RUSSIA - Russia is unlikely to obtain investment grade status until after the presidential elections in March 2004.
But analysts at Schroder Investment Management believe that the Russian economy, which remains vulnerable to oil price fluctuations, has still managed impressive growth in the first three months from both the commodity and manufacturing sectors.
Gabor Sitanyi, Schroders’ director of European emerging markets, said: “As a result of the strong external and fiscal positions Russia may win further credit rating upgrades, but it is unlikely to obtain an investment grade rating until after the 2004 presidential elections.”
According to recent research, emerging market bond funds experienced their first outflows since the start of the year in May. Figures from EmergingPortfolio.com Fund Research (EPFR), which tracked 173 dedicated emerging market bond funds with US$12bn in assets, showed net investor redemptions of US$1.8m. But EM bond funds have still attracted inflows of US$1.94bn year to date, over three times the total inflow for 2002.
Schroders reckons that over the medium term the primary concern for investors is the potential impact from an anticipated fall in oil prices following the war in Iraq. The health of the Russian economy will therefore depend on whether the government and the central bank are able to adjust fiscal and exchange rate policies quickly enough to avoid a loss of market confidence.
The fund manager also expects the political scene to remain relatively calm despite the approaching elections as President Vladimir Putin continues to lack any major challenger apart from the relatively unpopular Communist leader, Zhuganov.
“Looking ahead, Schroders does not expect a collapse in levels of oil prices and believes that sustained performance is underpinned by a continued under-valuation of Russian companies due to their strong growth prospects and the declining Russian risk free rate. M&A activity should continue to propel stock prices,” added Sitanyi.
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