Russian macro: The 2025 budget looks reasonable but the 2024 amendments puzzle investors
In recent days, the Russian government submitted to the State Duma the final draft of a three-year rolling budget (2025-2027) that at a glance looked quite peculiar, although that is not unusual. As macroeconomic growth forecasts supporting the budgetary planning were usually conservative, while the inflation outlook used to be excessively optimistic, actual revenues used to significantly exceed plans in recent years. Previously, the government used to save the extra cash in the National Wealth Fund, but after the pandemic and in light of the new geopolitical reality that emerged after February 2022, additional spending appeared the Number One priority.
The draft budget for 2025-27 puzzled investors as Minfin’s borrowing program looks overly ambitious. The government plans to issue OFZs worth R4.8 trln in gross terms (R3.3 trln net) in 2025. The maximum annual issuance was observed in 2020 during the pandemic, when Minfin sold R5.3 trln. Four years ago, several state-owned banks bought huge amounts of floating-rate bonds and in that way assisted the government in financing its deficit. Another point that made investors cautious was the upward revision of the expected budget deficit this year. Initially the 2024 budget deficit was set at 0.9% of GDP, while now the government expects it to be 1.7% of GDP. Given that the 8M24 deficit was 0.2% of GDP, it turns out that authorities will spend a huge amount of money at the end of the year. So far, in 9M24 Minfin was able to raise in borrowing only about half of the annual target.
Still, we don't see many problems with the 2024 budget execution as the government may collect somewhat more revenue this year than it currently expects and the deficit may appear lower. Domestic borrowing will catch up in 4Q24—the government's appetite may be not very pleasant for those institutions that may be encouraged to buy more OFZs, but it doesn’t appear that they may find many more alternatives in which to invest, as the November-December budgetary spending spree won’t allow money market rates to rise significantly and ruble liquidity won’t be in short supply. The government also has some spare cash in it treasury accounts. The 2025 budget looks realistic as well, as inflation will remain elevated as a result, but if the government sticks to its currently targeted 2025 expenditures, inflation will start to come down in 2Q25.
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