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Bankers and Bureaucrats Predict a Tough 2010

As bankers and government officials were clearing out for the New Year’s holiday this week, there was little cause for cheer. Their full-year targets and forecasts were shattered by a global banking collapse, and no one was in the mood to bet on the coming 12 months.

There was a consensus: It’s going to be bad.

But as the Russian economy has begun to stabilize, the country’s prognosticators are returning to the table, and with them comes the task of manufacturing — and managing — expectations.

The government has stayed cautious with its full-year gross domestic product forecasts, trying to find figures that can’t fall short but that will also be of some use for budget planning. Banks are more optimistic on the economy’s prospects, but they also warn that the return to growth could start pushing prices back up.

“If the government’s forecast is below the real figures, then that’s OK, but when the official forecast looks too optimistic by the end of the year, the government faces political consequences,” said Vladimir Tikhomirov, chief economist at UralSib.

The Economic Development Ministry last week updated the three scenarios for its 2010 economic forecast, with pessimistic growth of 1.3 percent, a baseline scenario of 3.1 percent and possible growth of 3.5 percent if oil prices continue to stay above the $58 per barrel forecast used to calculate the 2010 budget.

The ministry’s pessimistic scenario sees an average Urals crude price of $58 to $60 per barrel and combined GDP growth of about 5.3 percent for 2010-2012. The base scenario puts crude at $65 per barrel in 2010, increasing to $70 to $71 in the next two years for three-year GDP growth of 11.1 percent.

The optimistic scenario predicts that crude will average $69 next year, $74 in 2011 and $81 in 2012 — bringing GDP past the precrisis 2008 level by 2.7 percent.

“We forecast that the economic results in Russia in 2010 will be much better than official government forecasts,” UralSib analysts wrote in a research paper. They said GDP would fall 6.9 percent in 2009, year on year, better than the ministry’s expected drop of 8.5 percent.

The economy will return to growth of 5.5 percent in 2010 and 5.9 percent the following year, they said.

Alexander Osin, chief economist at Finam, had a more cautious forecast, although it was still at the high end of the Economic Development Ministry’s guidelines. GDP will grow 3.5 percent in 2010, with a major upturn of 1.4 percent quarter-on-quarter growth coming in the third quarter before slowing back to a quarterly rise of 0.6 in the last three months of 2010, he said.

“GDP growth will be driven by increases in budget expenses and a net export surplus, and therefore we assume the peak of these activities will be in the second and third quarter,” Osin said.

Increased social spending added 2.9 trillion rubles ($97 billion) to the 2010 deficit, according to federal budget documents published earlier this month.

Another major point of contention was inflation, which is now widely expected to register at about 9 percent for 2009.

The government forecasts inflation of 8.8 percent to 9 percent for 2009, according to last week’s revised Economic Development Ministry numbers. Next year, prices may rise 6.5 percent to 7.5 percent, it said.

“The positive momentum of lower inflation is expected to continue into the first half of 2010, as the lower rate in the second half of 2009 came partly from seasonal factors (cheaper food) and partly because of the change in the Central Bank’s monetary policy,” the report said. “Expect a higher global inflation trend from mid-2010, and that will have some contagion for Russia. The expected general economic improvement in Russia by midyear will also add inflationary pressures.”

Anton Pletenev, an analyst at Raiffeisenbank, said he expected average inflation of 8.5 percent to 9 percent next year, while Finam’s Osin said the figure would be 9 percent to 11 percent, depending on what the state does.

And while the Economic Development Ministry may have submitted its best guesses, that hasn’t stopped senior policy makers from offering their macro forecasts for 2010. A number of top officials, most recently President Dmitry Medvedev, have said the economy could grow 5 percent next year — although virtually all have attributed the figure to “experts.”

Alexei Ulyukayev, a Central Bank first deputy chairman, and the Komsomolskaya Pravda newspaper in October made a bet — setting the consumer basket of goods used to calculate the effects of inflation on households as their wager — that full year inflation for 2009 would be less than 11 percent.

The newspaper on Monday conceded defeat and said it would pay him a “consumer basket of the future,” including caviar, crab meat and pineapple instead of the standard items like flour, eggs and sugar.

Last year, Ulyukayev lost a similar bet with Izvestia. He delivered a case of wine to the newspaper after inflation turned out to be higher than in 2007.

Economic Forecasts for 2010
Indicator Average Median Min / Max
GDP, % 3.3 3.3 -1 / 7
Inflation, % 8.3 8.5 5.5 / 11
Industrial Production, % 4.1 4.7 -3 / 8.2
Fixed capital investment, % 5.3 4.2 -4 / 20
Retail goods sales, % 4.2 4 0.5 / 10
Nominal wages, & 8.5 9.3 1.2 / 16.6
Real household incomes, % 3.4 3.1 1 / 8.4
Exports, $Bln 358 353 290 / 413
Imports, $Bln 230 226 184 / 270
Current account balance, $Bln 56 61 16 / 103
Capital inflows / outflows, $Bln 10 16.5 -60 / 60
Direct foreign investment, $Bln 39 45.5 6 / 70
Central Bank refinancing rate 7.9 8 6.5 / 9
Lending rate to nonfinancial sector 12 12.3 10 / 13.6
Increase in lending volume to nonfinancial sector, % 11.4 10 6 / 18
Increase in consumer lending volume, % 9.5 7.6 2 / 18
Average Urals crude price, $ / barrel 72.1 73.4 60 / 90
Ruble / dollar rate at the end of 2010 28.4 28.5 26.2 / 33
Unemployment, % 7.7 7.6 7 / 9
Participants: Alfa Bank, Bank of Moscow, BDO Unicon, Center for Macroeconomic Analysis and Short-Term Forecasting, Citibank, Higher School of Economics’ Development Center, HSBC, ING, Merrill Lynch, Otkritie, Renaissance Capital, Sberbank Macroeconomic Forecasting Center, Troika Dialog, Trust National Bank, UralSib
— Vedomosti

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