Recent Macroeconomic Developments in Ukraine

NBU: Ukraine will require a minimum of USD 37 B in funding to cover the budget deficit in 2024. The country received almost USD 27 B from international partners this year, surpassing currency sales by the NBU to balance the foreign exchange market. This steady inflow of foreign aid contributed to a record-high international reserve of USD 39 B by June-end, allowing the government to cover a substantial budget deficit without relying on emission financing. The regulator anticipates that international aid for this year will reach USD 42 B.

NBU: The National Bank revised its GDP forecast for 2023, predicting a growth of 2.9% instead of the previous 2%. The improved outlook is attributed to domestic demand growth, stable energy system functioning, and macro-financial stability. The actual results for Q1 were better than expected, and the revival of the economy continued in Q2. Looking ahead, economic growth is expected to accelerate further, especially after mid-2024, considering reduced security risks. The forecast predicts real GDP growth of 3.5% in 2024 (previously 4.3%) and 6.8% in 2025 (previously 6.4%). The recovery of exports, consumer demand, and increased investments during the country's reconstruction phase, along with a soft fiscal policy, are expected to play significant roles in stimulating the economy.

NBU: The NBU significantly improved its inflation forecast for this year, revising it from 14.8% to 10.6%. The slowdown in price growth is attributed to the decline in world inflation and tight monetary conditions in the country. Unchanged tariffs for most housing and communal services will also play a role. A downward trend in inflation is expected to continue as security risks reduce, allowing for improved logistics routes, increased production, and higher yields. Restoration of investment inflow and decreasing world energy prices will further contribute to the slowdown of inflation. The NBU predicts inflation to decrease to 8.5% in 2024 and 6% in 2025.
MoF: On July 25, the MoF conducted auctions for the placement of war bonds, raising a total of UAH 14.75 B. (mostly at 19.75% for 3 years).

NBU: The NBU made the first reduction in the interest rate since June 2022, lowering it from 25% to 22% at a meeting on July 27. This decision was influenced by the rapid slowdown in inflation and the stable foreign exchange market. The reduction aims to maintain the attractiveness of hryvnia savings and support exchange rate stability while promoting economic recovery. Consumer inflation decreased from over 26% at the beginning of the year to 12.8% in June, exceeding the NBU's expectations, attributed to supply factors and the impact of NBU's monetary policy measures. The Board of the NBU also lowered rates on overnight deposit certificates to 18% and for refinancing loans to 24%. The forecast suggests a gradual reduction of the interest rate to 18% in Q1 2024, but uncertainties may influence future decisions.

ICU: ICU, the investment company, updated its forecast for Ukraine in 2023, predicting GDP growth of over 5%, a slowdown in inflation to 10.5%, and a relaxation of monetary policy. The country's economy is expected to exceed expectations, supported by uninterrupted international financial assistance. GDP growth is fueled by positive expectations and increased business production plans, with household consumption playing a significant role. Inflation is also decelerating rapidly, expected to reach 10.5-11.5% by the year-end, and remaining in the range of 10-13% in 2024. The NBU is likely to start easing monetary policy in July, reducing the discount rate to 20% by year-end. Despite the risk posed by the foreign trade deficit, international loans and grants are expected to compensate for it. The NBU's reserves grew to a historical high due to international aid and are predicted to continue growing. While the NBU is considering introducing more flexibility in exchange rate formation, the official exchange rate is expected to remain at UAH 36.6/$ until at least the end of 2023. The state budget implementation is on track, and the national debt-to-GDP ratio is projected to approach 90% by year-end, with manageable pressure on public finances liquidity in the coming years.