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Macro Insights
AB-ICI: Recovery with Side-Effects
Natalia Orlova
Dmitry Dolgin
(+7 495) 795-3677
(+7 495) 780-4724
April 30, 2015
[email protected]
[email protected]
www.alfa-bank.com
Moscow
Investment Summary
 AB-ICI continued its recovery with an additional 4.6% m/m in March after the 7% bounce in February.

Active budget spending, big state investments and policy rate cuts limited the slowdown in 1Q15.

Proactive state policies create additional risks to longer-term price stability.
AB-ICI increases 4.6% in March
AB-ICI continued its
recovery in March:
4.6% m/m after 7.0% m/m
In February
AB-ICI continued its recovery in March, climbing 4.6% m/m after the 7.0% m/m
increase in February. This trend reflects improvement in market sentiment after
the risk-off regimen of December and January. The better market mood was
supported by pro-growth fiscal and monetary policies that limited the slowdown in
the real economy; however, these policies create risks for longer-term inflation
dynamics and pose questions about future macroeconomic stability, in our view.
Share of FX deposits
declined but exchange
rate and price instability
are likely to constrain this
effect

Economic confidence increased slightly, generally due to the decline in
the share of FX deposits; the sharp ruble appreciation of March and April
contributed to this change in saver preference. However, we believe that
both exchange rate and price instability are likely to limit the upside of ruble
deposits. We do not expect inflation to decelerate to pre-2014 (6.0-7.5%
y/y) levels in 2015-16.
Foreign confidence was
flat but negative FDI
trend of 2014 (inflow
-70% y/y) is likely to
continue
Market confidence
improved as Russia
returned to the EM trend
but CBR cuts are likely to
hamper convergence

Foreign confidence was effectively flat last month, given the lack of
relevant fresh data. However, we expect the negative trend of 2014 (FDI
inflow slumped by a huge 70% y/y) to remain, as negative real economic
growth and the sharp ruble appreciation of recent months reduced the
attractiveness of direct investment in Russia.

Market confidence was slightly up in March as spreads between Russian
and LatAm bonds narrowed. This signaled gradual Russian movement
toward the global EM trend. However, the CBR’s sharp rate cuts in 2015
decrease the relative attractiveness of Russia and will in our view limit the
upside to market confidence in the coming months.
Figure 1: AB-ICI increased by 4.6% in March
3000
RTS
RTS (LHS)
AB-ICI (rebased)
AB-ICI
1000
900
2500
800
2000
700
600
1500
500
1000
400
300
500
200
100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
0
Source: New Economic School, RTS, Alfa Bank
Alfa Bank Investor Confidence Index
April 30, 2015: Some Recovery In Sentiment
1
Macro Insights
AB-ICI: Recovery with Side-Effects
AB-ICI continued its
recovery, in line with
stronger than
expected real
economy data
AB-ICI continued its recovery in March, with 4.6% m/m growth after the 7.0% m/m
increase in February. This trend was in line with the better-than-expected
dynamics of the real economy in 1Q15. Both production and consumption data
were relatively strong; however, this result was achieved mainly through loose
fiscal policy, with military expenditures up 51% in 1Q15. CBR cuts to the key rate
(from 17% to 14% in 1Q15) also contributed.
But inflation (now at
16.9% y/y) is at the
heart of macro
instability
Nevertheless, while anti-crisis policies are concentrated on pro-growth issues,
inflation – now at 16.9% y/y – is at the heart of macroeconomic instability. Prior to
the 2014 shock, price growth had been decelerating (inflation had held in the
6.0-7.5% range since 2H12) and had fallen as low as 6.1% y/y in January 2014;
however, since then, the measure has surged near threefold. While we expect
price growth to decelerate toward the end of 2015, as transitory shocks (exchange
rates and import bans) vanish, in the longer term, we believe that it is still a risk.
State accounts for
29% of employment,
salary indexation
strongly affects
income trend
First, demand-pull inflation pressures are not to be underestimated. In preparation
for the 2018 elections, we believe the government might implement a program of
public sector wage indexation and increased social spending in 2016-2017. The
effect of this would be especially large, given that in Russia the state accounts for
almost 29% of employment, and social payments generate some 20% of
household income. With a low unemployment rate (5.9% in March), reflecting
demographic constraints, public sector salary growth would be immediately shared
by the private sector – even in a recessionary environment, in our view.
Monetary policy is
also easing while
preference for savings
remains low
Monetary policy also contributes to the inflationary trend. The present weakness in
the retail credit market (7% y/y in March vs. 28% in early 2014) mainly reflects the
CBR’s continuous tightening throughout 2014. Now that the regulator has entered
an easing cycle, credit resources are likely to be more available toward the end of
this year. This would support a pro-inflationary trend. It would also hurt preference
for savings, which is already low – as are real rates on deposits. In fact, deposit
rates have not been significantly positive for more than a decade. The real rate on
the 1Y deposit rate in rubles has slumped to almost -5.3%. Only 41% of Russian
adults saved in the previous 12 months compared with the global average of 56%.
Figure 2: Income sources: social spending of
the state and business income, %
20%
19%
15%
15%
Nominal interest rate, 1Y retail deposits
Real interest rate, 1Y retail deposits
10%
15%
5%
14%
10%
0%
9%
Доходы
от income
предпринимательской
Business
деятельности
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
Source: Rosstat, Alfa Bank
-5%
-10%
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
Apr-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Социальные
платежи
Social spending
5%
Figure 3: Nominal and real deposit interest
rates, %
Source: CBR, Rosstat, Alfa Bank
State monopolies are
to return to their
indexation practices;
MED proposed 7.5%
for 2016
Second, cost-push risks are also unfavorable. State monopolies’ tariffs are likely to
return to their previous practice of price increases; the MED has already proposed
a 7.5% hike in 2016. Accounting for the low base that the tariff freeze has created,
the contribution from this source of inflation will be higher. The low competitive
environment in the Russian economy also amplifies inflationary pressures.
Price instability is
likely to be prolonged
and hurt AB-ICI
prospects
Thus, while current policies attempt to limit recession, they are also inflationary,
which is risky in the current – already high – inflationary environment. As rapid
price growth is likely to remain and hurt savings and investment, we do not expect
strong development of the real economy, limiting AB-ICI index improvement.
Alfa Bank Investor Confidence Index
April 30, 2015: Some Recovery In Sentiment
2
Macro Insights
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Alfa Bank Investor Confidence Index
April 30, 2015: Some Recovery In Sentiment
3
Equity Market
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Research Department
Macroeconomics
Natalia Orlova, Ph.D.
Dmitry Dolgin
+7 (495) 795-3676
[email protected]
Retail, Real Estate
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Alfa Bank Investor Confidence Index
April 30, 2015: Some Recovery In Sentiment
4