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Deputy Minister of Economic Development Polina Badasen spoke at the sitting of the State Duma Committee on the Budget and Taxes.
I will briefly introduce you the forecast of socio-economic development approved at the Government meeting on September 19, 2019 that formed the basis for the draft of a three-year budget.
In accordance with the current legislation, the Ministry of Economic Development has developed the forecast in two scenarios, basic and conservative, which differ in the assumptions on external economic conditions. Besides that, a target scenario that assumes accelerated implementation of structural reforms in the economy was developed by the resolution of the Budget Commission.
Now, I will settle on the baseline scenario. It entirely retains continuity regarding scenario conditions that were discussed as a part of 2019 budget amendments at the State Duma in April this year.
As before, the baseline scenario suggests the achievement of the socio-economic development goals defined by Presidential Decree No. 204.
Main difference between the forecast assumptions that we consider now, and the scenario conditions considered in April is worsening of the external economic conditions.
Let me remind you that the most current global economic growth forecast of IMF for the current year is 3.2 %, while a year ago the IMF forecast was a 3.9 % growth. This is a very significant change for global GDP. The Ministry of Economic Development always had a more conservative approach to the assessment of global economic growth than international organizations, however, the current situation turns out to be somehow worse than our last year forecasts. It is highly likely that global economic growth this year will be below 3 %, and by 2024 it will slow down to 2.7 %.
Under these conditions, an assumption on the decline in oil prices is still the foundation of the baseline scenario of the socio-economic development suggesting a drawdown from 62.2 USD per barrel in 2019 to 57 USD per barrel in 2020 and to 53.0 USD per barrel in 2024. Let me remind you that the current level of oil price is 57 USD per barrel that means our next year forecast supposes the immutability of the situation compared with what we see now.
As for the ruble-dollar rate, the dynamics of ruble exchange-value has repeatedly confirmed the thesis on the reduction of its dependence on oil prices in almost two years that passed after the introduction of the budget rule. Under these circumstances, we expect the exchange rate on the average for Russian Ruble to US Dollar at 65.4 RUB/ USD for the current year (65.1 RUB/USD for the period since the start of the year), and 65,7 RUB/ USD next year.
Now, let’s see what will happen to economic growth under these circumstances. Weak external demand will be balanced out by the increase in stocks in the current year. We see that according to 1H2019 results, Russian industry continued to expand production output (+2.6 % YoY in January–August) despite the negative growth of exports. Under these circumstances, the GDP growth forecast for this year remained unchanged at 1.3 % YoY.
The measures to support exports will take the active phase next year, and this will boost the growth rate of the exports of goods to 3.3 % YoY in 2020 after slightly negative dynamics in the current year. On the contrary, the positive contribution of stocks in the economic growth will significantly decline. Under these conditions, the GDP growth rate will be 1.7 % YoY.
Later, the acceleration of GDP is expected to about 3 % at the beginning of 2021. This will provide with the income growth at 2.2—2.4 % in real terms. The investment dynamics must give an acceleration impulse to economic growth. According to the forecast, capital investment will accelerate to 5.0 % next year following the expected growth of 2.0 % this year and to about 6 % in the subsequent years.
At this time, let's take a look at what the boost of capital investment starting from 2020 is connected with.
At first, it relates to a standard cycle of the development and realization of new investment projects. Its first stage includes the development of submittals, carrying out technical and price audit, etc. The fiscal stimulus measures are in this event synchronized with the investment cycle, and a gradual increase of infrastructure spending (the increase of budgetary allocations for the Plan for the Modernization and Expansion of Trunk Infrastructure from 378.2 bln RUB in 2019 to 670.8 bln RUB in 2022), increase of % subsidies for Corporate Competitiveness Program (increase from 7.9 bln RUB in 2020 to 17.6 bln RUB in 2021 and 88.0 bln RUB in 2022), increase of % subsidies for SMEs (increase from 9.2 bln RUB in 2019 to 32.8 bln RUB in 2022), etc. is expected. This must provide a significant contribution starting from 2021.
Secondly, the growth of private investments based on the undertaken measures improving the investment climate and increasing public sector efficiency and competition development, as well as the reform of control and supervision are expected. At the same time, a change in the phase of lending cycle, namely, a change in the structure of credit proposal in favor of the corporate and mortgage credit proposal as a result of the measures undertaken by the Bank of Russia to clamp unsecured consumer lending are important assumptions for accelerating the growth of private investments.
Alongside with that, the support of regional investments is an important factor in the acceleration of investment growth.
At the end of my short report I would like to settle on the dynamics of inflation. Our forecast for the end of the current year (that, I’d like to remind you, was substantially below the level predicted by all the market participants at the time of its preparation) is 3.8 %. Inflation (as of October 7, 2019) was estimated at 3.9 % YoY. In view of the result of the basis for the calculation of high price increase at the end of the previous year, the inflation will decline further and probably by the end of the year will be below our official forecast. While the seasonally adjusted current inflation rate is already below 3 %.
Due to the effect of lags relating to the decisions adopted under the framework of monetary policy on real economic indicators it is already largely predetermined that the inflation will remain low in the first half of 2020. The expected slowdown in consumer lending will become an additional deterrent to price growth. Under these conditions, it is forecast that the inflation will be 3 % in 2020. In future, it is expected to return to the target level of 4 % considering the policy of inflation targeting implemented by the Bank of Russia.
At the same time, a more significant easing of monetary policy is suggested in the target scenario that will compensate the negative contribution in GDP from the slowdown of consumer lending, and to get to the target level of inflation at the end of 2020. With this consideration in mind, as well as in the assumption of a more rapid implementation of structural policies, the GDP growth rate in the target scenario is projected at 2 % in 2020.
The Ministry of Economic Development of Russia estimates the target scenario realization probability as high.
Thank you for your attention!