Market update

A seeming stability

The liquidity aiding measures introduced by the government last Thursday helped to cut rouble rates in money market and stabilize rouble Forex market.

 

Overnight rates for local large banks fell from over 10% last week to just 5-6% today, September 23. However the situation remains difficult and the rates on rouble government debt and 1M rouble deposits remain high as they did not decline as much as overnight rates. To illustrate the rouble 1M deposit rate fell only by 79bp to 8.79% and the longer dated government yields remained little changed from the last week. In the currency market the rouble trades in a weaker range against the dual currency basket. Unlike in the past a stronger euro vs. the dollar does not help the rouble basket rate, which remains within a 30.30-30.40 range similar to the last week. Yet, the pressure on the rouble has eased so the Central bank does not have to stage big interventions for the rouble in the currency market.

 

Where we see a bit of problem is investor sentiment which we measure by Russia’s stock market performance. Last week the anti-crisis package helped lift Russian stocks by a big margin. On Friday, September 19, MICEX stock index jumped nearly 29% recovering much of the pervious week losses. However, the package-induced rally came nearly to a halt by the end of trading session on Monday, September 22, and today, September 23, MICEX index was trading down 3.64% (15:15 Moscow time). There is a lot of correlation between global stocks and Russian stocks and thus far bearish closing of the US stock market yesterday had downward influence on Russian stocks. We do not see quick remedies for the investor confidence while Russia’s government pledge to buy stocks from the market is not going to find a quick implementation. It also appears the government is likely to show more commitment to the stocks of state-run companies and big natural resource or strategically important companies.

 

The government package of anti-crisis measures certainly managed to stabilize the situation and avert the worst in banking system. Tax incentives articulated by the government sound positive but their implementation will take time while only a few measures are going to be introduced immediately. Among them is a 23% reduction of oil export duty being made effective from Oct.1.

 

The authorities did everything to place enough liquidity on the market. However the authorities should do a better job to ensure that this liquidity is not stuck in the biggest banks and finds its way to the banking system outside top 20 banks. At present top 20 banks are mostly in command of the liquidity as they have a much better access to the Central bank liquidity window and government cash auctions while smaller banks are paying perhaps much higher rates as bigger banks are slow and unwilling to credit them.

 

Certainly, a 3-month deferral period, in which companies and banks can delay their VAT payments, introduced by the government from October 1, 2008 helped the liquidity as well.

 

However the economists already worry about large liquidity injections pushing inflation. The government admits they expect inflation to be higher this and next years, yet unwilling to revise their conservative estimate still. We see the inflation picking up to 14% at year-end in 2008 and to 11-12% next year.

 

In our opinion the liquidity measures serve good the stability but any kind of market rally in Russia is highly unlikely given the amount of risk aversion in global markets and a very difficult situation in Russian market itself. So perhaps we should not expect buyers to return to Russian debt or stock markets in near future. Local market is incapable today of carrying a rally too because of the liquidity problems and losses incurred during latest stock market crash. The rouble might remain in a weaker range against the basket with max 30.10 and min 30.40.

 

 

 

 

 

 

 

 

 

 

 

 

The combined tax breaks will amount to about 0.5% of Russia's gross domestic product when all announced measures will go into force in 2010.