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Macro Review-Macro Insight: A Race to Secure More Budget Funding for 2026

Economic growth to remain slow as the economy will struggle to increase the stock of available resources, capital and labor, in the near future. The recovery will be supported by private consumption on the back of surging incomes in the private sector. Meanwhile, government consumption will remain a drag due to a gradual fiscal consolidation. Additionally, lower-than-expected harvest prompts a downgrade in our 2025 GDP growth forecast to 2.5%.

The key near-term challenge for the government is to secure an additional US$10-15bn in funding for 2026 on top of the existing commitments of the foreign partners. We expect the IMF will substantially revise its unrealistic baseline scenario for the BoP and budget during the next review in December 2025 and will use much more conservative assumptions admitting the need for more external funding.

Inflation sharply reversed the trend since June, and we expect it will keep decelerating robustly in the coming months. The NBU will remain very cautious in its shift to monetary-policy loosening, partly due to sustained huge imbalances in the FX market. We now expect only two key policy rate cuts for a combined 100bp through end-2025. We don’t expect the CPI to return to the NBU target next year or in the foreseeable future due to rapid growth in the prices for services against the backdrop of a tight labor market.

We upgrade our projection of end-2025 exchange rate to UAH42.6/US$ from 43.5 previously. We have seen little appetite from the NBU over the past year to weaken the hryvnia. If the government finds US$10bn of additional funding for 2026, the NBU will have all the necessary resources to keep the hryvnia strong through end-2026. We, thus, expect insignificant hryvnia depreciation in 2026 as well. The NBU reserves will spike to above US$55bn this year, but will take a U-turn back to the US$40-45bn range in 2026.

Our analysis assumes no major breakthrough in terms of a ceasefire in the near future. Even if a peace agreement is signed, that is unlikely to bring credible relief leading to a sustained improvement in business sentiment. This implies the revised baseline scenario in the IMF program in December 2025 will be close to the current downside scenario.