Macro and markets: Russia and global turbulence
Risk-off trades dominated the markets last week, affecting almost all financial assets in the EM universe, as well as commodity markets. In response to Covid-19 the Fed cut its rate by 50 bps, and other leading central banks may follow suit, also softening their monetary policy, while governments are likely to implement certain fiscal stimuli. The actual measures have not been announced yet, but expectations of such actions may provide some support to the markets, while delivering stronger and more robust economic growth seems to be a much more complicated task.
Russia’s economy and its financial markets are likely to be affected as well, but the impact is expected to be limited. The Russian government also considers Covid-19 as a potentially negative factor for economic growth, but has so far announced no specific macroeconomic policy actions. The updated mid-term forecast is going to be released in early April, and it is too early to judge what kind of revisions may be announced.
Still, Russia’s fiscal position remains strong, and the country’s balance of payments looks stable as well. Even though the Russian ruble was affected by the recent turmoil on the global financial and commodities markets, its value has changed only moderately, and this moderate weakening of the ruble can be considered a healthy adjustment as the currency was overheated last year by strong foreign capital inflow.
* Given that the macroeconomic situation looks relatively stable, the situation on the OFZ market doesn’t look scary, either, also due to the fact that Russia holds a huge amount of money in its National Wealth Fund, which can be used to cover potential deficits in case of low oil prices and/or the absence of the opportunity to raise funds on the market.
* The $50/bbl oil price is not a threat to Russian financial stability. The budget is not going to turn to a deficit with this oil price as non-oil revenues exceed 60% of total revenues, and this year their share is going to increase further to exceed 65%. Oil-and-gas revenues are going to shrink this year; however, this contraction can be covered by non-oil-and-gas taxes.
* Minfin’s “FX shopping” activity is going to change. With a lower oil price and lower oil revenues it will have to curtail its FX purchases on the market. It was announced recently that the daily spending on FX purchases will only slightly exceed R6 bln in March, lower by a factor of three than in mid-2019 and by a factor of two compared to recent months.
* Interest rates in Russia are likely to move down further as inflation remains low and is unlikely to accelerate in the near future. As a result, the cost of funding for local banks will decrease, and the purchase of OFZs at current levels may become attractive in terms of the carry trade.
* The carry trade remains attractive for international players as well. The spread between the 10-year OFZ yield and 3M LIBOR rate has widened to 520 bps, last seen in early March 2019. Since then internationals bought (in net terms) almost R1 trln of ruble sovereigns. The 500 bps premium is likely to be the threshold above which OFZs move to the top of the wish list.
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