Intesa Sanpaolo is thinking about South-East Asia

26.11.2010 — Analysis

The Intesa Sanpaolo Banking Group intends to expand its presence in developing countries. The Italians are planning to service export and import transactions between Europe and South-East Asia. In the meantime, experts tend to be quite conservative about the anticipated steady growth in China, India and Russia. They think that the Chinese economy can face a dramatic slowdown in two years, whereas the Russian economy is definitely doomed to stagnation without reforms in government institutions. As the "RusBusinessNews" columnist has found it out, Russia may fail to fit into the new global financial system if it does not address its image.

Bank Intesa gave a seminar in Ekaterinburg where analysts outlined their vision of world economic development after the financial crisis. Luigi Ruggerone, head of Country Risk and Foreign Subsidiaries at the Risk Management Department of the Intesa Sanpaolo Banking Group, thinks that the economic situation is complicated, but there will be no second wave of the crisis. The 2008-2009 recession took place due to reduction in the gross domestic product (GDP) in the world's leading countries, aggravated by volatile loan interest rates. At present, the rates are stable and will retain their stability at least for another year. World trade is demonstrating an upward trend, and bankers look into the future with conservative optimism. In 2011 the USA anticipate a 2.5% increase in their GDP; the euro area is showing a 1% improvement this year.

As consumption of high-tech products is decreasing, commodity flows are turning steadily to developing countries. The share accounting for the BRIC countries keeps on rising. China has paved the way to Africa and South America, while demonstrating the highest GDP growth rates. In Russia, the upward trend is much more moderate: L. Ruggerone expects that in 2011 the Russian economy will improve by 4.6%. Among the developed countries only Germany matches such levels; therefore, Intesa has decided on expanding its business in the BRIC countries. The bank is interested in early finding of its niche in servicing of commodity flows, which will eventually move to developing countries.

The analyst thinks that the optimistic scenario can be thwarted by the treat coming from the USA. The consumption rates there have fallen down; the real estate market has deflated causing damage to banks. The government is trying to keep them afloat, inflating money. The administration headed by President Barack Obama covers its expenses through issuing of long-term bonds, which eventually will result in the increased tax burden and decreased business activity. The percentage of borrowed funds is going up resulting in disequilibrium between the USA and China. According to Luigi Ruggerone, it is time to stop selling Chinese goods for American debt securities; otherwise it may lead to a new crisis. However, the situation is still unchanged, as it is not clear what to do with the accumulated debenture stock. The United Sates have just cut purchases of commodities manufactured in other countries. China, in its turn, has to strengthen the yuan, which drives it to a deadlock: there is a decrease not only in export, but also in currency assets.

Andrei Korzhubaev, head of the department at the Institute of Economy and Industrial Organization of the Siberian Branch of the Russian Academy of Sciences, does not believe that relations between China and the USA are at a deadlock, as both countries are not interested in breaking the economic model that has been built within the last decades. The Americans are still providing incentives to maintain the consumption rates, and the Chinese have to purchase debt securities for the dollars received for their goods. They do not have any other investment alternative: developed countries are not willing to replicate the latest technologies. That is why, the purchasing of debt securities will continue - until China will come up with the political force that will be willing to shoulder the burden of the world leader. It will result in creation of a new world financial system: the role of the dollar and euro will weaken, whereas the yuan will strengthen its positions. In the end, the United States will have to buy out their unsecured debts.

The Russian ruble is secured by raw materials, i.e. having more reliable positions than the yuan, but it will not be easy for Russia to fit into the new world financial arrangement. Nobody wants to have savings in the Russian national currency; therefore, the petroleum country is not able even to create its commodity exchange. The lack of confidence in the ruble is based on political risks. Aggressiveness of the Russian elite and lack of legality, in A. Korzhubaev's opinion, erode the financial system of the country. The typical example is the war with Georgia in 2008: before August Russia used to be a truly safe haven, but after the troops were brought into Georgia, investors left the country. The expert says that patriotism is a good thing; however, if the government wants to reinforce confidence in the national currency, it must care about the image.

The predictability of the political system of the country can produce even a greater effect than an increase in oil prices. The GDP growth in Russia stopped being dependent on the price for a barrel of oil on the stock exchange long ago. As is known, the industry demonstrated the highest growth rates in 2001-2004 when a barrel of black gold was bought for slightly more than 20 US dollars. At the price for a barrel amounting to 146 dollars the economy did not show such remarkable rates: in 2005 the consumption rates went into an artificial consumption growth, evidencing the clearly adverse environment in the country. Andrei Korzhubaev anticipates that in 2011 not only oil prices will become the driving force underlying Russia's development, but also the accumulated growth potential in the service, transport, communication, and to some extent in machine-building sectors. These industries were hit worst during the crisis; therefore, they are trying to regain their former positions. The expert thinks that the Russian GDP may rise by 6-7% next year.

Yevgeni Gavrilenkov, chief economist at the Troika Dialog Investment Company, is very careful about all the forecasts and announced numbers. Industrial production is undoubtedly improving - mainly, due to the domestic market; however, this growth is rather unstable, because it was generated artificially by the government that injected substantial financial funds into the automobile industry and into some other sectors of economy. State statistics agencies speak about a 2.7% increase in the gross domestic product - the expert does not see this number as convincing. On the other hand, he does not believe in 6%: in 2011 this number is impossible. Moreover, the next two years may witness a sharp slowdown in the Chinese economy. It may be even not through the fault of the USA: the world economy faces a lot of threats today. That is why, the 6% increase in the Russian GDP can be expected as a very distant prospect: for example, some miracle can happen and Russian government institutions can go through sweeping reforms.

Luigi Ruggerone names the judicial system as one of such institutions. He states that Bank Intesa gives low-interest loans to transparent companies that show sound balance. The bank prepares ratings of corporate customers where it considers the litigation level existing in a country. The rule is simple: if the bank, when encountering loan default, is able to return at least part of the provided funds through the court within two months, then the country risks can be admitted as reasonable. At the moment, the rates offered to Russian companies are among the highest in the world: they are even higher than in Greece that is on its last legs.

Vladimir Terletsky