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Macro Update -- Macro Risks Remain Manageable

The resilience of Ukraine’s economy to unprecedented external shocks remains beyond any doubt. The economy continues to grow in 2024 at a reasonable pace and massive destruction of the country’s energy infrastructure will only slow, but not disrupt, the recovery. Ukraine’s largest economic achievement of the past quarters is the launch of a fully functioning Black Sea cargo corridor that made it possible to export a wide range of commodities.

The biggest positive surprise of 1Q24 was a sharp slowdown of inflation that reached 3.2% in March. Low CPI combined with a stable FX market implies significant potential for a further reduction in interest rates that still remain elevated. We now expect an end-2024 NBU key policy rate of 11.5%, a 3pp reduction from the current level. Yields on government bonds will follow the trend, and we see good chances of the cost of one-year debt slipping below 14% by the end of the year.

Apparently, inflows of foreign financial aid remain the key thing to watch as far as macroeconomic risks are concerned. With the US aid package voted, Ukraine should secure enough external financing to ensure that NBU reserves increase in 2024, and the central bank remains in a position to address any disturbances in the FX market. Another welcome development is the gradual and controlled hryvnia depreciation. It is much needed to reduce surging trade balances. Given NBU’s revealed appetite for a weaker hryvnia, we downgrade somewhat our end-2024 exchange rate projection to USH41.5‒42.5/US$ from 40.7 previously.

Government managed to properly address fiscal risks in Jan‒Feb, when foreign financial aid was paused, by delaying some non-critical expenditures. A substantial increase in tax collections was also a favorable factor. There remains a risk that budget financing needs will exceed the UAH1.6tn specified in the budget law. Should this happen, government will be able to raise additional funding in the local market to fill the gap.