Market Analysis: US Economy Stays Strong, Russia Earns Higher Credit Rating


February, 2019

AK Equity Group

While the US economy clearly felt an impact from the government shutdown, the 4Q GDP numbers are expected to generally be supportive of the Federal Reserve’s decision[i] to indicate a significant pause for monetary policy.

Headline inflation will likely come down to just 1.5% YoY, helped by lower gasoline prices, and core inflation should stay in line with the target of 2.0% YoY.[ii] Lower fuel costs will also create a drag on the value of retail sales, but other than this effect, the economic outlook appears good, with a strong jobs market and rising pay giving consumers the cash and the confidence to spend.

We will also be keeping an eye on trade-related issues, especially the possibility of the US determining the car industry to be a national security issue. This decree would carry implications of further tariffs on imports, which could add to a trend towards protectionism.

On Friday, Moody’s Investors Services lifted Russia’s credit rating to investment grade.[iii] Moody’s joins two other companies who have also raised the country’s rating.

Russia’s new rating increase, from Ba1 to Baa3, now puts them at the same level as Italy, South Africa and Hungary.

“The fact that three agencies have assigned investment grade to Russia will be an additional positive argument for investors that consider the possibility of capital investments in our country,” Finance Minister Anton Siluanov said in a statement. “The Russian government, on its part, will create new conditions for a further improvement of the rating.”[iv]

In a strategy to buffer against possible new U.S. sanctions, President Vladimir Putin’s government passed legislation last year to increase the retirement age for the first time in Russia’s post-Soviet history. In addition, it also pushed through an increase in the value-added tax that took effect Jan. 1. These measures are intended to shore up reserves and diversify currency holdings, in order to contain the damage of any further measures by the Trump administration against Russia.

Moody’s report concluded that these buffering measures contributed to their decision, saying,”The sovereign’s vulnerability to such shocks has indeed materially diminished, and no longer constrains the rating to sub-investment grade.”[v]

It is expected that Moody’s decision may lead to big inflows of capital to Russia, and that Russia may yet outperform EM in the short to medium term.