The economy continues to consolidate. Economic growth accelerated significantly in Q2 2017, and inflationary pressures fell sharply, allowing the central bank to lower its key rates by 150 basis points since the beginning of the year. Although the banking sector is still in a fragile situation, it continued to improve in H1 2017. The share of risky assets is declining, the supply of new loans is accelerating, and bank profitability is picking up. At the same time, the government is still determined to consolidate public finances, as illustrated by the decline in the fiscal deficit (even excluding oil and natural gas revenues). Under this environment, Fitch switched to a positive outlook for its sovereign rating for Russia.
Growth accelerated robustly in Q2 2017 GDP growth rose to 2.5% year-on-year in Q2 2017, from 0.5% the previous quarter. The main factors driving economic growth were the rebound in household consumption (4.3% y/y) and investment (6.3% y/y), while net exports made another negative contribution to growth for the second consecutive quarter. Capital goods imports increased in keeping with the upturn in investment. On a sector basis, activity mainly rebounded in construction, with the start-up of major government-financed projects (Siberian pipeline and the Crimean Bridge). Retail sales and automobile purchases benefited from higher real wages, thanks to the easing of inflationary pressures (consumer prices rose only 3% y/y in September, less that the monetary authorities’ inflation target of 4%). The central bank seized this occasion to lower its key rates by 150 basis points (bp) since the beginning of the year. Although interest rates are still very high on household and corporate loans 1 , monetary easing combined with the consolidation of corporate and bank situations has nonetheless fuelled an upturn in bank lending. In the first eight months of the year, new loans to companies increased 13.3% yearon- year.
Banking sector consolidation supports the recovery Even though some banks are still in a very delicate situation, as illustrated by the troubles of Otkritie and Binbank, on the whole the clean-up of the banking sector continued in the first half, and the central bank demonstrated its capacity to contain the risk of a systemic crisis. There were only 576 banks in September 2017, 302 fewer than 5-years earlier. Even though the banking sector is still fragile, asset quality has stopped deteriorating. In July, the ratio of risky assets slipped to 17.8%, from a peak of 19% in November 2016. Thanks to this slight improvement, banks were able to reduce their provisions (by 3.4% year-on-year in August) and boost profitability. According to the IMF, at the end of Q1 2017, Russian banks reported ROA and ROE of 1.5 and 12.3, respectively, compared to only 0.2 and 1.9 for the year-earlier period. At the same time, the solvency ratio increased by 1 basis point to 13.4%, while the Tier-1 CAR was 9.9%.
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by Johanna MELKA