The FINANCIAL — London, UK — The decision by the Central Bank of Russia (CBR) to limit its currency market intervention should ease immediate pressure on reserves and counteract the negative fiscal impact of lower oil prices, Fitch Ratings says. However, pressure on reserves is unlikely to abate fully, and falling oil prices and higher interest rates present risks to growth.
The CBR said on Wednesday that it would widen the rouble’s exchange-rate corridor and limit its daily interventions to a maximum of USD350m. This followed last week’s 150bp increase in the main interest rate, to 9.5%.
Accelerated transition to a floating exchange rate should put a brake on reserve depletion (the CBR said on Thursday that reserves had fallen by a further USD10.5bn to USD428.6bn in the week to 31 October) and reduce the risk of a self-fulfilling currency crisis. The sharp decline in international reserves has been partially offset by comparable declines in external debt. CBR statistics showed Russia’s gross external debt fell by USD52.7bn in the third quarter to USD678.4bn. Deleveraging on this scale implies that Russia’s net external creditor position is eroding less quickly than headline reserve numbers would suggest.
The move toward greater exchange-rate flexibility is in line with the CBR’s aim of a freely-floating rouble in 2015, which should cushion public finances against falling oil prices and other external shocks. With last week’s interest-rate hike, it represents a reassertion of the CBR’s credibility in the face of political pressure (the Economics Ministry has said monetary policy should be more supportive of growth) and a strengthening of the monetary policy framework, according to Fitch Ratings.
Russia retains strong sovereign and external balance sheets, which Fitch views as key supports for its ‘BBB/Negative’ rating. However, the fall in international reserves has exceeded our expectations (we had forecast reserves of USD450bn at end-2014) and they currently stand at their lowest level since October 2009. The Reserve Fund, the main fiscal buffer, stood at around USD90bn in October, or 5.4% of GDP, around half its level at the end of 2008, when Russia last faced a terms-of-trade shock on this scale.
It is not clear whether the 150bp rate hike will also help to stem the decline in international reserves, as outflows may be driven by larger concerns about economic and geopolitical risks. It remains to be seen whether further monetary tightening will be needed to stabilise the rouble and restore confidence in the CBR’s end-2015 inflation target of 4.5%. Although Russia ran a current account surplus of 3% of GDP in 3Q14, external debt repayments of USD134bn between November 2014 and end-2015 will be closer to 8% of GDP. The rouble fell to a new record low against the dollar on Friday presaging further increases in inflation; consumer prices rose 8.3% in October.
The impact of sanctions and rouble depreciation prompted us to lower our growth forecast for Russia to 0.3% in 2014 and 1% in 2015 in September. A sustained decline in oil prices would hurt confidence and growth, further testing the country’s policy framework, according to Fitch Ratings.
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