09 June 2020
Key highlights: Online press briefing "The winds of change: What developments can we expect this summer?", hosted by Sofya Donets, CFA, Russia & CIS Economist, and Maxim Orlovsky, Managing Director, Equity Markets, Renaissance Capital.

Sofya Donets:

On Russian GDP: The Russian economy contracted 12% in April (i.e. by 1% in annualised terms), below market expectations. However, this could just be the beginning of the story if we see a second wave in COVID-19 cases. We note that regions with lower income levels and higher quarantine-related costs are less likely to reintroduce quarantine measures, but if a second wave materialises, we expect Russia to see more lockdown measures. At the same time, the economy might be less sensitive to a second wave with the business and fiscal adjustments already in place. We estimate that another COVID-19 wave will cost the CIS region 1.5-3.0% of GDP growth, which implies that Russia will slide lower; from -2.5% (our base case) to -4.0-5.0% in FY20. As of today, we expect to see an 8% YoY fall in 2Q20 and a 5% YoY decrease in 3Q20 (in annualised terms).  

On the rouble exchange rate: Unprecedented fiscal stimulus at 5.0% of GDP is likely to weigh on the rouble in the next 12 months. In the coming several months, we expect additional pressure from recovered demand for imports, including imported services. We estimate the downside at 5.0-7.0% from existing levels. At the same time, significant FX sales by the Ministry of Finance (via the Central Bank of Russia) in recent weeks have been supporting the rouble, and the Ministry of Finance has stated that it will continue to do so, not only to offset lower oil prices, but also production cuts due to the OPEC+ agreement. This is likely to translate into a more stable rouble performance even amid low oil prices as compared with 1Q20. We estimate that the FY20 exchange rate will average RUB73.5/$.

On Kazakhstan: Kazakhstan remains one of our top picks in the region. It has a proven track record of surviving two previous crises without negative growth. Although this time around recession is unlikely to be avoided, and in case of a second wave we estimate GDP will lose 2.0% instead of 0.7% (as was our base-case scenario), we believe that as soon as the turbulence is over the country will return to growth.

On the tenge exchange rate: Currently, the tenge is benefiting from the oil price recovery and improved investor perception of EM and FM. We expect that throughout the rest of the year the tenge will remain stable as negative pressure from recovered import consumption will be recouped by stronger revenues from oil exports subject to favourable oil prices. Moreover, we view the tenge as one of the most undervalued FM currencies and believe it has upside potential in 2021.

Maxim Orlovsky:

On markets: We are positive that global markets have passed their lows and the worst is already behind us. The majority of equities and bonds have recovered most of their losses; many currencies are rebounding with the rouble among the top performers. As for the second wave, markets are disregarding its impact on global economies and are confident that the necessary medicine will be developed. Poor 2Q20 results will hardly be a surprise and are likely to trigger only short-term corrections.

On oil: The majority of global leaders are starting to accept that the future belongs to a green economy. Rapid growth of electric and alternative transportation in the next 15-20 years will weigh on oil prices in the same way that the shale revolution did once before. As a result, we believe we are likely to see a 20-25% contraction in oil consumption. Therefore, the OPEC+ countries are now facing the pressing issue of investment returns with tough choices to be made. They either opt for further production cuts and higher prices, which would enable North America to recover its oil output in a relatively short time, or maintain prices at the existing comfortable level of $40-45/bl and increase production, thus winning market share from the majority of marginal producers such as shale oil and oil sand companies.

On opportunities: Perhaps, this has been the fastest market ups and downs in a relatively short period of time. The majority of losses have been recouped already with strong recovery in the sovereign bonds of Russia, Kazakhstan and some African countries such as Ghana, Egypt, Nigeria and South Africa. Most assets have won back their losses to reach 90-95% of their pre-crisis values. We do not rule out short-term market corrections in the following months, including a possible rouble depreciation.