Russian Federation: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, November 24, 2020
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- Published: November 24, 2020
Foreground challenge
- Foremost challenge: bringing the COVID-19 pandemic under control and avoiding lasting damage to the economy.
- Key policy strengths: fiscal and monetary policy credibility built over years of strong policies, which created macroeconomic policy space that has been tapped to combat the crisis.
- Policy balance: continue extending support for people and firms until the recovery is properly entrenched, while sustaining efforts to address structural factors that constrain potential growth.
Outlook and risks
- Q2 contraction: large but not as severe as in most other G20 countries.
- Q3 rebound: stronger-than-projected third quarter gross domestic product (GDP) rebound, supported by fiscal, monetary, and macroprudential responses.
- Short-term risks:
- Sharp rise in infections threatens the recovery.
- Reintroduction of restrictions could weigh less than spring restrictions but could still cause further layoffs and strain firms’ balance sheets.
- Geopolitical tensions cloud the outlook.
- Medium-term risk mitigation: recent positive vaccine news lowered the risk of a prolonged crisis without a medical solution.
- Baseline projections:
- Economy to contract by about 4 percent this year.
- Economy to expand by some 2½ percent in 2021, assuming the COVID-19 situation gradually normalizes.
- Labor market: the economy will remain well below full employment for the foreseeable future.
- Dominant risk orientation: downside risks dominate in this highly uncertain environment.
Fiscal policy — findings and recommendations
- Pre-crisis fiscal position: sound fiscal framework, substantial policy space, very low levels of debt, and substantial savings in the National Wealth Fund.
- Fiscal rule: contributed to delinking the budget and the economy from volatile oil prices and reduced uncertainty.
- Crisis response magnitude:
- Fiscal measures amounted to about 3.5 percent of GDP.
- About 4.5 percent of GDP if off-budget measures are included.
- Support measures effectiveness:
- Income support (expanded social and unemployment benefits) bolstered household incomes.
- Firm support measures buffered liquidity and solvency pressures, limiting long-term scarring.
- Support was relatively well targeted with measures to limit fraud and abuse.
- Recent policy moves welcomed:
- Extension of some support measures.
- Extension of tax deferrals for firms in newly affected sectors.
- Fiscal policy recommendations:
- Stand ready to do more if needed.
- Consider further extending tax deferrals if the economic situation weakens as projected.
- Ensure conditions to convert subsidized loans into grants remain compatible with underlying economic developments.
- Broaden sectors and firms receiving support if more restrictive lockdowns are instituted or stress spreads more widely.
- Consider reinstating the higher unemployment benefits while the crisis persists and until there is a meaningful recovery in employment, as the pre-crisis benefits are very low relative to the cost of living.
- Tax and social policy reforms:
- Permanent reduction in SME social security contributions is positive for reducing informality.
- Reduction of inefficient tax exemptions in the oil sector is welcome; staff encourages identifying and eliminating inefficient exemptions in other sectors.
- Planned tax policy measures for next year will contribute towards a more equitable, progressive tax system.
- New welfare programs being means-tested are better targeted; staff supports ongoing plans to better target remaining welfare programs.
Monetary policy — findings and recommendations
- BoR actions:
- Policy rate cut by 200bps to 4.25 percent, a record low.
- Introduction of new tools to provide liquidity.
- Monetary transmission: lending and deposit rates have fallen closely in line with the policy rate; credit growth has held up well, supported by credit-targeted policies.
- Inflation developments:
- Inflation accelerated in recent months, reaching 4 percent in October.
- Staff view: this acceleration is likely temporary and largely owing to recent ruble depreciation.
- Inflation outlook and recommendation:
- Projected below-target inflation for some time.
- Baseline projection: inflation at 3–3½ percent in the second half of next year.
- Recommendation: policy easing in the coming months to keep inflation at target and preserve room to respond to future shocks.
- Note: market-based measures of expectations are below 4 percent; household inflation expectations have increased.
- FX operations:
- Support for BoR engaging in FX operations when market conditions are disorderly to reduce excess volatility.
- Recommendation to separate regular FX purchases/sales under the fiscal rule (to remain on monthly schedule for transparency) from FX operations aimed at reducing disorderly market conditions.
- Caveat: some external risks outside central bank control could trigger inflationary pressures; these events are considered largely independent of BoR policy rate levels and could be addressed as they occur.
Financial sector policy — findings and recommendations
- Pre-crisis banking strength:
- Capital adequacy ratio of 12.7 percent.
- Adequate liquidity.
- Profitability reached peak level before the crisis.
- Nonperforming loans (NPLs) as a share of loans were high at above 9 percent but conservatively provisioned.
- BoR regulatory measures:
- Regulatory forbearance on loan classification and provisioning to incentivize restructurings.
- Restructurings exceeded a notional value of six and a half trillion rubles.
- Forbearance on securities and FX asset valuations.
- Elimination of macro-prudential risk-weight add-ons on mortgages and to some extent on unsecured loans granted before the crisis.
- Assessment of bank losses and resilience:
- Bank losses so far appear manageable for the banking system as a whole, but this assessment should be taken with caution.
- Based on restructured loan amounts, loan losses are not expected to put much pressure on most banks’ capital, if at all.
- Central bank stress tests indicate capital buffers could withstand a significantly more severe scenario than currently projected.
- Supervisory recommendations:
- While forbearance remains in place, supervisors should track the health of restructured loans closely to gauge needed (instead of actual) provisions.
- Central bank should continue encouraging banks that can afford to fully provision to do so without delay.
- Once loan classification/forbearance expires, it should not be renewed, as it obscures true asset quality.
- If needed provisioning brings any bank’s capital ratio under the regulatory minimum, solvent banks should be granted additional time to restore capital conditional on a credible plan.
Structural policies — findings and recommendations
- Pre-crisis growth performance:
- Growth averaged 1.5 percent in the years preceding the crisis, stalling convergence to advanced economy income levels.
- Staff view of medium-term potential growth: 1.6 percent.
- Structural priorities reiterated:
- Improve the business climate.
- Increase competition within and across regions.
- Strengthen SOE governance.
- Regulatory guillotine: welcome initiative, effectiveness in eliminating legacy regulatory maze remains to be seen.
- National projects:
- Present both an opportunity to bolster potential growth and risks.
- If well executed, could materially improve infrastructure, strengthen skills, and increase diversification and exports.
- Should not substitute for broader reforms or expand the state’s footprint on the economy.
- Maximizing impact requires a level playing field to ensure strong private sector participation.
Closing
- The mission thanks the authorities and other counterparts for candid and constructive dialog.
IMF Staff Concluding Statement, November 24, 2020.