ICU Investment Group worsens 2024 GDP growth, inflation forecasts for Ukraine
MOSCOW. Aug 20 (Interfax) - The ICU investment group has worsened its inflation forecast for Ukraine in 2024 to 7%-8% from 6.4% and now expects the country's GDP to grow 4% compared with 4.1% in the April forecast, with an increased likelihood of limited monetary financing for the budget deficit.
"Inflation started to pick up from May, as expected, and it is accelerating, more quickly than anticipated. It is set to reach 7%-8% by the end of the year and will likely accelerate even further in Q1 2025, but remain in single digits," Ukrainian media reported, quoting the head of the ICU macroeconomic research department, Vitaly Vavrishchuk, as saying in the forecast.
The investment group expects inflation to be 8% in 2025.
Its analysts said the National Bank of Ukraine could have gone a little further with reducing interest rates in H1, but now the pickup in inflation and the recent FX market volatility make it "hardly possible for the central bank to cut the key policy rate in the coming months."
The ICU in April predicted a reduction in the key rate to 11.5%, but now it expects it will remain at 13% and not fall to 11% per annum until next year.
In H2 2024, the investment group expects the country's economic growth to slow due to likely blackouts, shortage of labor and a reduction in the harvest. "Yet, we still expect a decent growth rate close to 4% for the full year. The key growth drivers are domestic private consumption and the resumption of exports due to the operation of the sea transport corridor," Vavrishchuk said. In his opinion, the role of government consumption in supporting economic growth will be positive, but less significant than in 2023.
ICU predicts the country's GDP growth will be 4% in 2025 also.
In the updated forecast, the nominal GDP estimate for this year has been lowered to $188 billion from $190 billion, and for next year it is $195 billion.
Macroeconomic risks have increased in the past months, but even so, they remain fully manageable, ICU said. 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. "The external political risks of less Ukraine-friendly governments coming to power in major ally countries will likely be mitigated by a $50 billion aid package that is currently being finalized by G7 countries," Vavrishchuk said.
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 forecast says.
Vavrishchuk also said the situation with Ukraine's external accounts has remained unchanged for the past 2.5 years. The deficit of foreign trade remains extremely high and net private capital outflows persist. Nevertheless, the gap has been generously covered with foreign financial aid and this situation is likely to continue in the foreseeable future.
The investment group has raised its estimate for the current account deficit this year to 5.6% of GDP from the 7.8% of GDP expected in April, but expects it to rise to 9.5% of GDP next year.
"The inflows of foreign financial aid in H2 will be at least 60% higher than in H1, and they will replenish the NBU reserves. If all financial aid comes in as planned, we see end-2024 reserves at above $43 billion, or above end-2023 level. This level is comfortable and fully enables the NBU to control the FX market," the forecast says.
The forecast for Ukraine's international reserves has been lowered to $43.7 billion from $44.7 billion in April, and in 2025 they are expected to decrease to $37.5 billion.
Vavrishchuk said the FX market continued to operate under a substantial deficit, which has grown significantly in recent months. "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," he said.
The ICU has worsened its exchange rate forecast for the end of this year by UAH 0.30 compared to the previous forecast, to 42.6 UAH/$1.
The main challenge in the second half of the year will be financing the state budget deficit, since defense spending may exceed the current plan by almost UAH 500 billion, the analyst said. In his opinion, a large part of it is expected to be financed with higher taxes, but more than UAH 200 billion will have to be raised on the domestic debt market.
"Thus, we believe the scenario of limited monetary financing of the budget from the NBU is becoming very likely," Vavrishchuk said.
