We propose to analyze our expectations regarding the baseline scenario of a year ago:
1) “The baseline scenario envisages the end of active hostilities on 75% of Ukraine’s territory in Q2 2023. Some territories that were captured by the army of the Russian Federation will remain under occupation. On these territories the war will continue”.
Comment: We did not expect a direct invasion by Belarusian troops, but we underestimated Russia’s ability to continue active missile terror throughout Ukraine. Unfortunately, the threat of the aggressor shelling homes, energy facilities, and businesses and commercial areas remains. Moreover, the intensity of enemy UAVs and ballistic missiles is increasing.
2) “Until the middle of 2023, the AFU conducts de-occupation of the Nikolaev region, Kharkiv region, part of the Kherson region and the city of Kherson. We also envisage the advancement of the Armed Forces of Ukraine in the Lugansk and Zaporizhzhya regions. The conflict is localized without active advancement of either side due to the exhaustion of the main forces of both armies”.
Comment: The Ukrainian army has indeed liberated Kherson and parts of Kharkiv and Zaporizhzhya oblasts, but the war continues. The reason for the slowing down of the liberation of the territories, besides the exhaustion of human resources, is the total mined-out nature of the occupied territories and the wide network of enemy fortifications on the contact border.
3) “Financial assistance to Ukraine includes more than $25 billion a year in direct budgetary needs and grant funds. Cooperation with the IMF allows Ukraine to restructure foreign debts in 2024, payments on which are not being made within the study period.”
Comment: In 2022, the state budget received more than $30 billion in international financial assistance. More than $40 billion is expected for 2023. Eurobond payments are frozen until the end of 2024. The IMF will be reviewing the support program in October-November and, we think, one of the items will be a proposal to restructure the public debt.
4) The NBU will keep the hryvnia fixed at high interest rates until the end of 2023, but we assume another “reshuffle” of the official exchange rate in Q1 2023.
Comment: The NBU continues to hold the fixed UAH/USD exchange rate at 36.6 UAH/dollar. In Q3 2023, the regulator started the transition to a soft monetary policy with a reduction in the discount rate from 25% to 22%. By the end of 2023 we expect the rate to decrease to 18%.
5) According to the baseline scenario, the Ukrainian economy will shrink by 31% by the end of 2022, with a subsequent recovery by 2.9% in 2023 and growth by 6.0% in 2024. The Ukrainian economy will reach the pre-war level not earlier than 2026, provided there is no new escalation in the war.
Consensus forecast of 2.6-3.6% growth for Ukraine’s economy in 2023. Ukraine managed to quickly restore some export positions and domestic consumption, which improved the estimate of the economy reaching the pre-war GDP level. We expect nominal GDP to reach the USD 200 bln mark in 2025.