The National Bank has once again changed the forecast for the Ukrainian economy. According to the latest inflation report, which the NBU published on November 2, in 2023, GDP growth will accelerate to 4.9%, and the inflation rate, on the contrary, will slow down to 5.8%.
At the same time, there are not many reasons for optimism yet. Growth in 2023 is, rather, an attempt to push off from the bottom that the economy reached in 2022. And the decrease in inflation is associated with an excess supply of goods against the backdrop of reduced consumption.
At the same time, the main threat to macrostability is still the military conflict, which is entering a protracted phase. Therefore, against the backdrop of economic recovery in the past year, it will slow down in 2024. Moreover, the National Bank believes that GDP will not reach pre-war levels even by the end of 2025.
What helps the Ukrainian economy during the war, and what threatens macroeconomic stability and what to expect in 2024, according to the forecasts of the National Bank, we looked into more details .
What does the NBU predict? The NBU's previous macroeconomic forecast was released in July. Compared to it, some indicators have changed significantly. Namely (below are forecast indicators for 2023):
GDP growth improved from 2.9% to 4.9%; inflation rates improved from 10.6% to 5.8%; the negative balance of the state budget worsened from UAH 1.29 trillion to UAH 1.36 trillion; the balance of payments improved from $7.4 billion to $11 billion; the expected volume of NBU international reserves has been revised from $38.3 billion to $41.8 billion.
As for the main indicators for 2024, GDP growth improved slightly from 3.5% to 3.6%, and inflation worsened from 8.5% to 9.8% (at the end of the year).
What supports the Ukrainian economy? The NBU supports its forecasts with the following arguments:
the acceleration of recovery is associated with a high degree of adaptation of business and the population to the war, with a record harvest in 2023 (almost 82 million tons of grain according to the Ukrainian Grain Association), with the alignment of export logistics and with an increase in budget expenditures; the fall in inflation rates occurs due to an increase in commodity production volumes; long-term stability of the foreign exchange market is the result of the administrative influence of the National Bank. This is the preservation of a fixed official exchange rate (it seems to no longer exist, but the rate still hardly moves), limiting the demand of individuals for currency, abundant interventions on the interbank market; significant volumes of external financing (in 2023, Ukraine will receive about $45 billion from abroad), which ensure a net influx of foreign currency into the country, despite the persistence of its deficit against the background of limited exports, allowing to close the budget deficit and replenish NBU reserves.
What threatens macroeconomic stability? The situation in the Ukrainian economy remains rather precarious. In 2024, pressure from unfavorable factors will increase, including:
an almost twofold acceleration in inflation rates, which will be associated with a low base of comparison in 2023, as well as an increase in business costs for logistics, energy and labor; maintaining a significant gap between exports and imports. According to NBU estimates, the deficit in foreign trade in goods and services will exceed $38 billion, and in 2024 it will decrease to only $35 billion; reduction in foreign funding. Moreover, this is no longer a ghostly threat, but an inevitable reality.. The National Debt Management Strategy for 2024–2026, which was approved by the Cabinet of Ministers, clearly states that the further Ukraine goes, the more it will have to rely on internal resources to fill the state budget; high fiscal (budget) deficit, which will reach 29% in 2023, and exceed 20% in 2024; increase in the level of public debt: in 2024–2025, according to NBU estimates, the ratio of public debt to GDP will exceed 95%; weak investment inflow, which will remain so until the end of active hostilities; shortage of labor (skilled and not only) as a consequence of migration and mobilization of the working population.
What influenced the forecast revision? Modeling the situation in the Ukrainian economy is based on a more conservative NBU forecast compared to the one announced in the summer of 2023.
The main risk that the National Bank sees is the prolongation of the military conflict until the end of 2024. Although there were earlier expectations that hostilities could die down in the summer of 2024. Accordingly, a longer war will worsen the prospects for the recovery of the Ukrainian economy, lead to even greater destruction of industry, housing, and infrastructure, deter the return of migrants from abroad, and increase imbalances in foreign trade.
Expenditures from the state budget will increase while sources of filling it are limited (that is, the deficit will remain about 20% or higher), pressure on the foreign exchange market will increase and inflation rates will accelerate.
What conclusions can be drawn from the NBU data? GDP growth in 2023, unfortunately, will not be caused by real economic development, but by the influence of war. In simple terms, this year GDP will at best make up a sixth of the decline in 2022, which reached almost 30%. Therefore, it is still very early to talk about real economic growth. Moreover, military risks are still extremely high.
The slowdown in inflation was mainly due to the fact that manufacturers produced more goods than the domestic market could absorb.. At the same time, business costs continue to rise, so an acceleration in price growth is inevitable, which will happen in 2024.
Import volumes are more than one and a half times higher than exports. And until logistics from Ukraine becomes completely safe, the situation is unlikely to change for the better. This imbalance reduces the competitiveness of Ukrainian producers, who are already forced to work under the threat of shelling and destruction of assets. In addition, imports wash currency out of the country, while limited exports lead to a weak influx of foreign exchange earnings and put pressure on the hryvnia exchange rate.
There will be less and less money from partner countries. This means that resources (for replenishing the state budget, for restoration) will have to be sought within Ukraine. Accordingly, already in 2024–2025 there will be an increase in tax pressure, both on business (inspections, fines) and on the population (the fight against salaries in “envelopes” and other types of shadow income).
The National Bank continues to balance the foreign exchange market in “manual” mode. But since international reserves are unlikely to grow at the same rate as in 2023 (from $30 billion in January to $40 billion in September), the NBU has less and less opportunities to curb the exchange rate. For example, in September–October alone the National Bank spent more than $6 billion on interventions. This is 25% of interventions since the beginning of the year. An unaffordable luxury.
So a gradual devaluation is inevitable. The only question is when it will happen. Considering that the draft state budget for 2024 includes an average annual exchange rate of 40.7 UAH/$, the target is clear. At the same time, the National Bank indicates that its plans for currency liberalization will limit the space for further easing of interest rate policy in 2024. Based on this, the gradual “rocking” of the rate will begin just in the new year.