ALEXEY VEDEV: GROWTH AT 1.4% DECLARED BY MINISTRY OF ECONOMIC DEVELOPMENT IS TOO MUCH AFTER ALL
Alexey Vedev, Head of Financial Studies Department of Gaidar Institute, was interviewed by “Invest-Foresight” business journal regarding results of economic development in 2019.
There are cases when after a cycle of final recalculations going on throughout Q1, the rate of economic growth looked more convincing retrospectively. That was relevant to results of 2018 while results of 2015 were reviewed five times. As for 2019, one thing is certain for sure: they are worse than indicators of 2018, finally recorded at 2.5%. Last year, there was at least a slowdown in growth or a decline according to harsher terminology.
Alexey Vedev stated: “Growth at 1.4% declared by Ministry of economic development is too much after all. According to my estimation, growth accounted for 1–1.1%”.
In the beginning of 2019 governmental expectations regarding growth were more optimistic. However, Ministry of economic development adjusted forecast downwards already in September.
IEP expert questioned: “The most impressive activity for myself was the revision of dynamics of non-energy exports: it was expected to grow by 6% already in April and predicted to fall to minus 3% in September. What happened in this area?”
Prospects for further development seem very uncertain against slowdown of economic growth.
According to Alexey Vedev, “Stagnation of households’ incomes which they are trying to somehow stretch towards positive side is obvious to everyone, however, progress equals to statistical error. Accordingly, domestic demand remains quite low and therefore investments are not high: investments of private sector are associated with domestic demand and in its absence have a high risk exposure. Situation related to Ruble exchange rate is not clear. I believe that it should be targeted since policy of its “free fluctuation” turns here into a risk for the investment process.
We can also conclude that in connection with the change of government - without even criticizing it - this whole year will be spent on elaboration of strategy, getting up to speed, etc. Nevertheless, this means as a whole that implementation of Presidential executive order - and, in principle, this is the correct goal - to bring economy to the path of sustainable growth, is in doubt. The reason is that it is absolutely unclear which tools should be used to secure growth to 3% and above, envisaged for 2021 in the construction of a new cycle”.
High expectations of the government are associated with implementation of national projects. However, their “heaven-sent” function is not obvious for specialists. According to Alexey Vedev, this is “simple” arithmetic. Twenty seven trillion Ruble was envisaged for 6 years. This means approximately Rb 4 trillion per year. Roughly, half of it is investment and the other half is state consumption. In total, this is Rb 2 trillion of additional investment annually. In this context, aggregate investments already amount to Rb 20 trillion. They do not result in any breakthrough. Therefore, it is practically not clear how we can dramatically accelerate at the expense of two trillion”.
Analysts express cautious hopes that the new government will revise fiscal policy as current strict fiscal rule has an obvious restraining impact on economy.
Alexey Vedev agreed that previous government managed saving better than investing. “Budget surplus amounted to Rb 2 trillion in 2019. In fact, this is unintended “extra” money. “There are discussions going on in this context in connection with the President’s address on how to finance a package of social measures worth Rb 400 billion. Why, then, “money box” is needed"? Budget surplus means that "extra" money should be spent either for investment purposes or for social support.”
He thought that heavy borrowings at the market of federal loan bonds have no explanation under budget surplus: funds borrowed at 6% interest are too expensive for investment.
Personnel reshuffle in the new government allow us to expect mitigation of budget policy. Otherwise, according to Alexey Vedev, economic growth in 2020 will be relevant to last year, i.e. within or slightly above 1%.
Alexey Vedev stated: “Growth at 1.4% declared by Ministry of economic development is too much after all. According to my estimation, growth accounted for 1–1.1%”.
In the beginning of 2019 governmental expectations regarding growth were more optimistic. However, Ministry of economic development adjusted forecast downwards already in September.
IEP expert questioned: “The most impressive activity for myself was the revision of dynamics of non-energy exports: it was expected to grow by 6% already in April and predicted to fall to minus 3% in September. What happened in this area?”
Prospects for further development seem very uncertain against slowdown of economic growth.
According to Alexey Vedev, “Stagnation of households’ incomes which they are trying to somehow stretch towards positive side is obvious to everyone, however, progress equals to statistical error. Accordingly, domestic demand remains quite low and therefore investments are not high: investments of private sector are associated with domestic demand and in its absence have a high risk exposure. Situation related to Ruble exchange rate is not clear. I believe that it should be targeted since policy of its “free fluctuation” turns here into a risk for the investment process.
We can also conclude that in connection with the change of government - without even criticizing it - this whole year will be spent on elaboration of strategy, getting up to speed, etc. Nevertheless, this means as a whole that implementation of Presidential executive order - and, in principle, this is the correct goal - to bring economy to the path of sustainable growth, is in doubt. The reason is that it is absolutely unclear which tools should be used to secure growth to 3% and above, envisaged for 2021 in the construction of a new cycle”.
High expectations of the government are associated with implementation of national projects. However, their “heaven-sent” function is not obvious for specialists. According to Alexey Vedev, this is “simple” arithmetic. Twenty seven trillion Ruble was envisaged for 6 years. This means approximately Rb 4 trillion per year. Roughly, half of it is investment and the other half is state consumption. In total, this is Rb 2 trillion of additional investment annually. In this context, aggregate investments already amount to Rb 20 trillion. They do not result in any breakthrough. Therefore, it is practically not clear how we can dramatically accelerate at the expense of two trillion”.
Analysts express cautious hopes that the new government will revise fiscal policy as current strict fiscal rule has an obvious restraining impact on economy.
Alexey Vedev agreed that previous government managed saving better than investing. “Budget surplus amounted to Rb 2 trillion in 2019. In fact, this is unintended “extra” money. “There are discussions going on in this context in connection with the President’s address on how to finance a package of social measures worth Rb 400 billion. Why, then, “money box” is needed"? Budget surplus means that "extra" money should be spent either for investment purposes or for social support.”
He thought that heavy borrowings at the market of federal loan bonds have no explanation under budget surplus: funds borrowed at 6% interest are too expensive for investment.
Personnel reshuffle in the new government allow us to expect mitigation of budget policy. Otherwise, according to Alexey Vedev, economic growth in 2020 will be relevant to last year, i.e. within or slightly above 1%.