russia economic report november 2007. 2 main messages robust growth supported by high energy prices,...
TRANSCRIPT
Russia Economic ReportNovember 2007
2
Main Messages
• Robust growth supported by high energy prices, large capital inflows, rising domestic demand and prudent macroeconomic management
• Short-term challenges:
– Control inflation– Limit rapid real exchange rate appreciation – Manage large capital flows– Maintain prudent fiscal policy
• Medium-term challenges:
– Sustain productivity growth– Close the infrastructure gap – Boost private investment – Promote economic diversification
3
I. Recent Economic Developments
4
Rapid Output Growth Driven by Booming Domestic Demand
Contributions to GDP Growth, in %
-6
-4
-2
0
2
4
6
8
10
12
H1-2006 H1-2007
Final consumption Capital formation Net exports
• Economic growth remains robust. Having grown by 7.9 percent in 1H-2007, Russia is likely to post full-year GDP growth of over 7 percent
• Output growth was driven by rising domestic demand, in particular, buoyant household consumption (9.8 percent growth in 1H-2007) and business investment (21 percent growth in 1H-2007)
• Negative contribution of net exports to GDP growth is explained by rapid import growth and weak export performance, affected by the real appreciation of the ruble
GDP growth, %
0
1
2
3
4
5
6
7
8
9
2001 2002 2003 2004 2005 2006 2007-9M
5
Non-Tradable Sectors Continued to Boom
Output Growth by Sectors, 2006-2007
-5 0 5 10 15 20 25
Base industries and sectors
Agriculture
Extraction of mineral resources
Manufacturing
Electricity, gas, water
Construction
Retail trade
Transport
9M-2007
9M- 2006
2006
• Sectors servicing domestic demand continued to boom in 9M-2007: construction (23.5 percent) and retail trade (15 percent)
• Manufacturing also grew at healthy 10 percent in 9M-2007, driven by the steady performance of a few sectors (machines and equipment, electro- technical, and transportation equipment)
6
Manufacturing Growth: Strong But Tapering Off
y = -0.1776x + 9.7795
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
I Q2003
II Q2003
III Q2003
IV Q2003
I Q2004
II Q2004
III Q2004
IV Q2004
I Q2005
II Q2005
III Q2005
IV Q2005
I Q2006
II Q2006
III Q2006
IV Q2006
I Q2007
II Q2007
III Q2007
Manufacturing growth rate, %, y-o-y Linear (Manufacturing growth rate, %, y-o-y)
•While still strong, manufacturing growth is decelerating. The impressive growth posted in early 2007 was driven by temporary factors (warm winter, low output level in Q1-2006 and unusually high investment demand in machine-building sectors)
Quarterly growth in Russia Manufacturing(relative to the same period of the previous year)
7
The downward trend in manufacturing might be associated with the erosion in competitiveness in non-fuel, non-metal tradable sectors
• Parts of manufacturing that service domestic demand with limited competition from imports may continue to thrive in Russia’s booming domestic market
• But the real appreciation of the ruble, without commensurate increases in productivity, drives up unit labor costs, hindering competitiveness in tradable sectors (outside resources and metals)
80
100
120
140
160
180
200
220
2002 2003 2004 2005 2006
Russia Czech Republic Hungary Poland
Slovak Republic Euro Area United States
Manufacturing ULC index (US dollars), 2002 = 100
Unit Labor Costs in Manufacturing
Russia
8
Russia continues to experience an investment boom
02468
10121416182022
2000
2001
2002
2003
2004
2005
2006
2007*
Capital investment growth, % to previous year
•The aggregate fixed capital investment grew by 21.2 percent in 9-M of 2007 (from 11.8 percent growth in the same period in 2006)
•While capital investments decelerated in September 2007 they still posted double-digit growth rates (16.1 percent, relative to the same month in 2006)
9
Despite Investment Boom, Domestic and Foreign Investments Went to A Few Sectors
H1-2006(% of total)
H1-2007 (% of total)
Agriculture, hunting, forestry 3.7 4.7Extraction of mineral resources 19.5 20.4Manufacturing 18.7 17.5
Food & tobacco 3.2 3.2
Coke and oil products 1.9 1.6
Machine building 0.8 1.1
Transportation devices 0.9 1.1
Chemical products 2.3 1.9Other non-metal mineral products 1.3 1.4
Metallurgy and metal products 5.3 4.1
Electricity, gas, water 6.3 6.9
Construction 3.6 2.9
Retail Trade,Wholesale Trade, Repair 2.8 2.9
Transport and communication 25.7 23.3Railways 4 4
Communication 4.5 4.5Real estate 11.1 12
2006 H1-2007% total % total
Agriculture, hunting, forestry 1.4 0.6
Extraction of mineral resources 33.1 70.6
Manufacturing 19 11.1
Electricity, gas and water 0.4 0.2
Construction 2 2.9
Retail & wholesale Trade, Repair 6.1 4.1
Hotels and restaurants 0.2 0.1
Transport and communication 2.8 1Finance 11 4
Real estate 23.5 5.2
Total Fixed Capital Investment by Sector Foreign Direct Investment by Sector
• Resource sectors and Non-Tradable Sectors (retail and construction) remain the favorite direction for domestic and foreign investments.
• In Manufacturing, most investments went to the food and metal sectors
10
Inflation is Rising, Driven by Food Prices and Monetary Factors
*Data for 9 months. Source: CBR
10M-2006 10M-2007
CPI inflation, % 7.5 9.3
Core CPI Inflation, % 6.5 8.9
PPI inflation, % 15.2 * 17.0*
M2 growth, % 28.0* 27.8*
• Inflation increased since April 2007 to reach 9.3 percent over 10M-2007 (compared to 7.5 percent in the same period of 2006)
• Most likely, end-of-year inflation will reach 11 percent (Dec/Dec)
11
Price change (end period) weight in CPI
10M-2007 10M-2006 Meat products 10.28 6.4 4.5 Milk and milk products 2.68 22.7 5.8 Bread and bakery products 2.23 21.3 9.0 Fruit and vegetables 3.83 9.0 3.7 Alcohol 6.63 6.0 8.3 Clothing 5.27 6.0 5.9 Footwear 2.55 5.9 5.4 Construction materials 2.07 15.0 9.9 Housing utility services 8.83 13.5 17.1 Transportation services 3.26 8.2 11.3 Communication services 3.19 10.7 1.9 Education services 2.5 14.2 14.4
Food prices increased, but prices of non-tradable goods and services also increased…
Changes in prices of the main components of the CPI
3.00
5.00
7.00
9.00
11.00
13.00
15.00
17.00
Jan -2006
Feb -2006
Mar -2006
Apr -2006
May -2006
June-
2006
July -2006
Aug -2006
Sept-
2006
Oct -2006
Nov -2006
Dec -2006
Jan -2007
Feb -2007
Mar -2007
Apr -2007
May -2007
June-
2007
July -2007
Aug -2007
Sept-
2007
CPI, p-o-p, % Food CPI, p-o-p, %
12
Keeping inflation in check is becoming increasingly difficult with large capital inflows
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
01.01.05 01.04.05 01.07.05 01.10.05 01.01.06 01.04.06 01.07.06 01.10.06 01.01.07 01.04.07 01.07.07 01.10.07
Gross foreign reserves, mln USD Stabilization fund, mln USD
Accumulation of Foreign Reserves and the Stabilization Fund
•Unlike oil revenues, capital inflows are not absorbed by the Stabilization Fund, driving rapid money expansion and exerting upward pressures on the ruble.
• Given the limited monetary instruments for sterilization, one policy response would be gradually allowing more rapid nominal appreciation of the ruble.
•The pace of nominal appreciation this year was slower than in 2006. The rubble appreciated by 6 percent against the USD in nominal terms in 10M-2007 (compared to 7 percent in 2006).
13
BoP continued recording surpluses: weaker C/A was more than offset by stronger Capital Account
2004 2005 2006 9M-2006
9M-2007*
Current Account Balance 58.6 83.8 94.5 79.7 57.1 Trade Balance 85.8 118.4 139.2 111.2 94.1
Capital and Financial Account
-6.3 -13.6 11.9 -5.1 59.5
Errors and Omissions -7.1 -8.8 1.1 1.5 -10.2
Change in Reserves 45.2 61.5 107.5 76.2 106.4
•Balance of Payments (USD billions)
• The surge in capital inflows pushed the BoP surplus to record highs, becoming an important source of foreign reserve accumulation (gross foreign reserves: 447bn)
• Large capital inflows reflected acceleration in foreign borrowing by state corporations and the banking sector. Net capital inflows to the private sector amounted to 56.8 bn in 9M-2007 (compared to 26.3 bn in the same period last year)
• Russia has weathered well the global financial turmoil. By October 2007 Russia received a net inflow of capital of about 10 bn
2006 9M-2006 9M-2007 Q3-2007
Total net capital inflows to the private sector 40.1 26.3 56.8 -9.4 Net capital inflows to the banking sector 27.5 15.7 37.6 0.7 Net capital inflows to the non-banking sector 12.6 10.6 19.2 -10.1
14
Fiscal surpluses continue, but recently fiscal policy has become more accommodative
• The approved 3-year budget entails fiscal relaxation (that might reduce the budget surplus to 0.2 % of GDP by 2008). Recent revisions to the 2007 federal budget entail additional fiscal easing (that would reduce the budget surplus to 2.8 percent by end 2007).
• The bulk of the planned increase in public expenditures goes to infrastructure and social spending with a view of boosting growth.
• Two cautionary notes:
(i) raising public investments might not be enough to achieve a sustained impact on economic growth. Keeping up private investments and improving the efficiency of investments will be as important;
(ii) the pace of fiscal policy needs to be studied carefully to avoid exacerbating tensions in the macro mix (additional fiscal stimulus might increase pressures for ruble appreciation)
2007 Budget Law
(approved)
Revenues 22.3 23.19 19 18.8 18.1
Expenditures 17.5 20.35 18.8 18.8 18.1
Of which: General state management w/o interest expenditure National defense 2.6 2.6 2.7 2.7 2.7 National security, law enforcement 2.1 2.1 2.2 2.3 2.2 National economy 1.6 2.3 (0.6)* 2.1 2 1.2 Housing and communal Services 0.2 0.9 (0.7)* Education 0.9 0.9 0.9 0.8 0.8 Culture, mass media 0.2 0.2 0.2 0.2 0.2 Health and sport 0.7 0.9 0.6 0.6 0.6 Social policy 0.7 0.9 0.8 0.9 1 Interbudgetary transfers 2.5 2.8 2.6 2.3 2
Transfers to extrabudgetary funds 3.4 3.3 3.8 3.8 4.1
Total non-interest expenditure 17 19.9 18.2 18.2 17.5
Interest payment 0.5 0.5 0.5 0.5 0.6
Oil and Gas Transfer 6.1 5.3 4.5
1.82.1 3.0 (0.7)* 2.1 1.9
Three year budget plan
Federal Budget with amendment
2007 2008 2009 2010
(..)* capitalization of development institutions: Bank for Development, Russian Nanotechnology Corporation, Investment Fund, Fund for Housing reform support
Federal budget surplus reached 7.1
percent of GDP (9M-2007 )
15
Prospects
• Growth is likely to remain robust. With energy prices set to remain high, booming domestic demand will continue to translate into strong growth in services and manufacturing
• However, growth might slowdown if medium-term challenges are not addressed….
– Sustain Productivity Growth (which can also help alleviating pressures from the real appreciation of the exchange rate)
– Promote Economic Diversification– Boost Private Investment
16
II. Productivity Growth in Russia
17
Russia has experienced a productivity surge, propelling economic growth
Sources of Growth: Russia and Comparators (1999-2005)Contributions of K, L, and TFP Growth to Aggregate Growth
-1
1
3
5
7
9
RUSSIA China Industrial EU10
(%)
TFPGr
LgrCont
KgrCont
GDP Index (1989=100): Russia, ECA, and EU-10
EU10
ECA
RUSSIA
40
50
60
70
80
90
100
110
120
130
140
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total factor productivity growth (5.8 percent) drove GDP growth (6.5 percent) over (1999-2005)
Real income per capita (constant $2000,PPP) rose from $5,964 in 1998 to $9,650 in 2005
But capital and labor accumulation played little role in total output growth
18
What are the drivers of the productivity surge?
• Capacity utilization• Sectoral shifts • Firm dynamics
19
Higher capacity utilization explains part of the productivity surge
Sources of Growth in Russia: 1999-2005Impact of Adjustment for Capacity Utilization
0
2
4
6
8
No Adjustment forCap. Util.
Adjusting forCapacity Utilization
(%)
TFP
L
K
• Utilization of excess capacity yields ‘easy’ productivity gains in a growth rebound after a deep recession
• But higher capacity utilization only explains part of the productivity surge
Even after adjusting for capacity utilization, TFP growth still accounts for 4.15 percent of total GDP growth
(of 6.5 percent)
20
The productivity surge is also explained by major sectoral shifts in the economy
Sectoral Shares in Russia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 2005 1990 2003
Total Value Added Total Employment
Agriculture Industry Services
Labor Productivity Growth, 1999-2004
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
RUSSIA EU15 EU10
within reallocation
A substantial reallocation of resources toward services
Efficiency gains ‘within sectors’ had more impact on total productivity growth than cross-sector shifts
Labor productivity over 1999-2004 grew by :
4.4 percent in agriculture, 4.7 percent in industry and 6.4 percent in services
22
Productivity growth came mostly from efficiency gains within firms -but reallocation & net entry also mattered
Sources of Productivity Growth in Russian ManufacturingContribution rates (in %)
0
5
10
15
20
25
1998-2001 2001-2004
Within Net entry Reallocation
RUSSIA: Decomposition for Manufacturing, Contributions to Aggregate Productivity Growth 2001-2004
-30
-20
-10
0
10
20
30
40
50
60
70
80
MA
NU
Food
Text
iles
Gar
men
ts
Lea
ther
Wood
Pape
r
ing
Chem
ical
s
Rubbe
r/P
lastic
s
Min
era
ls
Basi
c M
etals
Fabr
icate
d M
eta
l
Mac
hiner
y
Ele
ctr
onic
s
Ele
c. M
ach
.
Pre
cis
ion
Tools
Mot
or V
ehi
cle
s
Oth
er T
ranspo
rt
Furn
iture
NACE Industry Code
Gro
wth
Rat
e (
%)
Within Reallocation Net Entry
Highest Productivity Growth in ICT
sectors
23
Firm turnover plays a smaller role than in other advanced economies
0
10
20
30
40
50
60
UK USA Canada Mexico Korea Taiwan Slovenia Hungary
Firm Entry rates Firm Exit rates
RUSSIA
•Private entrants are less productive than state-owned peers (suggesting barriers to entry and exit)• Entrants do not promote productivity of incumbents (suggesting weak market competition)
-0.5
0.0
0.5
1.0
1.5In
cu
mb
en
ts' P
rod
uctivity G
row
th
-1.0 -0.5 0.0 0.5 1.0 1.5Net Entry Productivity Growth
Note: Excluding Brazil and Venezuela. Outliers Excluded.
Correlation Coefficient: 0.5800***
Five-Year Differencing, Real Gross OutputCountry and Industry Time Averages
Labor Productivity - Pooled ManufacturingRussia
-100
-50
0
50
100
150
-40 -20 0 20 40 60 80 100
Net Entry Contribution
Incumbent Prod GrowthIn advanced market economies 5-20 percent of firms enter and exit the market every year. In Russia, only about 5 percent of firms were created or destroyed during the last decade
24
Challenges Ahead• In spite of the productivity surge, Russia’s income per capita remains low (at 28
percent of EU-15 average)
• Rapid productivity gains were ‘easy’ to achieve in the first years of the growth rebound
• But now with the economy growing close to potential, sustaining productivity gains will be more difficult.
• Capital and labor accumulation must play a greater role
• Economic diversification including higher export sophistication also needs to be promoted…
Share of Medium and High Tech Products in Total Exports (%)
0
5
10
15
20
25
30
35
40
RUSSIA EU-10
1995-1998 1999-2005
% of Discovery in Total Exports, 1995-2005
0.0
0.2
0.4
0.6
0.8
1.0
1.2
RUSSIA EU-10
Source: Bank staff calculations; UN-Comtrade, 2007
25
Sustaining Productivity Growth Calls For Policy Reforms that Accelerate Reallocation of Resources towards More Efficient Uses
Impact of Policy Improvements on Productivity Growth:Catching Up with the Median Industrial Country
-1
0
1
2
3
4
5
RUSSIA ECA EU-10
(in
per
cen
tag
es)
Education Financial Development Trade Openness Institutional Quality Infrastructure Stock Infrastructure Quality
Russia has most to gain from policy catch-up
26
III. From Red to Gray: The Third Transition of Aging Population in Russia
27
Shrinking and Rapid Aging Population
% Population Decrease, 2000-2025
-12%
- 30%
- 20%
- 10%
0%
Russia
17 million17 million
% of over-65 population, 2000-2025% of over-65 population, 2000-2025
These demographic trends will affect labor supply:
Declining and aging labor force: labor force will decline by 3 percent (about 11 million people). Over 95 percent of the decline will come from the 15-39 age group
12%
18%
0
2
4
6
8
10
12
14
16
18
20
2000 2025
Russian population is also aging rapidly: by 2025, one person in every five will be over the age of 65 . (share of population over 65 will be 18 percent in 2025)
Russia’s population will shrink by 12 percent (over 17 million people) by 2025
28
Aging is not a stop sign for growth: Message 1) Address labor shortage through reforms to boost productivity
Message 2) Address fiscal risks associated with aging (pension, health & long care) Russia, Growth decomposition, 1998-2005
58%32%
10%
Share of growth due to higher:
Labor productivity
Employment rates
Working-age population
But growing older does not have to mean growing slower
29
Thank you for your attention