Dragon Capital raises Ukraine GDP growth forecast for 2023 to 5.2%

MOSCOW. Dec 11 (Interfax) - Dragon Capital has raised its growth forecast for Ukraine's economy in 2023 to 5.2% from 4.5% in light of the increase of Ukrainian commodity exports by sea, the stable energy situation in the country and the strong harvest, but it has left the growth forecast for 2024 unchanged at 4%, Ukrainian media reported, citing a press release from the investment company.

The company's updated forecast sees real GDP growing by 5.0% year-on-year in the fourth quarter of 2023 rather than the previously expected 3.0%.

Ukraine exported about 4 million tonnes of commodities through the maritime corridor in November, up from 2 million tonnes in October, Dragon Capital estimated. Agricultural commodities made up about 60%-70% of these exports and iron ore and steel accounted for the rest.

This growth is giving a boost to related sectors, including trucking and trade, facilitating a recovery in ore mining and steel production and improving the financial results of agribusinesses, reducing risks for next year's harvest, the company said.

In light of the latest data on yields for key crops, Dragon Capital has raised its forecast for Ukraine's grain and oil crop harvest this year from 77 million tonnes to 80 million tonnes, which would be an 11% increase over last year.

However, Polish truckers' blockade of the main checkpoints along Ukraine's border with Poland since November was an unexpected negative development that will have a limited adverse impact on economic activity in Ukraine, the company said.

The negative aspects of the blockade include a decrease in state budget revenues, losses for producers oriented toward the European Union market, primarily in the food industry, wood processing and automobile electronics, a shortage of certain energy resources such as autogas (liquefied petroleum gas), and financial losses for businesses due to long waits at the border.

On the other hand, since imports of goods from the EU by truck exceed exports by $1.1 billion per month, the blockade is leading to a decrease in Ukraine's foreign trade deficit, which has fluctuated in the range of $2.8 billion-$3 billion per month in recent months, Dragon Capital said. In addition, the decrease in imports is giving some Ukrainian manufacturers of consumer goods a temporary competitive advantage, the company said.

One of the key drivers of the anticipated 4% economic growth next year will be the partial recovery of exports through seaports and the resulting increase in production in sectors reliant on seaborne exports, including ore mining, steel, freight transport and internal trade, the company said. The development of the domestic defense industry will also support the economy, it added.

However, the economic recovery in 2023-2024 will not compensate for the 29% contraction in 2022 due to the military operation in Ukraine and real GDP in 2024 will still be 22% lower than it was before the conflict, Dragon Capital said.

At the same time, nominal GDP in U.S. dollars could already reach $200 billion next year thanks to relative exchange rate stability and high average annual inflation, the company said.

The company's inflation forecast for this year and 2024 remains unchanged at 6% and 8%, respectively, given an unchanged National Bank of Ukraine (NBU) key interest rate of 15% following its anticipated reduction from 16% at the next policy meeting on December 14.

The company also noted the importance of financial aid from partners, remarking that if it falls short the Ukrainian government will have to resort to monetizing the budget deficit, which is expected to shrink from 25% to 21% of GDP next year, or increasing the tax burden.

The company expects international partners to approve new economic support packages for Ukraine and provide about $40 billion in direct budget financing in 2024, although there might be a delay in the release of funds at the beginning of next year.

If this foreign aid is received, the NBU's international reserves will begin to gradually grow and reach $45 billion by the end of 2024, the company said.

Dragon Capital left its forecast for the hryvnia's exchange rate against the dollar unchanged at UAH37.30/$1 on average in 2024 and UAH39.00/$1 at the end of next year.

Investment group ICU, meanwhile, has lowered its 2024 growth forecast for Ukraine's economy to 5% from the 6.4% it projected in July.

"Economic growth will continue if there are no new significant security risks, but it will slow somewhat compared to this year," ICU's head of macroeconomic research, Vitaly Vavrischuk was quoted as saying in the group's report.

ICU has left its forecast for real GDP growth this year unchanged at 5.8%, but lowered its inflation forecast to 6.2% from 11.2%.

The group expects inflation to accelerate next year, starting in the summer, to 10.1%, with the NBU expected to lower its key rate to 13% in the second half of 2024 after cutting it to 15% from 16% later this month.

"We expect that a number of new challenges will arise in 2024, perhaps the biggest of which will be risks related to the amounts and stability of external financial support for Ukraine," Vavrischuk said.

ICU believes that, at the moment, the risks of a significant reduction of financial aid are low and Ukraine will receive at least $28 billion-$30 billion, which will be sufficient to balance external accounts until the end of 2024.

"This means that the NBU will be able to continue to fully control the forex market and even be able to take significant steps toward currency liberalization. All the prerequisites are also in place for a moderate and manageable devaluation of the hryvnia and, according to our forecasts, the exchange rate will be about UAH41/$1 at the end of 2024," Vavrischuk said.

ICU expects Ukraine's current account deficit to widen to 5.2% of GDP next year from 4.4% this year, but the NBU's international reserves to grow to $44 billion from $42 billion.

Although Ukraine will very likely receive sufficient external funding to balance external accounts, it might be insufficient to fully finance the budget deficit, which will shrink to 21% of GDP (without grants) in 2024 from 29% this year, Vavrischuk said.

"Raising more than $40 billion in foreign loans and grants is still not guaranteed, so there will be a risk of printing money (purchases of domestic government bonds) by the National Bank next year," he said.

An important expected event in 2024 will be the restructuring of Ukraine's sovereign Eurobonds, the terms of which will depend greatly on assumptions about the continuation of the military operation and the sustainability of international financial aid, Vavrischuk said.