Yesterday, the CBR published its preliminary BoP estimate for 3Q14.
Despite the unfavourable seasonality, this time the third quarter was strong in terms of the current account surplus, running at USD 11.4bn vs. a deficit of USD 0.7bn last year. This was chiefly by virtue of:
the gain in the trade balance remaining in the double-digit area (11.2% YoY), although it slowed, as shrinking exports of crude oil and gas were more than recouped by choking merchandise imports (-8.7% YoY);
an all-time high annual plunge in investment income deficit (USD 5.8bn) was the largest contributor among the invisible parts of the CA in light of stabilising/dampening external debt and waning corporate profits that squeezed payouts for foreign investors.
Net private sector capital outflows moderated to USD 5.7bn, from USD 61.7bn in 1Q14 and USD 10.2bn in 2Q14, as well as USD 12.2bn in 3Q13.
Net demand for cash FX from households decreased further from the USD 10.3bn spike in 1Q14 to just USD 1.5bn last quarter.
The BoP statistics for 3Q14 reveal further evidence of a strengthening internal adjustment in light of the sanctions which have been enacted and the weaker currency. The reshuffle in underlying capital flight goes on, with ‘grey’ flight stabilising at lower levels and net FDI outflows intensifying.
RUB/rates commentary. Let’s analyse the ongoing pressure and outlook for the local currency and monetary policy from BoP perspective. The terms of trade shock (drop in oil prices) as well as the sanctions-driven lack of access to capital markets are nothing but a BoP shock. Imports have to decline further to compensate for both the shortfall in oil revenues and debt inflows. As can be seen from the released numbers, 'weaker currency/more expensive imports' is only part of the adjustment and monetary policy has to be tighter to weigh on domestic demand and imports. Our calculations show that with a structural decline in oil to USD 90/bbl, equilibrium models would put the USDRUB fair value at around 39.00–40.00, while rates would be lifted around 150bp.
We wait to see what the CBR has to say. There is no consensus on the market as to whether the recent dive in oil prices is temporary or of more a fundamental nature. This is important, however, from the CBR’s standpoint as, for example, if it is a new long-standing level for oil, let alone a decline further, then RUB is not that much undervalued. However, the CBR will likely be bound to decide on this question sooner rather than later along with every 5-kopek shift in the corridor (it now stands at 35.00–45.00, according to market quotes) and increasing signs of a rising intensity in savings dollarisation. The next meeting is too far away (on 31 October) and the policymakers might conduct another extraordinary meeting, unless the pressure goes away for some reason. The reaction would, we think, be pretty similar to what we saw in March: a mix of more powerful interventions (with the simultaneous announcement of dirty float) to break the trend and rate hikes.
Daria Isakova, Vladimir Kolychev
VTB Capital analyst