#21 - JRL 2009-166 - JRL Home
Moscow Times
September 7, 2009
Economic Data Look Rosy but Debt May Bite
By Alex Anishyuk

A raft of economic figures released last week indicate that the economy may be bottoming out, but balance sheets filled with bad loans and a shortage of lending for the real economy may cause trouble down the road.

The services sector expanded for the first time since the onslaught of the financial crisis last year, VTB Capital said last week in its Purchasing Managers’ Index. The index was at 52.2, up from 48.5 in July. A figure above 50 indicates growth.

While the manufacturing industry didn’t see any growth, its PMI indicated the smallest contraction in 11 months, with the index inching up to 49.6, a hair’s breadth below expansion.

Gross domestic product shrank an annualized 3.9 percent in August, compared with a 6.4 percent contraction in July, VTB said Friday.

The figures add credence to the pronouncement in August by First Deputy Prime Minister Igor Shuvalov that the economy may have bottomed out and that the country is exiting the recession.

“Apart from the positive statistics showing the Russian economy on a moderate rise, a number of companies witnessed demand growth in recent months ­ far from the precrisis level ­ but still quite steady,” said Vladimir Tikhomirov, chief economist at UralSib. “It’s hard to say whether the trend will be long-lasting, but I expect further increases in October and November.”

Among the manufacturing sectors seeing growth over the period was metallurgy, which rose amid increased demand on international markets, he said, while state subsidies helped makers of power-generating equipment and arms.

Carmakers, however are not yet showing signs of recovery, he said. The car industry, which has seen sales plunge by more than 50 percent since last year, is facing a huge debt load amid falling demand. AvtoVAZ’s factory in Tolyatti and Ford’s factory in Vsevolozhsk were on extended vacation for the summer, while IzhAvto has filed for bankruptcy, putting 5,500 jobs on the line.

And while the services sector saw some growth, demand overall remains anemic and the sector has a long way to go before returning to precrisis levels.

“As far as the service sector is concerned, its growth was driven by tourism amid the hot vacation season and the overall relatively positive macroeconomic dynamics,” he said. “But trade and restaurant businesses aren’t doing very well, as people are still scared to increase spending.”

But an increase in investment activity will be the main signal that the economy has emerged from the recession. “An increase in investments will drive up all the sectors,” Tikhomirov said. “The crisis started with a lack of cash and investments, and it will end as soon as investments are on the rise again.”

In July, investment in capital stock fell 18.9 percent year on year to 621.7 billion rubles, the State Statistics Service said last month.

The economy has been on the rise since June, and the real sector will get the loans it needs badly in the middle term, said Yulia Tseplyayeva, chief economist at Merrill Lynch.

“The economy was down in the first half of the year, but we witnessed a positive tendency in June,” she said. “If we track the situation month on month instead of comparing the current figures to the last year’s statistics, we can see a growth in manufacturing,” she said.

Tseplyayeva said relatively high oil prices and a general recovery of the world economy were contributing to the upturn. “The trend is likely to stabilize, and we pin our hopes on the fourth quarter, as we expect significant budget spending that will make up for insufficient lending activities in the real sector,” she said.

Corporate lending shrank for a third month in a row, bringing banking-sector growth to just 2.2 percent in the year to date, the Central Bank said in a report last week. Retail loans pulled back 0.4 percent in July, which marked the lowest monthly reduction since February.

While overdue loans inched up to 5.5 percent of the total banking sector, the Central Bank firmly rebutted expectations of a second wave of the crisis. The head of the Central Bank’s regulatory department, Alexei Simanovsky, said he was confident that banks could service their foreign debt and that there wouldn’t be a second wave.

By the second half of 2010 there will be an increase in lending, which will also benefit the recovery, but the ruble will remain quite volatile because of huge budget spending and high demand for foreign currencies, Tseplyayeva said.

The news bolstered the country’s oil-driven equity markets against a slide in global crude prices, which saw the Urals blend fall 6.9 percent over the week to $66.97 per barrel. The dollar-denominated RTS Index closed down 2.4 percent at 1063.57, while the ruble-denominated MICEX Index fell 2.3 percent, finishing the week at 1085.58.

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