By Vladimir Osakovsky, Head of Macroeconomic Research at UniCredit Securities
The Russian government agreed on forecasts for oil prices and other economic parameters for 2011 that will be used for budget formation, Kommersant reported. The oil priceforecast for 2010-2011 was set at $75/bbl oil, real GDP outlook was cut to 3.4% (from 3.5%), industrial output to 3.2% (down from 3.3%) and inflation is expected to stay within 5%- 6%, down from the previous 6%-7%.
Our view: The news appears to be the outcome of a long-lasting dispute between the Ministry of Finance, which was insisting on a more conservative $ 70/bbl oil price outlook for 2011, and the Ministry of Economic Development, which suggested $76/bbl. The new $75/bbl forecast appears to be a rare victory of the more optimistic position of the Ministry of Economic Development, which seemed to receive support from Prime Minister Vladimir Putin, who yesterday stated that the government sees opportunities for faster economic recovery in 2010-2013.
The new forecast will be used to develop a new federal budget for 2011-2013, and we think that the higher oil price outlook suggests that the overall government is getting much less aggressive in its austerity approach to the budget formation, which could lead to spending hikes in the coming years. However, Finance Minister Alexei Kudrin has stated that the budget deficit will be cut to 4% of GDP in 2011 and to 2% of GDP by 2013, suggesting that his ministry is intent on further austerity measures to keep government finances in balance.
He also stated that the budget deficit in 2010 might fall slightly below 5.9% of GDP because of some RUB 700bn ($23bn) in additional revenues due to higher oil prices.
Conclusion: We see the development as positive and indicating increasingly likely hikes in public spending. This is good news for local markets in general and especially for sectors exposed to internal investment demand such as steel and metals and mining, which were the most affected from the sharp cuts in infrastructure spending in 2008-2009.
