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The economy was off to a great start in 2024, but it is set to slow considerably in 2H due to likely blackouts, shortage of labor, and a reduction in agricultural harvest. Yet, we still expect a decent growth rate close to 4% for the full year.
Inflation expectedly started to pick up from May, and it is accelerating at a faster pace than expected. It is set to reach 7-8% by the end of the year, will likely accelerate even further in 1Q25, but remain in single digits. The NBU could have gone a bit further with reducing interest rates in 1H, but now a pickup in inflation and the recent jitters in the FX market make it hardly possible for the central bank to cut the key policy rate in the coming months. The FX market continues to operate with significant gaps, which widened substantially of late.
The NBU’s exchange-rate-smoothing mechanism does not always work perfectly, and once in a while, markets get upset with high volatility. Yet, fundamentally, the central bank is moving in the right direction by letting the hryvnia depreciate in a controlled manner. We keep our exchange rate projection broadly unchanged and see the rate at UAH42.6/US$ at the end of 2024.
The budget deficit remains the major headache for the authorities given that expenditure on the defence sector are going to be some US$12bn higher than the current budget plan assumes. A big part of it is expected to be financed with higher taxes, but a large hole is still set to be covered with domestic borrowings. It’s very unlikely this amount can be raised in the market even if the NBU resorts to financial repression measures. We, thus, believe the scenario of limited monetary financing of the budget from the NBU is becoming very likely.
Macro Review-Macro risks edge up on large fiscal needs
Macroeconomic risks have increased in the past months, but even so, they remain fully manageable. The recent resumption of inflow of foreign financial aid provides a comfortable safety cushion for the FX market and a vital liquidity source for the state budget. Expected disruptions in electricity supplies in late autumn and winter is currently the second most significant risk for the economy, while the shaky safety situation remains the top risk.The economy was off to a great start in 2024, but it is set to slow considerably in 2H due to likely blackouts, shortage of labor, and a reduction in agricultural harvest. Yet, we still expect a decent growth rate close to 4% for the full year.
Inflation expectedly started to pick up from May, and it is accelerating at a faster pace than expected. It is set to reach 7-8% by the end of the year, will likely accelerate even further in 1Q25, but remain in single digits. The NBU could have gone a bit further with reducing interest rates in 1H, but now a pickup in inflation and the recent jitters in the FX market make it hardly possible for the central bank to cut the key policy rate in the coming months. The FX market continues to operate with significant gaps, which widened substantially of late.
The NBU’s exchange-rate-smoothing mechanism does not always work perfectly, and once in a while, markets get upset with high volatility. Yet, fundamentally, the central bank is moving in the right direction by letting the hryvnia depreciate in a controlled manner. We keep our exchange rate projection broadly unchanged and see the rate at UAH42.6/US$ at the end of 2024.
The budget deficit remains the major headache for the authorities given that expenditure on the defence sector are going to be some US$12bn higher than the current budget plan assumes. A big part of it is expected to be financed with higher taxes, but a large hole is still set to be covered with domestic borrowings. It’s very unlikely this amount can be raised in the market even if the NBU resorts to financial repression measures. We, thus, believe the scenario of limited monetary financing of the budget from the NBU is becoming very likely.
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Vitaliy Vavryshchuk
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