Russian macro: money markets becoming less distorted in 2021 as Minfin’s meddling set to subside
Ruble liquidity tightened in 4Q20 and continued to do so in January, as well, despite massive spending from the federal budget at the very end of the year. In December alone the government spent R3.9 trln (versus R2.1 trln in November). The federal budget deficit reached R1.7 trln in December, accounting for 41% of the entire deficit in 2020 (R4.1 trln). Yet Russian money markets were tight in January, so that the government was unable to borrow in line with its plan for the year 2021. There are several reasons for that, and accelerated inflation is just one of them. Higher inflation implies that the demand for nominal money from the economy rose significantly at the end of last year.
The Russian Finance Ministry borrowed around R5.2 trln in gross terms last year by issuing OFZs (R4.6 trln in net terms) that were well above the initial and the amended borrowing plans and financing needs. In addition to increased domestic borrowing in 2020, the Ministry of Finance absorbed liquidity by selling FX in line with the fiscal rule to support the ruble and reduce its volatility. The combined effect was negative, meaning these activities of Minfin absorbed around R1.5 trln from the system in 2020.
Going forward, it looks likely that, given the already higher oil price and FX purchases resumed by Minfin since mid-January, the liquidity situation will ease (unless the oil price falls below the budgeted cut-off level). The ministry will also spend some of cash it “pre-borrowed” in 2020 to finance expenditures this year.
• Given that liquidity is currently in short supply and Minfin is unable to borrow according to the plan, no major liquidity absorption can be expected by the ministry in the short run.
• There is hope that Minfin will eventually stop borrowing in advance and will no longer crowd out other borrowers. As the budget deficit this year will be smaller than the official budget stipulates, the ministry will not need to borrow too much.
• Amid the decreased key rate in 2020 banks depleted the reserves they previously kept in their accounts with the CBR – hoarding CBR bonds and keeping cash on deposits. As the demand for money increased in nominal terms amid accelerated inflation, while economic activity improved in 2H20, lending to the non-financial sector became more tempting.
• Demand for banks’ refinancing by the CBR increased and will stay elevated this year as banks increased their holdings of high-quality collateral, such as OFZs, which requires no haircut.
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