Matrix Capital: Russia’s financial system has made quick post-Covid recovery but rest of economy still in trouble

By Andrei Skvarsky.

Russian asset manager Matrix Capital says Russia’s financial markets have made a remarkably quick recovery from blows inflicted by the Covid-19 pandemic but that the rest of the country’s economy remains in a “very alarming” state.

“By and large, financial markets are making an unprecedentedly quick post-crisis recovery, especially if one draws comparisons with the crises of 1998, 2008 and 2014,” Matrix general partner Pavel Teplukhin said during an online briefing.

Rapid financial recovery is a feature of emerging markets in general, according to Teplukhin.

In an email to EmergingMarkets.me, Teplukhin argued that it is mainly the result of the lowering by the U.S. Federal Reserve of its funds rate, which “set off an increase in volumes of liquidity that, after overfilling the American market, partly spilled over to emerging markets”.

“Central banks throughout the world followed suit, sometimes justifiably, sometimes because they were forced to,” Teplukhin said during the briefing.

This and “numerous economic support packages – sometimes quite exotic –immediately approved by governments and regulators throughout the world flooded the markets with liquidity … has enabled financial systems to avoid a crisis”, he said. “Financial markets have made a V-shaped recovery”.

These measures did not work everywhere, though.

The ruble dropped sharply because of rate cuts, and in developing countries yields on the entire range of debt instruments went down, Teplukhin said.

Russia’s manufacturing and other non-financial sectors have still been unable to cope with adverse effects of the pandemic and remain in a “very alarming state”.

Teplukhin cited “authoritative forecasts” that this year’s gross domestic product will show a year-on-year decline of 6 per cent while previously a decrease of 4 per cent was predicted.

Today’s forecasts “will be revised at least twice before the end of the year, most likely downwards”, he said.

The main reason for the anticipated GDP decline is reduced consumption by the population because of the lockdown and consequent lower real incomes, Teplukhin argued.

This year’s investment in Russia’s non-financial sectors may be more than 10 per cent down on 2019, he predicted.

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