28 Oct 2022 14:14

NBU forecasts Ukrainian GDP will fall 35.6% in Q3, 31.5% in 2022

MOSCOW. Oct 28 (Interfax) - Ukraine's real GDP will fall 35.6% year-on-year in Q4 2022 after dropping 34.4% in Q3 and 37.2% in Q2, the National Bank of Ukraine forecasts.

The NBU said in an updated inflation report that the economy would shrink another 17.5% in Q1 2023, given the high base in Q1 2022. Recovery is expected to begin in Q2 2023 when GDP could grow 13.9%, followed by 9.2% growth in Q3 and 11.3% in Q4.

The NBU said in July that it expected the economy to shrink 37.5% in Q4 2022 and 19% Q1 2023. Growth outlook for the other three quarters of next year has been lowered.

In general, the NBU expects GDP to plummet 31.5% in 2022 then grow 4% in 2023 and 5.2% in 2024, whilst in July it expected a drop of 33.4% in 2022 and growth of 5.5% and 4.9% in 2023 and 2024, respectively.

Nominal GDP could decrease to UAH 4.75 trillion in 2022 from UAH 5.46 trillion in 2021. However thanks to high inflation of 30% in 2022, 20.8% in 2023 and 9.4% in 2024, nominal GDP will reach UAH 6.175 trillion in 2023 and UAH 7.35 trillion in 2024.

The baseline scenario "is based on assumptions of entering a new IMF program, conducting coordinated monetary and fiscal policies, and gradually neutralizing quasi-fiscal imbalances, in particular in the energy sector," the NBU said. In addition, the baseline scenario assumes "a significant decline in security risks from the middle of next year, which would contribute to complete unblocking of seaports, a decrease in sovereign risk premiums, and return of displaced persons to Ukraine," it said.

The baseline scenario assumes a complete unblocking of seaports from the second half of 2023 and the return in 2023 of 400,000 of the 8 million refugees who left the country in 2022.

In addition, the baseline moderately optimistic forecast assumes continued active international financial support for Ukraine of $28 billion in 2023 and $20 billion in 2024, compared to $31.1 billion this year, of which about $24.1 billion has been received so far.

The National Bank said the prolongation of the military operation and its escalation was the biggest risk for such a scenario, estimating the probability of this at between 25% and 50%. The NBU gives the same degree of probability to increased emigration and energy risks related to getting through the winter, as well as termination of gas transit. However, the degree of influence of the first two is moderate, and the termination of transit, which is envisaged at 20 billion cubic meters per year, is weak.

The NBU also said major risks to the baseline scenario included any imbalance of public finances - low government bonds rates, freezing of housing and utility rates, reduction of international aid and lengthier monetary financing - but the probability of this is lower at 15-25%.

Termination of the "grain corridor" and not signing the program with the IMF are classified as moderate in terms of the impact on the baseline macro-forecast, however, the probability of such events is estimated at 15-25% and less than 15%, respectively.

There is also mention in the report of a "Marshall Plan" factor, which could vastly improve the macro-forecast, but the NBU estimates its probability at below 15%.

An alternative scenario is based on the assumption that military operation will continue until mid-2024. GDP growth in that case will be 1.9% in 2023 and 2.5% in 2024, while gross international reserves will fall to the critical level of $12.6 billion in 2024.

But the NBU notes that real GDP growth of about 2% is expected only thanks to the partial adaptation of business to difficult conditions and active international financial assistance.

The alternative scenario assumes inflation slows from 30% this year to 13.4% next year, instead of 20.8% in the baseline scenario, due to the assumption that the increase in gas and heating tariffs will take place only in 2024. Because of this, inflation for 2024 in the alternative scenario is estimated at 19.6% against 9.4% in the baseline scenario.

Other alternative scenario assumptions include the full opening of seaports a year later than in the baseline, that is, from the second half of 2024, as well as a continued emigration of 1.4 million in 2023 in addition to 8 million in 2022.

The alternative scenario retains most of the other assumptions, in particular, active international financial assistance and a program with the IMF.

The risks of macro-financial destabilization for this scenario are much higher than for the baseline.