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World Bank expects Russia’s GDP to stand at 1.2% in 2019 - report

In 2020 the Russia's economic growth is supposed to reach 1.8%

MOSCOW, June 10. /TASS/. Russia’s GDP is expected to stand at 1.2% in 2019, reaching 1.8% in 2020, the World Bank said in its Russia Economic Report.

"Russia’s overall growth prospects for 2019-21 remain modest at 1.2 to 1.8% in 2019-2021, in line with its current potential growth trends. GDP growth in 2019 is projected to be 1.2% Continued oil production cuts and deterioration in the external environment (which affects export growth) are factors weighing down on GDP growth in the second quarter on top of subdued domestic demand. A less tight monetary stance and acceleration in the implementation of national projects weigh in favor of growth acceleration in the second half," the report reads.

"Yet, weak growth dynamics in the first half are expected to affect the annual growth number through the carry over effect. GDP growth is expected to accelerate to 1.8% in 2020 and 2021. Household consumption growth is expected to rebound after its 2019 deceleration, and implementation of national projects is expected to support investment demand," the World Bank added.

At the same time, according to the World Bank, "Russia faces risks both external and domestic. Downside risks to Russia’s growth outlook stem from the potential expansion of sanctions, renewed financial turmoil in EMDEs, and a dramatic drop in oil prices." "The recent expansion in household credit may pose a risk to financial stability in the case of a deterioration in the macroeconomic environment. Investment growth is subject to the successful and efficient implementation of government infrastructure investment initiatives," the report says, adding, however, that "if ongoing national projects are implemented effectively and efficiently, they could contribute to an increase in the potential growth, but only after 2021".

National projects impact

The effective implementation of national projects may help increase Russia’s GDP, the World Bank said.

"Russia’s growth is forecasted at 1.2-1.8% in 2019-2021. If ongoing national projects are implemented effectively and efficiently, they could contribute to an increase in the potential growth, but only after 2021," the report reads.

Russia’s GDP stood at 0.8% in the first quarter of the year. The country’s Ministry of Economic Development expects the GDP to grow to 1.3% in 2019, reaching two percent in 2020 and hitting the 3.3% mark by the end of 2024.

Inflation

The CPI inflation in Russia is expected to return to the Central Bank’s target of four percent in 2020-2021.

"Supported by relatively high oil prices, the general government budget is expected to remain in surplus in 2019-2021. CPI inflation peaked in March 2019. It is expected to decelerate for the rest of 2019, averaging 5.0%, y/y. The CPI inflation is expected to return to the central bank’s target of 4% in 2020-21. The forecast of a narrower external surplus reflects lower oil prices and a pickup in import spending. Net capital outflow is expected to decrease gradually with lower debt payments," the report reads.

Russia’s Central Bank expects the 2019 inflation rate to stand at 4.3%

Poverty rate

According to the World Bank, the moderate poverty rate in Russia is expected to continue to decline in 2019-2021.

"The moderate poverty rate is expected to continue to decline in 2019 and through 2021, although social vulnerability needs to be monitored. Continued growth of the economy, wage growth in the private sector, and the indexation of pensions to inflation will support disposable incomes and contribute to a gradual decline in the poverty rate (Table 5). However, many individuals lack formal employment and many households remain close to the poverty line, suggesting a level of social vulnerability that will continue to require close monitoring," the report reads.

Russia’s Audit Chamber said in later May that the real income of the population was unlikely to grow in 2019 following a decline in the first quarter of the year. According to the Audit Chamber, it will be impossible to reduce the poverty rate in 2019.

‘Relatively stable’ banking sector

Russia’s banking sector has been relatively stable, the World Bank pointed out.

"The Russian banking sector has been relatively stable, supported by modest economic growth and the proactive position of the regulator. The CBR [Central Bank of Russia - TASS] has been taking timely steps to address the risks of the accelerated consumer-lending growth, and it continued its sector clean-up by revoking the licenses of some smaller banks and focusing on the financial rehabilitation of large financial institutions," the report reads.

According to the World Bank, "the Russian banking sector is stabilizing as the modest economic growth supports lending growth, though dynamics vary from segment to segment, and credit risk and sector performance indicators remain stable." "Corporate demand for new loans strengthened as credit to the corporate sector in Rubles grew by 11.4%, y/y, as of May 1, 2019 (Figure 16). Lending to households in Rubles continues to grow in double digits - at 24.0%, y/y, at the same time," the report says.

Fiscal loss due to informal workers

The fiscal loss of underpayment by informal workers in Russia is estimated to between 1 to 2.3% of GDP.

"The share of informal employment, a pervasive phenomenon in Russia, is estimated to range between 15.1 and 21.2% The fiscal loss of underpayment by informal workers is estimated to between 1 to 2.3% of GDP," the report reads.

According to the World Bank, "policies that reduce payroll taxes to lower the cost of formal labor are not enough." The report emphasizes the need for a more "flexible labor legislation in certain areas," "a stronger safety net with better unemployment benefits" and a more efficient workforce. "Specifically, Russia’s labor code and regulations could be adjusted in the areas of labor contracts, minimum wages, and redundancy dismissal," the document says.

"The antidote to reducing informality is the faster creation of more formal-sector jobs: in both 2017 and 2018, net job creation by medium and large enterprises was close to zero," the World Bank added.

"Stable economic growth, wage growth in the private sector, and the indexation of pensions to inflation should support disposable incomes and contribute to a gradual decline in the poverty rate in 2019-21," the report points out.

Retail loans

There are no signs of a crisis in Russia’s retail loan segment, the World Bank said.

"Despite rapid growth in Russian retail loans, the current situation is different from the one that led to the 2014 retail-loan crisis," the report reads. "Current retail loan growth in Russia is slower than in 2012-13, and there are no signs of nonperforming loans picking up. The system-wide retail nonperforming loan ratio has held largely steady since the beginning of the year, with some signs of decline - notably a drop of 5.1% as of April 1, 2019," the World Bank added.

"The recent double-digit expansion in household credit may pose a risk to financial stability in case of a deterioration in the macroeconomic environment, although consumer lending risks appear to be contained owing to tightening prudential regulations aimed at slowing unsecured consumer lending," the report says.

National Welfare Fund

The organization added, that the Russian National Welfare Fund’s investment in domestic infrastructure projects could reverse the achievements of the fiscal rule.

"The liquid part of the National Welfare Fund could exceed seven percent of GDP by the end of 2019, giving the government the ability to invest part of it in domestic infrastructure projects. But while Russia’s infrastructure gaps are large, substantial investment in domestic infrastructure projects from the liquid part of the fund could reverse the achievements of the fiscal rule," the report reads.

Russian Finance Minister Anton Siluanov said earlier that by the end of 2019, the government planned to set out criteria for choosing projects that would receive money from the National Welfare Fund once it reached seven percent of GDP. Siluanov pointed out that the Fund’s investment strategy involves overseas and domestic investments.

As of June 1, the National Welfare Fund has accumulated over $58 bln.