HSBC Sees Ruble Offering 6% Drop to Growth Effort: Russia Credit

The ruble will probably depreciate more than 6 percent against the dollar this year as Russian policy makers seek to spur the stuttering economy, the currency’s top forecaster said.

The ruble will weaken to 35.40 per dollar by year-end, compared with 33.0270 on Jan. 10, and will drop further in 2015, according to Alexander Morozov, chief economist for Russia and the Commonwealth of Independent States at HSBC Holdings Plc, the most accurate forecaster for the pair over the past two years. While the nation’s Eurobonds are attractive, the outlook for local-currency debt is “not very favorable,” he said.

Russia, the world’s biggest energy exporter, is seeking to boost the slowest growth since 2009 amid an inflation rate that is no less than five times higher than in the euro zone or the U.S. and a current-account surplus that shrank by more than 50 percent in the first nine months of 2013. Labor productivity remains two to three times lower than in developed economies, President Vladimir Putin said last month.

“This means the ruble needs to weaken to support the Russian economy’s competitiveness and the current-account surplus by halting import growth,” Morozov said by phone from Moscow on Jan. 9. “The present state of the Russian economy and its investment climate is such that net capital outflow will continue and requires a considerable current-account surplus.”

Cash Flight

Net capital outflows will probably be $55 billion in 2013, Bank Rossii said in November. The country had outflows of at least $30 billion annually for the past six years, according to the central bank.

The current-account surplus dropped to $29.1 billion in the first nine months of the year from $61.5 billion in the same period of 2012, Bank Rossii data show. The measure may be $30 billion, or 1.5 percent of gross domestic product, this year, Morozov said.

Consumer prices increased 6.5 percent in December from a year earlier, half a percentage point above the top end of the central bank’s target range for 2013. Annual inflation in the U.S. stood at 1.2 percent in November. Russian policy makers plan to target a rate of 5 percent this year as they shift away exchange-rate management to inflation targeting in 2015.

“The planned abandoning of the ruble corridor may trigger additional weakening,” Morozov said. “But the fundamental factors are of primary importance.”

Ruble Support

While the ruble may come under pressure in the first quarter as investors weigh the Federal Reserve’s start to tapering, the currency will get some support from improved confidence as the world’s biggest central banks exit “crisis mode,” according to Soeren Hettler, an analyst in Frankfurt at DZ Bank AG, the second-most accurate forecaster ranked by Bloomberg.

The currency forecasting classification is based on criteria including timing and directional accuracy and used foreign-exchange predictions on Bloomberg for the four quarters ended Dec. 31.

“For 2014 we are slightly optimistic for the ruble,” Hettler, who predicts the ruble will be 33.00 to the dollar by year-end, said in e-mailed comments on Jan. 9. “The Russian currency should be able to benefit from improving global sentiment.”

‘Significant Headwinds’

The ruble “faces a number of significant headwinds,” including Fed tapering and structural declines in the current-account surplus, said Carl Paraskevas, senior economist at Lloyds Banking Group Plc, ranked third in the Bloomberg list, who forecast the ruble at 32.70 per dollar.

“The reluctance by the central bank to cut interest rates over coming months and continued foreign-exchange intervention will provide some support to the currency,” he said by e-mail from London on Jan. 9.

Some technical patterns suggest the ruble is at risk of weakening against the dollar should its monthly closing price breach the upper end of a four-year pattern, currently 32.9988 per dollar, developed since the currency’s 2008-2009 decline.

The monthly moving average convergence-divergence, or MACD, which provides buy and sell signals, shows that trend and momentum conditions are negative for the ruble, with the indicator above both the zero and signal lines.

‘Efficient, Modern’

Russia is rated Baa1 at Moody’s Investors Service, the third-lowest investment grade. The yield on the nation’s April 2020 dollar bonds fell three basis points, or 0.03 percentage point, to 3.68 percent of 2:05 p.m. in Moscow today. The extra yield investors demand to hold Russia’s dollar debt over Treasuries was unchanged at 213, according to JPMorgan Chase & Co. indexes.

Russia needs to create “efficient, modern sectors of the economy,” Economy Minister Alexei Ulyukayev told the London School of Economics last month. GDP grew 1.2 percent in the third quarter matching the pace in the three months through June.

Expansion of 2 percent in 2014 “will be a good result in the current situation,” HSBC’s Morozov said. “There are greater risks that we won’t see even this growth.”

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