Russian government plays catch up on spending

Russian budget spending growth materially accelerated in October, as the government is trying to fulfil the annual spending plan. This is a positive sign for corporate activity and also an argument for the central bank to pause the rate cut cycle

The preliminary budget data for 10M19 points towards a material acceleration in the federal spending growth from 5% YoY in 9M19 (downgraded from the initial 6% estimate) to 22% YoY in October.
Approaching year-end, the government has started to catch up on fulfilling the spending plans, and there's more acceleration to come.10M19 spending is 74% of the annual plan vs. 76% allocated in 10M18. In order to comply with this year's plan, overall spending growth should pick up from 7% YoY for 10M19 to 18% YoY in November-December 2019.
The key component contributing to this pick up was the so-called 'National Economy' item, which represents spending on infrastructure and other direct economic support measures, also part of the 'National Projects' programme: the growth of this targeted spending item skyrocketed from 4% YoY in 9M19 to 42% YoY in October.
In addition to this year's plan, there is a backlog of RUB0.8 tr (c.0.8% of GDP) spending rolled over from 2018, which is unlikely to be released this year either. This will be passed on to the next 2020 plan.
The current acceleration in budget spending is positive news for corporate activity in 4Q19. While we initially expected industrial output growth to decelerate from 3.0% YoY in September to 2.4% YoY in October (mostly on calendar/workday effects), we now do not exclude a positive surprise.
The support for the economic activity in 4Q19 may lower the urgency for the central bank to immediately continue its rate cut cycle. The central bank may take a pause to assess the inflationary effect of normalisation of budget spending. According to the ministry of finance, each RUB0.1-0.15 tr of budget underspending has a constraining effect on the CPI in the amount of 0.05 - 0.1 pp. This means that a potential reversal in budget spending, which could return up to RUB1.0 tr of spending backlog (RUB0.2 tr for this year and RUB0.8 tr for 2018) to the economy, is a watch factor for the mid-term CPI trend.