Easing access to loans may boost inflation and defaults in repayment

In her report at the 23rd International Banking Congress in St. Petersburg Chairwoman of the Bank of Russia Nabiullina E. S. paid a special emphasis to the objectives of the regulator’s current monetary policy.

1) preserve price stability by consistently lowering inflation down to 4% within a 3-year period and maintaining this level within a period of time sufficient for restructuring the national economy;
2) strengthen and reorganize the banking sector by enhancing the regulatory system through introduction of the international standards and national regulatory regulations;
3) prevent the financial system from systemic risks and certain market segments, e.g. the consumer lending segment, from overheating;
4) develop a payment system, financial markets, and the central bank as fully-fledged mega-regulator.

These objectives determined the choice of monetary policy tactics in the first half of 2014, when Russia was facing major challenges including, besides slowing down economic growth rates, mounting tensions in global financial markets which were triggered by changes in the monetary policy of the U.S. Federal Reserve System (FRS), as well as escalation of the geopolitical situation.

At the same time, according to the Rosstat’s (Federal Service of State Statistics) data on the structure and dynamics of using GDP, the dynamics of all internal demand components kept declining in Q1 2014. For instance, final consumption expenditure increased 2.6% in Q1 2014 against the corresponding period of the previous year, comparing to a growth of 4.2% in Q1 2013. Also growth in household expenditure which account for about 55% of Russia’s GDP slowed down to 3.7% relative to Q1 2013 which saw a growth of 5.7%. Investment declined further: while in Q1 2013 gross fixed capital formation declined 0.5% relative to the corresponding period of the previous year, in Q1 2014 it dropped by 7% despite a low base. It was the growth in net exports that became the sole factor that supported the Russian economy: in Q1 2014 the volume of export supplies increased 1.6% (0% in Q1 2013) while import of goods and services fell by 4.4% relative to the corresponding period of the previous year (a growth of 7.3% in Q1 2013).

According to the estimates of the Bank of Russia, the Russian economy in 2014 will see a growth of 0.4%, which is determined by the effect of internal structural problems rather than external and market-related factors. According to the Bank of Russia, decline in labor productivity with simultaneous reduction of working-age population makes it impossible for high economic growth rates to resume by injecting extra liquidity into the economy.

Focus should be placed on that growth rates in the real disposable personal money income declined to 0.2% in the period of January to May 2014 relative to the corresponding period of the previous year, comparing to a growth of 4.9% in the period of January to May 2013. Corporate net profit contracted by 5% in the period of January to April 2014 relative to the corresponding period of the previous year. In our opinion, easier access to loans in such circumstances would not only unwind the inflationary spiral, but also threatens a growth in repayment defaults in the banking system. Furthermore, the share of distressed and bad loans increased in the total volume of loans as early as the end of April 2014, having reached 6.5%, the highest value since September 2012.

Although it is obvious that the Russian economy needs an impulse to accelerate economic growth, monetary easing policies will be ineffective in that context. Furthermore, focus should be placed on an extremely low level of unemployment in Russia, being a further proof of exhausted extensive growth factors in the Russian economy and the need to implement a new model of economic development.

Anna Kiyutsevskaya, PhD in Economics, Senior Researcher