OPINION: Russia's economy will, at long last, start to grow
(Hey Rob, I figured its about time that I post a positive article, though I'm still a ferocious bear on Russia - I also will announce here a prediction the VimpelCom will zero out by year's end (meaning become a penny stock).
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THE BridgeNews FORUM: A series of viewpoints
on an international market.
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* The Recovery Remains Fragile, Unbalanced And Socially Painful
From economic research by Ralph Suppel, J.P. Morgan Securities Ltd.
LONDON--Evidence is gathering that Russia's economy will grow in 1999, belying widespread expectations of a prolonged sharp contraction. Industrial output has surged over the past six months and stood in March already 7 percent above its 1998 average level. The rise in unemployment has stopped and even tax collection has improved compared with last year.
This rebound reflects the normalization of the payments system, a
shift to a less restrictive fiscal policy and--most important--the ruble's 50 percent real devaluation. The recent oil-price surge will provide additional stimulus.
THE RECOVERY remains fragile, unbalanced and socially painful, however. Competitiveness of manufacturers has surged, mostly at the expense of a plunge in real wages.
Goods production is rising to substitute for imports in the shrinking home market. Neither exports nor investment are growing so far. And non-tradables output keeps contracting. Moreover, the "import substitution bounce" will taper off during the year.
Gauging the chances for sustained growth over the rest of 1999
therefore requires a focus on investment data.
THE SURGE in competitiveness has, in principle, paved the way for better capital spending.
But uncertainty remains, for the ailing domestic banks have few means to finance investment, and the 1998 crisis has left foreign firms skeptical of Russia's economic and political stability.
J.P. Morgan continues to call for 1 percent growth in real gross
domestic product this year, dissenting from the average forecast of a 5 percent contraction. Prognoses differ widely not only for analytical
reasons but also because no more GDP data were released after last summer.
STILL, a close look at other output indicators available for 1999 strongly supports the assumption of a growing economy. This is most obvious in industry data, which have consistently posted gains over the past six months.
Seasonally adjusted output surged a cumulative 19 percent from its
crisis trough to what in March was its highest level since late 1997. The manufacturing bounce is corroborated by a fall in merchandise imports and a surge in the trade surplus.
The economy outside manufacturing clearly is performing worse, as
domestic demand is faltering and the firms concerned do not benefit from import substitution.
BUT IMPORTANTLY, even indicators of nontradables production posted a clear improvement in early 1999. And the contraction in these areas at current annual rates is not large enough to offset fully the prospective 10 percent increase in industrial production in 1999.
Over coming months, the bias of the trend in output growth will be up rather than down.
An important new positive this spring is the jump in crude oil prices. The Urals spot price has surged from $9.50 per barrel in February to $14.50 today. Oil brings in roughly 20 percent of Russia's total export revenues. Natural gas, whose price is related to oil, makes up almost another 20 percent.
Judging from past correlations, a $1 dollar rise in the Urals price lifts total merchandise exports by an annualized $3.5 billion.
Together with a revival in Western Europe's domestic demand during the year, export revenues could thus surge by an annualized $15 billion to $20 billion.
THE DIVERGENCE of output from real income and demand is extreme. While industrial production is already back at crisis levels, registered real personal income is still falling at a 30 percent annual rate, led by an almost incredible 40 percent contraction in official wages. The share of citizens living below the official subsistence level skyrocketed to 38 percent this past January from 22 percent a year earlier.
Importantly, the income deterioration has not sparked social unrest nor discredited the current government. And this spring, the social pain should finally ease a bit, as the government plans to lift wages and pensions by 50 percent to 80 percent after a long standstill. At the same time, underlying consumer inflation has come down to around 50 percent.
INVESTMENT is Russia's key variable from here. Except for a few months in late 1997, Russia's capital spending has contracted ever since the Soviet Union broke up.
But conditions for investment both in manufacturing and in the natural resource sector have now improved, in the former thanks to the collapse in domestic production costs, and in the latter thanks to legislative reforms that facilitate foreign firms' participation in the exploitation of raw materials.
Also, the desperate financial situation of many regions and
municipalities--which play a critical role in local businesses--has awoken a new openness to foreign investors.
But the odds are that, even with improved investment conditions,
capital spending will take off only reluctantly.
MOST commercial banks lost their equity capital last year, and few were lending to firms even before, as the government bond market offered a simpler way to earn interest.
Thus, investment will rely mainly on the financial means of the firms themselves, government support and foreign direct investment.
Interestingly, balance-of-payment data show a recovery in foreign
direct investment in the fourth quarter of 1998, shortly after the
financial crisis. But a fast and large-scale rise in the short run would be at odds with the negative international sentiment toward the country today.
THE AUTHOR'S views are not necessarily those of Bridge News.
End
By Bridge News
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