Russia’s Outlook Revised to Positive

Fitch Ratings has revised the outlook on Russia. The federal government deficit is expected to decline to 2% of GDP, from 3.4% in 2016.

russia ratingFitch Ratings has revised the Outlook on Russia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at ‘BBB-‘.

Russia continues to make progress in strengthening its policy framework underpinned by a more flexible exchange rate, strong commitment to inflation targeting and a prudent fiscal strategy, reflected in the recently approved budget rule. This policy mix will result in improved macroeconomic stability and, together with robust external and fiscal balance sheets, increases the economy’s resilience to shocks.

After falling below the central bank’s 4% target in July (and reaching a historical low of 3.3% in August), inflation will average 4.1% in 2017, down from 7.1% in 2016. Fitch expects the central bank to remain focused on achieving a sustainably low level of inflation through a prudent easing cycle, strengthening transmission mechanisms, cementing institutional credibility and sustainably anchoring expectations. Inflationary risks stem from exchange rate volatility, domestic demand recovery (reflecting a tight labour market) and food price shocks. However, inflation will average 4.5% in 2018-2019, an unprecedented level of low inflation for Russia, albeit still above the 2.1% ‘BBB’ median.

The budget rule approved in July programmes spending based on a conservative oil price baseline of USD40. In addition, the government will continue to accumulate above-budgeted oil revenues, using FX intervention to prevent real effective exchange rate appreciation, reduce its fiscal oil dependence and rebuild fiscal buffers. Oil revenues are likely to remain around 36% of total revenues. Authorities revised down the 2017 budget deficit target to 2.1% from 3.2% of GDP, with additional spending to be financed by above-budgeted non-oil revenues in line with the fiscal rule. The deficit target is 1.4% of GDP for 2018.

Fitch expects the federal government deficit to decline to 2% of GDP, from 3.4% in 2016, and to reach the 0% primary deficit target in 2019.