EM Daily:Russia -Fiscal tightening

Russia in pictures - Fiscal tighteningPlans by the government to reduce 2017 budget deficit to 2.1% (3.2% plannedearlier) is the highlight of Russia in pictures this month. This is a strongpositive signal for long-term investors and possibly ratings outlook, in our view.

    Specifically, the government is planning to submit to Duma amendments to the2017 budget in the coming days. The government now expects oil price of 45.6(40 earlier), GDP growth of 2% and inflation of 3.8% by end-2017. Most of thereduction to the deficit comes from higher revenues as nominal expenditure willremain practically unchanged (Rub16,556trln vs. Rub 16,241trln). Reserve Fundwill be fully spent in 2017, as earlier budgeted, however the MinFin expectsreplenishment of the Reserve Fund in 2018 budget. The MinFin expects toaccumulate Rub623bln from extra oil and gas revenues in 2017 to be transferredin 2018. In other macro themes, GDP grew by 0.5% YoY in 1Q2017, marginallyhigher than market expectations and an improvement compared to 4Q2016 of0.3% YoY; Index of regional economic performance (Development Center, HSE)also confirms that economy is on the mend; Inflation continued to trend downin April to 4.1% (4% CBR target); we believe there is room for the CBR to deliver200bps in cumulative cuts in 2017 to 8% by end-2017 (9.25% now); and finally,we expect a moderate FX depreciation in 2h2017.

    India: A defensive carry-vol propositionIt is tempting to think that the carry/flow dynamic remains the path of leastresistance for EM over the summer months, but the extension of this narrativehinges more critically than ever on volatility staying at near record lows. Asthe last few days have shown, however, it is easy for a carry-long market toget nervous. We see it prudent in such times to both scale appropriately theexposure to carry in EM, and perhaps more importantly, to identify the moreresilient among carry friendly trades. We see India fitting that bill best within Asia. The fundamental case for the India macro trade is already well known. Wewould add the contention that India also offers an attractive ‘defensive’ carry-volproposition for periods of stress in EM. It has delivered