The Ministry of Finance has reported that in 2013 the federal budget printed a marginal deficit of 0.5% of GDP, or RUB 311bn. This is less than the original plan (of 3 December 2012) of a deficit at 0.8% and the 0.7% in the amended law of 2 December 2013. However, it is close to our expectation of a 0.4% deficit.
Meanwhile, the non-oil budget deficit edged down a bit to 10.1% of GDP. In the last week of December, MinFin’s account in the CBR shrank RUB 1.5tn to RUB 6.6tn.
Russian budget figures typically end up better than expected due to MinFin’s conservative planning (planned budget expenditures are usually 1.0-1.5% higher than actually spent). In 2013, better than expected oil and gas revenues offset disappointing non-oil and gas revenues.
Also, the bulk of the catch up came, as usual, in December, when spending increased 2.2 times MoM to RUB 2.2tn. This seasonality, nevertheless, softened last year and we believe MinFin will continue to smooth it further. As a result, the monthly budget recorded its largest deficit in 2013: RUB 953bn in December. This pattern had a positive influence on liquidity: RUONIA slid 90bp in late 2013/early 2014. The impact, however, was milder than usual as MinFin decided not to roll over the bulk of the deposits through the year end.
Our base case has the federal budget delving further into deficit this year (we see -0.7% of GDP) as lower oil prices (USD 100/bbl of Brent) and stagnant economic growth continue to take their toll on revenue collection. Hence, debates on additional budget manoeuvre might intensify into the next budget cycle. Among other things, MinFin might want to employ a new wave of discussion about the retirement age to cut transfers to cover the PAYG funding gap. On the other side of the policy debate, we note that this will also be a challenging environment to reverse the temporary freeze on the pension system’s saving pillar.