BofA estimated the impact of privatization of “Rosneft” on the excess money from banks

Analysts at Bank of America Merrill Lynch (BofA) said the privatization of “Rosneft” an important factor that may affect the dynamics of liquidity in the banking sector. If the government for whatever reason decide to postpone the deal, it could trigger a serious influx of additional liquidity into the banking sector, said in a review (have). Regardless of this, they expect an increase in surplus by the end of the year and in 2017.

According to the Directive of the government members of the Board of Directors of Rosneftegaz, the calculations for the shares of “Rosneft” and the buyer will have to be completed by 15 December, and the money from the sale of about $ 711 billion rubles should be transferred to the budget before December 31. On 16 November the first Vice-Premier Igor Shuvalov said that the privatization will take place according to plan.

According to analysts BofA, if the privatization of Rosneft is scheduled to be held in December, this neutral impact on domestic liquidity of the banking sector, for timing of scheduled payments of defense enterprises on loans. “The potential outflow of liquidity [banks are] associated with the payment of more than 700 billion rubles for the company’s stock should be fully absorbed due to the increase in defense spending by the same amount in the revised budget for 2016. This amount is pledged for the payment of leading defense enterprises outstanding credit debt, and it should go directly into the banking sector”, — explained in BofA. But if the government for whatever reason will postpone the transaction, the sector will come with additional liquidity from the budget.

“In this scenario, we believe that the government should abandon the planned debt refinancing operation — theoretically by restricting costs and the associated outflow of liquidity. But technically it is difficult to do because it provides for significant deviation from budget that must be approved by the government”, — stated in the review.

The Russian banking sector has passed to the structural surplus liquidity of November 9, reported the Central Bank. The volume of excess liquidity, the regulator has called that day, “timid” and was estimated at 26 billion rubles. As he wrote , analysts believe that in the case of the surplus part of the excess liquidity in banks can spend on currency that could affect exchange rate. At the same time the excess money from the banks, coupled with declining inflation could lead to a drop in interest rates on deposits and loans, experts add.

According to analysts BofA, the tax period, which will begin on November 21, at some time, will eliminate the structural surplus liquidity, but in early December in connection with the increase in budget expenditures, the surplus will resume until the end of the year will show strong growth. “In November and December, the state must spend to 4.4 trillion rubles to ensure the achievement of annual targets, twice the average annual level of expenditure”, — says the experts.

Of surplus, in their opinion, will continue in 2017 against the expected increase of the budget deficit. Excess liquidity can spur domestic demand for Federal loan bonds (OFZ) and potentially to support the plans of the Ministry of Finance to increase the annual volume of placement of OFZ with 500 billion rubles in 2016 to 1.1 trillion rubles in the years 2017-2019, according to a survey. The last time Russia placed Federal loan bonds more than 1 trillion rubles in 2011, when the country experienced a surplus of liquidity. BFL then became the main instrument of its absorption.

But domestic demand for OFZ could be kept a high level of key rates and the interbank lending market, analysts say BofA. “At the rate of 10% the value OFZ can be attractive enough to maintain the demand despite prevailing market expectations regarding the prospects of easing monetary policy of the Central Bank, which in any case will be very long. It [expectations of an interest rate cut] could be the main reason for increased demand for OFZ bonds from foreign investors this year”, — noted in the review.

According to the analysts of BofA, a large part of excess liquidity will be absorbed through operations of the Bank of Russia. In particular, the Central Bank will continue to conduct Deposit auctions and may begin to place the bonds of the Bank of Russia (OBR). “Similar operations will allow the Central Bank to take control of the money supply and to minimize the impact of surplus liquidity on inflation. But the increase in the use of these tools may limit support to the OFZ market and increase pressure on the Central Bank towards further monetary policy easing,” they say.

In 2016, the market had placed a small amount of OFZ — about 300 billion rubles, notes the analyst of Raiffeisenbank Denis Poryvai. “Yields on OFZ bonds this year fell too fast, at the current levels OFZ, in particular, with a fixed coupon rate less attractive than the deposits of the Central Bank,” he adds. According to experts, to 2017, the more significant impact on the yield of OFZ will play the money market rates.