19.03.09

Analysts are still unable to give coherent macroeconomic forecasts for 2009 due to the extreme uncertainty in the world in general and in Russia, and there is still no knowing what awaits the country this year. Inflation forecasts for the year range from 9.6% to 17.5%, but, for the first time, some analysts polled by Interfax gave more optimistic forecasts than the official line.

Falling incomes and demand to limit price growth

The Russian Economic Development Ministry forecasts inflation will be 13%-14% this year, and the Central Bank thinks 13%. Kremlin aide Arkady Dvorkovich said last week there was a risk that inflation would reach 15% this year. Consumer prices rose 13.3% in 2008.

Slower growth or even a decrease in money supply is one of the main factors that will influence the rate of inflation, Troika Dialog's Yevgeny Gavrilenkov said. The sharp drop in household income and more limited access to loans will also ease inflationary pressure, and prices might not grow more than 10%-12% this year, he said.

"Public spending could fuel inflation, but budget funds will likely be spent gradually, like they were in 2008: some 60% of budget spending will be allocated in the first ten months, and the rest at the end of 2009, which will cause inflation to accelerate, but not until 2010," Gavrilenkov said.

The inflationary impact of the devaluation, which has pushed the cost of imports up, will be one-off in nature. Most of the price growth from this will occur this quarter.

Gavrilenkov said consumer inflation could average at 0.5% per month in the second half, which is on the low side.

UniCredit Securities analyst Vladimir Osakovsky said slower money supply growth and a drop in domestic demand, caused by the reduction in real wages and disposable income, would balance out the inflationary pressure caused by the devaluation, and that prices might not rise more than 9.6% this year as a whole.

The sharp slowdown in money supply has still not had its full impact on the consumer market, and price growth ought to start slowing in the second quarter.

The devaluations in a number of other countries could help offset the inflationary impact of Russia's own devaluation, Osakovsky said: the Russian ruble will hold relatively firm against the currencies of some major neighboring countries, where Russia could buy goods to substitute the more expensive varieties it has been importing from Western Europe and elsewhere.

And the global economic problems ought to push prices down worldwide, which make pricing policy more flexible, regardless of the exchange rate.

Deutsche Bank's chief economist, Jaroslav Lisovolik, said he thought inflation would be 11%-12% in Russia this year.

"Inflation will be faster in the first half than in the second, mainly due to the seasonal factor in January and the devaluation, which will drive price growth in the first few months. The impact that the economic downturn has on slowing inflationary growth will be felt more in the second half," Lisovolik said.

Deutsche Bank expects oil prices to be a little higher in the first half than in the second half of 2009. That will also take the edge of inflation in the third and fourth quarters as gasoline prices ought to go down, too.

But Alfa-Bank analyst Natalya Orlova said she still thought inflation would be 13%, and that this would be very high given the global deflationary tendency.

"Cheaper goods in other countries will mitigate the inflationary effect caused by the ruble's devaluation. Imports will of course to up in price, but perhaps disproportionately to the ruble's depreciation," Orlova said.

VTB Capital's forecast is 10.8%, but this could be revised up. "The worsening economic situation in the world, particularly the possibility of a second devaluation in Eastern European countries, suggests there could be a second round of devaluation in Russia, too, and that would stoke inflation. And if in the past we thought the budget would be financed by non-inflationary means, now we believe the opposite, in other words the Central Bank will not have enough means at its disposal to soak up excess ruble liquidity, and that could also speed price growth up," VTB Capital's Alexandra Yevtiyeva said.

Second devaluation could fuel inflation

Another school of thought says that inflation could be as high as 17.5% this year if the ruble devalues again.

ING Bank's Stanislav Ponomarenko said this could happen and was the main inflation risk. "We expect the ruble to come under renewed pressure and that it might lose another 5% of its value at the end of 2009 or early 2010. Imports would then go up in ruble equivalent, which would have a major impact on prices. Managers at Russia's largest retail chains share this view - they reckon prices could go up 20%-40% this year." ING Bank currently forecasts 14.3% inflation this year.

Ponomarenko also said that unlike the crisis year of 1998, there were now corporations with a lot of forex debt, and they will be trying to protect themselves from devaluation-related risks by putting their prices up.

"VimpelCom is a prime example. It has already said its charges will go up. It is raising charges that depend little on the ruble's exchange rate. But its forex debt is forcing it to raise prices in rubles. Transneft is switching to foreign currency tariffs. In a word, the trend is obvious," he said.

The consumer won't feel the impact the cost-cutting caused by lower prices for raw materials and farm produce even if producer prices fall, Ponomarenko said.

UralSib expects 13.8%-inflation this year. The financial corporation's expert, Vladimir Tikhomirov, said the devaluation effect would be felt from the start of this year until April or thereabouts. Then a more traditional factor, tariff growth, will come into play, as this is spread out on a quarterly basis this year.

But Deutsche Bank's Lisovolik said the inflationary effect from the tariffs growth would be more tangible in January as that is when the bulk of the growth occurred.

"And we shouldn't forget that inflation has been on the high side this year even without these factors because inflation was also high to compared it with in 2008," said UralSib's Tikhomirov. Tikhomirov said producer prices would fall, but this would not have a substantial impact on consumer inflation.

"Some producer prices are already falling, but food plays the biggest role in consumer price inflation in Russia. Around 40% of the consumer basket consists of food, and the amount of imported food has risen a lot in the past year. In addition, locally produced food will go up on the back of imports, but to a lesser extent," Tikhomirov said.

Tikhomirov said he did not think prices would fall due to cost reduction, partly because transport costs, which ought to go down, do not account for a large portion of import prices as most imports come from Europe, which is not far away.

Imported cars could be expected to fall in price, but the import duty hike on these will make imported cars more expensive, and not only imported cars.

"We expect local production to substitute imports in the food segment, but under-investment will not make this possible in others and they will have nothing to put on the market in place of imports. We had an inflow of direct investment in 1999-2001, and this gave industries related to the consumer some impetus, giving them an advantage over imports. But right now it's practically impossible to raise additional capital for new production inside the country," Tikhomirov said.

Citi gave one of the most pessimistic 2009 inflation forecasts: its analyst, Elina Rybakova, said she thought consumer prices could rise as much as 17.5% this year.

Nomura Holdings Inc thinks inflation could be 13.5% according to a baseline scenario, where oil trades at $40 a barrel and GDP falls 2%. But inflation could reach 17% in Nomura's worst-case scenario, where oil trades at $35 and GDP shrinks 3%.

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Source: Interfax