RECORD oil prices have fuelled an economic recovery, since the 1998 crisis, with six years of gross domestic production growth averaging 6.7 per cent. However, there has been a decline in the GDP growth in the first two months of 2005, rising by 4.4 per cent against the high level of 7.1 per cent recorded last year.
The short-term impact on the economy of higher prices is unclear, because 90 per cent of the extra revenue is swallowed by the government through taxation and deposited mostly in an offshore stabilization fund. But with more than Rbs800 billion now in the fund, the authorities are relaxing fiscal policy, spending more on social transfers and financing tax cuts.
Also under consideration are big infrastructure projects, notably in regions which have missed out on the oil and gas boom. Once the money starts flowing, the net effect could be to lift the GDP growth by one to two percentage points.
With high oil prices feeding the economy, a new middle-class is emerging in Moscow and in the resource-rich regions of Siberia. But far from accelerating, the pace of investment is slowing, falling to 7.8 per cent in February, compared with more than 10 per cent in 2004. The Yukos affair has cast a shadow over the investment climate.
Cross-border capital flows, which turned positive in early 2003 for the first time in several years, last year went into the red again, with an outflow of $7.8 billion. Even in oil and gas, where high prices should be encouraging investment, companies are sitting on their cash.
How long the economy can grow without more investment remains to be seen. But there are signs of strain, with some industries – notably energy – reaching capacity limits and the authorities struggling to control inflation.
Consumer prices rose 11.7 per cent year-on-year in December 2004, little short of the 12 per cent recorded in 2003. These are not dangerous levels, but they are a clear warning of the stresses in the economy.
The country’s banking sector has grown 30 per cent in terms of its assets, state banks are growing faster than private ones. Liberal economists are of the view that state ownership of the country’s largest banks restrains competition in the sector. The central bank has insisted that private banks must grow in size and improve in quality before Sebrbank, which has 62 per cent of the country’s deposits can be privatized or broken up.
In the past year, the gap between private and state banks has widened. Vneshtorgbank’s assets increased by 54 per cent in the past year and credits have doubled. Last year’s banking crisis benefited Sebrbank and Vneshtorgbank at the expense of private competitors.
The closure of Sodbiznesbank, which was suspected of money laundering, and rumours that the central bank had made a blacklist of troubled banks, prompted a run on deposits in all private banks. Many companies transferred their accounts to state owned banks.
Alfa, the country’s largest private bank, which had successfully weathered the storm of the 1998 devaluation, lost $800 million of deposits last summer while the inflow of deposits into state banks doubled. State banks have also been acquiring assets. Last year Vneshtorgbank bailed out and took over private Guta Bank, which did not withstand the run on deposits.
The central bank is also set to transfer its stakes in foreign banks to Vneshtorgbank, including a 90 per cent stake in Moscow Narodny Bank in London, and BCEN-Eurobank in Paris. By contrast, there has been little consolidation among the 1,300 private banks.
Both private and state banks have seen demand for loans from companies weaken recently. Central bank figures show the level of credit to Russian companies fell 50 per cent last year.
Saudi Arabia IN Saudi Arabia, fiscal policy will be expansionary in 2005. It will be another year of budget surplus, although lower than the 10.5 per cent of the GDP estimated for 2004. In line with the trends of the past two years, both revenue and expenditure will again exceed stated budgetary targets. However, expenditure growth will slow over the forecast period – possibly becoming negative in 2006 – as revenues fall because of declining oil receipts. Increased spending should help insulate domestic demand against the contractionary impact of declining oil prices, although the GDP growth rate is expected to fall. The budget balance will remain in surplus-permitting a further reduction of public debt-although it will narrow marginally.
The 2005 budget foresees expenditure of SAR280 billion, up one-fifth on the SAR230 billion targeted in the 2004 budget. In practice, the actual rise in expenditure will be more modest than this, as actual expenditure in 2004 was SAR295 billion, 22 percent greater than the amount envisaged in the budget. This higher-than-the-expected spending was facilitated by the oil price windfall, which pushed revenues to a record SAR393 billion, nearly twice the original target, according to provisional figures from the finance ministry.
In 2005 and 2006, by contrast, oil prices are projected to decline, which will gradually undermine the government’s key source of revenue. In this context, expenditure growth is expected to slow, possibly becoming negative in 2006. Over the near term, spending will grow as the government plans new projects to upgrade infrastructure and enhance both physical and human capital in 2005. Furthermore, the actual rise in spending may be exacerbated by the security threat facing the state at present.
Emergency expenditures increased in 2004. With two attacks in late December highlighting the persistent risk of militant violence, this trend may continue in 2005. Increasing spending – without incurring a deficit – will have an expansionary impact on the economy, and should help cushion it against the adverse effects of an oil price decline. This poses upside risks to forecast of 1.4 per cent growth for 2005. However, expenditure may contract next year, assuming that oil prices fall further. This would represent a downside risk to growth, but would be in line with historical trends.
Since 2000, the budget has been in surplus every year, a marked improvement on the previous seven years of deficit. By contrast, from 1983-2000, the annual budget deficit averaged 12.1 per cent of the GDP. Although revenues are to fall over the forecast period, ongoing, though shrinking surpluses are expected. Key risks come from efforts to increase non-oil revenues and, as ever, from oil prices. With 2005 revenues also estimated at SAR280 billion, the budget is projected to be perfectly balanced, in contrast with the 2003 and 2004 budgets, each of which anticipated deficits exceeding three per cent of the GDP.
Based on oil price assumption of US$33 per barrel in 2005, revenues are projected at SAR364 billion (a 7.4 per cent y-o-y fall). Assuming actual expenditure of SAR321.5 billion (an increase of 9 per cent on the 2004 figure), this will result in a budget surplus equal to 4.61 per cent of the GDP. Opec’s December decision to curb production does pose an upside risk to oil prices, and contributed to market jitters in early 2005, as did the militant attacks in Saudi Arabia in December.
The widespread practice of quota-busting means there is often a credibility problem with Opec’s official output announcements. However, Saudi Arabia decision to cut output is more credible than most. This is essentially because its huge share of world oil supply means it gains more additional revenue from every price increase than any other producer state. With oil exports averaging around 8.5 million barrel per day in 2004, every extra US dollar one on the price of a barrel was worth an average of US$8.5 million in additional export revenues per day – adding up to more than US$3 billion per year.
Further production cuts remain a possibility, representing an important upside risk to prices. The GDP growth has traditionally been volatile and highly vulnerable to oil price changes. To some extent, the efforts the government has been making to improve fiscal discipline over the past four years will reduce the extent of cyclical expansions and contractions, compared with historical levels. After the oil boom of the late 1970s, the early 1980s saw four years of negative growth.
The finance ministry estimates 2004 GDP growth at 5.3 per cent in real terms and 16.9 per cent in nominal terms, with a 6.4 percent expansion in the non-oil industrial sector. The monetary authority has so far declined to forecast growth for 2005. However, economists in the private sector expect, growth will dip over the forecast period as the economy remains highly vulnerable to changes in world oil prices, and these are expected to decline.
However, in the light of better-than-expected provisional growth figures for 2004, as well as the oil production cuts implemented in January 2005 growth is forecast at 2.7 per cent. The contractionary impact of lower oil prices – which will also undermine expansion in the non-oil sector –is then expected to curb growth to 1.1 per cent in 2006.
