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Inflation is set to start decelerating rapidly from June on last year’s high base and larger supply of agricultural harvest. We see good chances of consumer prices slowing to 7-8% at the end of 2025, supported by weaker growth in domestic demand, a relatively stable exchange rate, and cheaper food products. The NBU will keep its tight monetary policy stance unchanged until September and will likely deliver three 50bp cuts thereafter to end the year reaching 14%.
The revised schedule of foreign aid commitments revealed by the IMF is a huge positive surprise for Ukraine. The aid package has been increased by US$15bn vs. the December plan, and the supply of loans/grants became much more frontloaded. Ukraine should receive over US$50bn in 2025, implying a spike in NBU reserves and strengthened central bank firepower to keep the hryvnia strong. We upgrade our end-2025 exchange rate projection to UAH43.5/US$. A larger financial aid package implies the economy now has more time to tackle its surging imbalances of external accounts. Should inflows of financial aid subside substantially beyond 2025, the pressures in the FX market will rise and the NBU will likely need to resort to relatively significant hryvnia devaluation.
The state budget financing looks to be fully secured for 2025, even though some increase in expenditure targets is likely in 3Q. Yet, the visibility for 2026 in terms of deficit financing is very low at this point.
Our projections assume no significant changes in the balance of safety risks over the 12-month horizon. We believe that even if a ceasefire agreement is reached soon, the hostilities on the frontline and russian attacks on civil infrastructure all over Ukraine will not subside completely. Ukrainian businesses and households will continue to operate under great uncertainty that will weigh on their sentiment and activities.
Macro Review-Macro Insight: Larger Financial Aid Buys More Time for Economy to Adjust
Ukraine’s economy has been in a sluggish recovery mode since 3Q24, and chances for a significant near-term acceleration are slim. The need to cut the fiscal deficit and budget expenditures will significantly restrain GDP growth going forward. We see economic growth close to 3% this year and next, supported by recovery in household consumption and higher agricultural output.Inflation is set to start decelerating rapidly from June on last year’s high base and larger supply of agricultural harvest. We see good chances of consumer prices slowing to 7-8% at the end of 2025, supported by weaker growth in domestic demand, a relatively stable exchange rate, and cheaper food products. The NBU will keep its tight monetary policy stance unchanged until September and will likely deliver three 50bp cuts thereafter to end the year reaching 14%.
The revised schedule of foreign aid commitments revealed by the IMF is a huge positive surprise for Ukraine. The aid package has been increased by US$15bn vs. the December plan, and the supply of loans/grants became much more frontloaded. Ukraine should receive over US$50bn in 2025, implying a spike in NBU reserves and strengthened central bank firepower to keep the hryvnia strong. We upgrade our end-2025 exchange rate projection to UAH43.5/US$. A larger financial aid package implies the economy now has more time to tackle its surging imbalances of external accounts. Should inflows of financial aid subside substantially beyond 2025, the pressures in the FX market will rise and the NBU will likely need to resort to relatively significant hryvnia devaluation.
The state budget financing looks to be fully secured for 2025, even though some increase in expenditure targets is likely in 3Q. Yet, the visibility for 2026 in terms of deficit financing is very low at this point.
Our projections assume no significant changes in the balance of safety risks over the 12-month horizon. We believe that even if a ceasefire agreement is reached soon, the hostilities on the frontline and russian attacks on civil infrastructure all over Ukraine will not subside completely. Ukrainian businesses and households will continue to operate under great uncertainty that will weigh on their sentiment and activities.
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