The government was prepared for oil at $40 within four years

The government today approved the revised macroeconomic forecast for 2016 and for scenario conditions in the 2017-2019 years. While a series of falling oil prices in recent months has forced the government to change the approach to the prediction and to choose a more cautious stance than before, relative to the forecasts that underlie the budget process.

“In General it is better to deviate the projection in the direction of understating the potential income, than to look for additional reserves to balance the budget,” said Prime Minister Dmitry Medvedev, opening a government meeting. The base forecast approved today comes from the average price of Urals oil at $40 per barrel not only for the current year, but in the years 2017-2019. “We proceeded from the conservative views of that the price of Urals oil will be $40 per barrel this year and in subsequent three years”, — said the Minister of economic development Alexei Ulyukayev, adding that now the price of Russian oil is $42.

Medvedev warned that the initial conditions for the economy remain very difficult, given the sanctions, the restrictions in access to foreign capital and technology and the “highly volatile situation” in the market of hydrocarbons. In previous years, the Finance Ministry and the audit chamber have repeatedly criticized the Ministry for predictions that in hindsight were too optimistic.

Recent years, the forecast almost always suffered from excessive optimism, confirms chief economist “PF the Capital” Evgenie Nadorshin. “Excessive optimism in the approach to forecasting at a time when the situation began to deteriorate, tarnished reputation, as the Ministry of economic development and the government and this whole idea of forecasting,” he said.

$40 a barrel for four years

Versions of the forecast were submitted to the government last week, Ulyukayev told journalists on April 13. Then he voiced the following parameters baseline forecast: us $40 per barrel for the current year, for 2017 — $45, 2018 and 2019 — $50 per barrel. “I guess you could say that, in General, supported by [these projections],” he said (quoted by “Interfax”).

However, this forecast was sent back for revision, told RBC Federal official. On 14 April, the representative of the Ministry of economic development of RBC clarified that the final version of the forecast will be ready next week and considered at a government meeting.

Now the base variant calculated based on the average annual price of oil at $40 until the end of 2019. The same price and pledged to the trust forecast for the same period. For comparison, the October forecast of socio-economic development in the years 2016-2018 assumed oil price in 2016 $50 per barrel and $52-55 in the next two years.

According to the new calculations submitted by the speaker, in the base case forecast reduction of GDP in 2016 it will be 0.2%, but in 2017 is expected to increase by 0.8%. And by 2019, the Ministry expects economic growth to 2.2%.

“Basic variant formed with a good degree of conservatism and indicates the willingness of the economy to work efficiently, even in these difficult conditions”, — said Ulyukayev. He noted that most analysts, “of course, a much more optimistic view of the situation”, anticipating a recovery in oil prices to $60 by 2019. A more conservative forecast for the coming years is a natural consequence, says the Nadorshin from “PF Capital”. “It’s better to lay some conservative scenario and then review it in a better way. The situation when it is better to be a pessimist — you’re either right, or pleasantly surprised,” says the economist.

The Agency expects to restore from 2017 consumer demand through growth in real incomes and investment demand. “The forecast assumes that in 2017, exports are expected to grow by 0.8%, real wage by 1.2%. Almost relevant values are in retail trade turnover — 1.1% growth, positive industry growth of 1.1% in the total GDP of 0.8%. In subsequent years the dynamics will improve and all indicators values closer to 2-3 percent,” Ulyukayev said at a government meeting. Inflation, according to him, in 2016 will be 6.5% by the end of the year 2017 “will be steady below 5%, and by the end of 2019 will be reduced to 4%.

Conservative “risky”

According to Dmitry Medvedev, there is another plan — “in case of more pessimistic developments”. It is calculated based on $25 per barrel average annual price of Urals. This “conservative” option in the triad forecasts “conservative — base — target”. As explained Ulyukayev, $25 — “is the lowest value [in oil prices], which was achieved by the market under the second oil shock”, i.e. at the beginning of this year. According to him, this variant of the forecast assumes that the economy will go to growth a year later “all parts” compared to the baseline option.

At the end of March at a business Breakfast in the Rossiyskaya Gazeta, Ulyukayev told me about this script and called it “risky”. “It is clear that this means saving a fairly significant economic downturn, although it would have been less than the decline for 2015: GDP — around 3%. Respectively cons and industrial production, and investment in fixed capital”, — commented then the speaker.

With the participation of Polina Nikolskaya