The federal budget deficit shrank to RUB11bn in June from RUB36bn in Jun 2016, according to data published by the FinMin on Friday evening. Thus, the cumulative deficit came in at RUB489bn (0.6% of expected annual GDP), sharply down from RUB1.4 trillion (1.7% of GDP) for the corresponding period last year.
Federal budget revenues grew by 5.5% y/y to RUB1.3bn in June, after a much bigger increase by 45.1% y/y in May, which was driven by calendar effects as some taxes were paid in early May this year rather than in late April due to holidays. Both oil and non-oil revenues rose in line with the overall outcome, up by 5.5% y/y and 5.6% y/y in June, respectively. Note that Brent oil prices actually fell by 3.3% y/y in June, which will affect oil revenues in July. Non-oil revenues were driven by proceeds from domestic activity as well as imports. More specifically, VAT, excises and especially profit tax proceeds expanded at double-digit rates. The same goes for import-related proceeds, reflecting strengthening domestic demand, albeit growth rates were weaker than those related to domestic activity. Other revenues, however, disappointed as dividend payments underperform this year amid lower-than-expected dividend payments from large SOEs.
Federal expenditures rose by 3.4% y/y in June, after a bigger increase by 11.9% y/y in May, which suggests that the positive impulse from government spending on construction (and ultimately gross capital formation) is likely to be milder, compared to May. The biggest savings were seen in social policy, defense, education and state matters. On the other hand, there was an increase in spending related to healthcare and debt servicing. Spending on law and order was stable compared to a year ago.
The federal budget faced larger domestic debt repayments in June, which put net domestic debt issuance at negative RUB11bn during the month. The deficit in June was financed from external borrowing, which was positive at RUB173bn, as the government sold USD3bn Eurobonds. The FinMin did not use money from the Reserve Fund for deficit financing and we expect it to start doing so in late fall or early winter.
The cumulative budget position in H1 shows FinMin’s commitment to fiscal prudence as federal revenues came in at 52.8% of their annual plan thanks to higher-than-expected oil proceeds (57.2%) whereas non-oil revenues are more or less in line with expectations (50.2%). Spending remains under control as its H1 performance accounts for 46.9% of the annual plan with both interest and non-interest expenses remaining below the 50% mark. Note that spending tends to increase tangibly in December. At any rate, we believe that the 2017 federal budget deficit target of 2.1% remains well within reach, considering the H1 performance and taking into account that GDP growth is expected to gain momentum in H2.