate borrowers will go up as well. Overall, it looks as though the Finance Ministry is going to borrow ‘in advance” for as long as it can.Such a strategy looks questionable, given that not all the planned expenditures for 2020 may be executed until the year-end. If so, the amount of spare money on the government accounts will continue to rise implying some liquidity absorption from the market. Potentially this strategy may be explained by the fear of more strict sanctions from the US, which may make borrowing more complicated. But, according to GKEM Analytica’s view, the near-term likelihood of this scenario is low, and hence borrowing “in advance” may be treated as too cautious strategic planning, which may eventually become costly, especially if inflation subsides.Evgeny GavrilenkovAlexander Kudrin