Risks To Long-Term Macroeconomic Outlook Feeds Into Pharmaceutical Forecast Downgrades

BMI View : Russia's economy is overwhelmingly reliant on oil and gas exports to deliver growth. Our Oil & Gas team expect oil prices to decline over the long term as supply overtakes demand. This has led to our Country Risk team expecting depreciatory pressure to mount on the Russian rouble over the medium term. As a result, our pharmaceutical sales forecasts have seen significant revisions in US dollar terms. As the provision of healthcare is shifted onto the state, we expect further tightening of procurement rules over the medium term.

According to our Country Risk team, Russia's growth trajectory is expected to slow markedly over the 10-year forecast horizon, with average real GDP growth of just 3.7% between 2016 and 2022, well below the growth observed during the past five years. Russia's oil and gas exports, which have underpinned the remarkable growth over the last decade, are set to observe a sustained decline over the long term as stagnating output and declining global oil prices weigh on headline real GDP expansion.

Oil exports have posted negative growth rates in the past five quarters from double-digit growth rates in the pre-financial crisis era, reflecting tapering demand from Russia's major export destination: Europe. Energy prices are expected to decline for the foreseeable future, as shale oil and shale gas assets are brought online and into production within the region. Hydrocarbon exports account for over 66% of the Russian export basket; as prices of hydrocarbons decline, there will be contractionary pressure exerted on Russia's current account balance over the long term.

Shifting Macroeconomic Fundamentals Impact Long Term Outlook
Pharmaceutical Sales, US$bn

BMI View : Russia's economy is overwhelmingly reliant on oil and gas exports to deliver growth. Our Oil & Gas team expect oil prices to decline over the long term as supply overtakes demand. This has led to our Country Risk team expecting depreciatory pressure to mount on the Russian rouble over the medium term. As a result, our pharmaceutical sales forecasts have seen significant revisions in US dollar terms. As the provision of healthcare is shifted onto the state, we expect further tightening of procurement rules over the medium term.

According to our Country Risk team, Russia's growth trajectory is expected to slow markedly over the 10-year forecast horizon, with average real GDP growth of just 3.7% between 2016 and 2022, well below the growth observed during the past five years. Russia's oil and gas exports, which have underpinned the remarkable growth over the last decade, are set to observe a sustained decline over the long term as stagnating output and declining global oil prices weigh on headline real GDP expansion.

Oil exports have posted negative growth rates in the past five quarters from double-digit growth rates in the pre-financial crisis era, reflecting tapering demand from Russia's major export destination: Europe. Energy prices are expected to decline for the foreseeable future, as shale oil and shale gas assets are brought online and into production within the region. Hydrocarbon exports account for over 66% of the Russian export basket; as prices of hydrocarbons decline, there will be contractionary pressure exerted on Russia's current account balance over the long term.

The knock-on impact of a decline in demand for Russian hydrocarbon products is a depreciation of the rouble versus the dollar. We now expect a sustained depreciatory trajectory in 2014-2015 as we expect the deteriorating trade balance, tepid inward investment and a likely rate cut in 2014 by the Central Bank to apply downward pressure on the rouble. Further downward momentum on the rouble will come in 2015, as the Central Bank of Russia will see through its transition of switching the rouble from a managed float regime to a free-floated currency.

As such, our dollar-denominated forecasts for Russian pharmaceutical sales have tumbled in tandem with our exchange rate forecasts. Indeed, dollar-denominated sales at the tail end of our forecast have been revised downward significantly, impacting expected compound annual growth rates within the Russian pharmaceutical market. While we initially posited that Russia's push towards import restrictions as part of its Pharma2020 programme would occur at a slow pace, we now believe that a narrowing of the trade surplus will catalyse the state into implementing further restrictions on imported pharmaceuticals and protecting the domestic industry. Over the past three years, pharmaceutical companies, generic and R&D-based, have invested in expanding local capacity in compliance with the Russian government's intentions. We expect this trend to accelerate over the short and medium term as companies race to become compliant with government procurement rules.

Imports of pharmaceuticals will continue to remain elevated in the short term, underpinned by growth in real household consumption spending, but as the provision of healthcare shifts from consumer and onto the state over the medium term, we expect that reliance on imports within the Russian pharmaceutical market will decline as more and more drugmakers invest in local capacity in anticipation of further narrowing of procurement rules.

We previously expected pharmaceutical sales to reach US$50.48bn by 2022, but we now expect sales to fall significantly short of that figure; our forecasts now expect sales of US$42.76bn. The compound annual growth rate (CAGR) in US dollar terms has been revised down considerably in the medium term; whereas previously we expected a five year CAGR of 9.4% in US dollar terms, we now the market will post a five-year CAGR of 6.6% to US$33.38bn in 2018.

Presently, the Russian pharmaceutical market is shrugging off any headwinds and continuing to post double-digit growth in local currency terms and high single digit growth in US dollar terms. This growth is underpinned by strong private consumption of pharmaceuticals. We forecast pharmaceutical spending to reach RUB766bn (US$24.29bn) in 2013, growing 11.0% year over year in rouble terms and 9.3% in US dollar terms. Over the next five years, we expect the market to achieve a compound annual growth rate of 9.3% in local currency terms and 9.5% in US dollar terms to a value of RUB1.08trn (US$30.96bn) in 2017.

Shifting Macroeconomic Fundamentals Impact Long Term Outlook
Pharmaceutical Sales, US$bn

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Sector: Pharmaceuticals & Healthcare
Geography: Russia
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