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Of the Central Bank for the first time in three years raised its key interest rate to 7.5% and hinted at the possibility of its further increase. What does this mean for the ruble? Is it possible in Russia in the foreseeable future, the new default?
Than September of 2018 is different from the August 1998
In August Russia celebrated the 20th anniversary of the default. August and September of this year was marked by a sharp fall of the ruble, which has forced the Russians to recall the events of the time. Subconsciously people are not trusting the statements of the authorities that the reasons for the unrest there, preparing for the worst. Foreign investors withdraw funds from the rouble bonds to buy foreign currency, causing the ruble devalued even more. The fact that the Central Bank and the Finance Ministry will be able to do something to strengthen the ruble, no one was hoping. But the sudden decision of the Central Bank to raise the key rate (analysts almost unanimously in favour of its retention) calmed the markets. The ruble, to do this, however, is a little weak after falling by 12% in six weeks, played some more for the American dollar. Is it a merit of the Central Bank and how long to strengthen?
the economic Situation is now very different from what it was 20 years ago. And the reasons for the weakening of the ruble are quite different. Then the state ran out of money to pay its debts. Hopes on the growth of export earnings, due to which it was planned this debt to extinguish, was not justified, the reserves melted away. In despair at the maintenance of the GKO pyramid even threw a loan from the IMF, but to extinguish the fire started in the financial market failed. Soon the crisis spread to the real economy. Alive seemed subdued inflation. And the ruble fell sharply, equating swollen until the money supply with the product. And although it seems to be preconditions for the crisis were obvious, but still for almost all it was a complete surprise.
since 1998, although in favor of the ruble, but does not guarantee protection against sudden shocks. For example, in the economy of Turkey not to say that everything was fine, but not the harbingers of a sharp devaluation. The national debt was a relatively low 28% of GDP, the economy grew, albeit erratically, but on average 7% per year (GDP growth of Russia in 2018 at the most optimistic forecasts, is expected around 2%). Inflation was high, 10-12%, but not galloped, and this largely fee for high growth. But only one of the duties on Turkish metals that are less than 10% of total exports (you can add that and the United States to Turkey is not a key partner: the share of the States accounted for about 5% of Turkish exports), and the Turkish Lira immediately lost more than 20% of its value. And all because of the fact that the money supply, or, scientifically, the macroeconomic indicator M2, grew at a frantic pace. Only for the year the amount of money in the economy increased by 26% and the number of goods — only 7%. The bubble burst, the Lira depreciates, the crisis threatens to spill over into the real sector. Familiar?
what is happening now in Russia, not a repetition of the events of August 1998. Now we can say firmly that there is no immediate threat of default. Russia does not pay crazy interest on the bonds of external and internal loan (except for certain issues). Foreign debt amounts to only 13% of GDP. If necessary, you can even increase by 70% without compromising the sovereign rating. Prices on the export of raw materials has increased markedly over the last year. Oil is above $ 75 per barrel, while the state budget were drafted on the basis of the 50 (and the exporters will survive and at 30 dollars per barrel). Inflation, although showing signs of revival, are still near historic lows. You can continue to list reasons for a sharp devaluation of the ruble is not threatened right now. But as they say, there is a caveat.
In the Russian economy there is an objective risk of devaluation. The economy is growing about 2% a year. The money supply now stands at 44 trillion rubles, or about 43% of GDP, and is growing by 10-12% per annum (Bank of Russia). And the government will increase the debt (this process is known as "printing money"), because of the need to Finance new social programs. Another problem is that the 8 trillion rubles, which the government according to the decree of the President is going to spend on the social sector does not create many high paying jobs. That is, the growth of the Russian economy at least to the Turkish pace, not faster. Even without taking into account external factors on the horizon a few years ripen the risk of devaluation.
the Key rate from the default will not save
the Measures taken by the Bank of Russia cut interest rates and the abandonment of the currency purchases on the open market before year end — do not remove the long-term devaluation risks. It is, strictly speaking, the task of the Central Bank and the government and specifically the Ministry of economic development. Central Bank only resulted in monetary and exchange rate policy in line with the market situation. Investors withdraw money from emerging markets, including from Russia. Because the share of nonresidents in the OFZ Russian was big, more than 30% and could fall below 20%, sales by non-residents government bonds have a significant pressure on the ruble. Does not help even a huge trade surplus, which reached $ 90 billion for the first half: exporters recently have reduced sales, holding currency, and in addition, the Ministry of Finance with the growth of the world prices for oil buys more foreign currency selling by exporters. The volume of purchases in the interests of the Ministry of Finance before the Central Bank stopped buying dollars, accounted for about 9% of the turnover.
the Likelihood of further interest rate hikes in Russia, in my opinion, is not excluded. The main motif — the fight against capital outflow. Fed raises key interest rate, a tax reform stimulates trump to return the money to US. The yield on us government bonds is now about 3% and will increase as further rate increases. The U.S. stock market growth due to including high profitability — profit margin for the top 20 us companies above 10%. To keep money in Russia, it is necessary to offer investors a high yield in the real sector of the economy or on the money market. Now our economy is, unfortunately, unable to offer any of either. Judging by the GDP growth rate of 1.9%, a large number wanting to expand the business there. Investments in fixed capital in this year, under forecasts the MAYOR, will increase by only 2.9%. In the debt and money markets is nothing interesting there. Government bond yields in the summer came to 6.5%. Against the background of falling of the ruble since the beginning of the year, 20% earned only by those who bought government bonds 2-2. 5 years ago. Now they take your money along with profit.
In the current environment, alas, has nothing to offer. The influx of tens of billions of dollars of foreign money to the OFZ has not caused the investment boom in the real sector. Two years a stable exchange rate, even the strengthening of the Russian currency, has not brought visible fruit. GDP is growing three times slower money supply, which only increases the pending devaluation risks. The growth of the oil prices, freezing of tariffs of monopolies, the food embargo brought the inflation down to historic lows. And the economy still grows poorly. Geopolitics intervene, the trade war. Increased significantly only the mortgage market and the demand for durable goods, mainly due to the regions where the incomes of the population employed in the private sector rose faster than inflation.
now the Central Bank and the Finance Ministry before a serious choice. The increase in yield on instruments of money and debt markets can re-establish investors ' interest. The ruble will return to a strengthening trend. But this time, investors will want yield, in my opinion, 10% and above. To invest in rubles at lower interest, given what is happening in the markets of Turkey and other EM countries, as well as taking into account the risk of deterioration in the geopolitical situation and the fact that the price for oil have grown for two years (and thus increasing the risk that would be adjusted), foreign investors are not interested. But the fact is that raising rates on the domestic market, the Ministry of Finance and the Central Bank run the risk of stepping on the same rake: the funds in the financial market will come, the ruble strengthened, while economic growth will continue to be low, 1.5—2.5% per year. While the money supply and the national debt will grow much faster. And one day, likely when the price of oil will adjust, there will come a reckoning for the policy of expensive loans. Interestingly, this tradition happens in August?
Central Bank, of course, sees these risks, the origins of which, by and large, beyond his control. While the regulator has chosen a policy of soft response. It is clear that the rate increase of 0.25 percentage points will not return the non-resident interest ruble-denominated government bonds. The Ministry of Finance, in turn, is also not in a hurry to raise the yield at auction.
If speculative capital will not fix the economy, then why is it, I ask, need? So, most likely, the Central Bank will continue to follow the trend, raising rates quite a bit, on one step, the growth of inflation and the weakening of the ruble. And thus, most likely, will be cheaper by 5-10% per year. Economic growth will slow to 1.5%. Of course, the visible effect will be to render external factors, particularly the price of oil. Its continued growth will move up the economy is stronger, and the rate will have to increase longer. The correction in oil prices, by contrast, will force the Central Bank to raise the key rate, and the Finance Ministry after that — to borrow more to ease the pressure on the ruble.
Georgy VASHCHENKO, head of operations on the Russian stock market IR "freedom Finance", Apchi
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