22 November 2022, Tuesday, 17:54 142

Dragon Capital Worsens Forecast Of GDP Decline To 32% In 2022 And Expects Moderate Devaluation Of Hryvnia To 43 UAH/USD

Редактор: Daria Zubkova

Dragon Capital has downgraded the forecast of a fall in real GDP to -32% year over year in 2022 and expects a moderate devaluation of the hryvnia to 43 UAH/USD at the end of 2023.

This is stated in the company's message, Ukrainian News Agency reports.

The negative impact on Ukraine's economy from power outages as a result of Russia's shelling of energy infrastructure facilities has so far been moderate.

"However, shelling is likely to continue, and rising winter electricity demand will force the scale and duration of winter power outages to increase. With this in mind, we have downgraded our forecast for real GDP this year by 2.0 p.p. to -32% year over year, and kept the forecast for 2023 unchanged at the level of -5.0% year over year, despite the change in the key assumption regarding the course of the war," says the analytical report of investment company Dragon Capital.

The GDP forecast for the next year is based on the assumption that Ukraine will gradually liberate the occupied territories, and will be able to end the hot phase of the war on acceptable terms next year, approximately closer to autumn.

Previously, the key assumption of the macro forecast was a long continuation of the war and attrition.

It is expected that as a result of a significant reduction in military risks, the operation of key seaports will be completely unblocked, at least half of the forced migrants from abroad (approximately 4 million people) will return, and Ukrainian private business will resume investment activities.

But given the enemy's damage to production facilities and the destruction of logistics chains, the pace of the initial post-war economic recovery will be moderate and insufficient to offset the economic losses in early 2023 caused by attacks on energy infrastructure.

The launch of a large-scale program to restore the Ukrainian economy will most likely take time and will begin as early as 2024.

International financial assistance remains a critical factor in ensuring macro-financial stability.

The latest statements and steps of international partners allow us to expect an increase in the amount of international support in 2023 to USD 42 billion from USD 32 billion expected in the current year, mainly thanks to the USA, the EU and, to a lesser extent, the IMF.

Inflows of funds from international partners will fully finance the budget deficit, which is estimated to remain at the level of USD 38 billion or 27% of GDP next year, more than USD 31 billion provided for in the current version of the law on the State Budget for 2023, and part of the planned repayments of the state debt.

The National Bank will probably be able to end the risky practice of "printing hryvnias" for budget purposes next year, or at least significantly reduce the volume from the expected UAH 400 billion this year.

"We believe that the National Bank will try to avoid another correction of the hryvnia exchange rate in the near future, since the fixed exchange rate is an important stabilization factor for the economy in the current uncertain conditions, and the weakening of the hryvnia will not help significantly reduce the foreign trade deficit due to the specific structure of trade flows and limited opportunities for export as a result of port blockades. We expect the NBU's international reserves to remain above the safe level, which we estimate to be around USD 20 billion (compared to USD 25.5 billion at the end of October and an expected USD 27 billion at the end of 2022). This will allow the NBU to keep the official exchange rate of the hryvnia to the dollar at the current level of 36.57 UAH/USD until the end of the third quarter of 2023, when the expected end of the hot phase of the war will make it possible to start a return to flexible exchange rate formation and inflation targeting," the company emphasized.

In the post-war period, the structure of demand and supply of currency on the interbank market will change significantly.

Export revenues will increase as a result of the unblocking of ports, the costs of migrants abroad will decrease significantly, as well as unproductive capital outflows, but at the same time imports will increase rapidly.

Most likely, in the first post-war months, the market will maintain a relatively small deficit of the interbank currency, therefore a moderate devaluation of the hryvnia is expected in the fourth quarter of 2023 to 43 UAH/USD.

The main risk for the forecast remains the development of the military situation and the extent of damage to critical infrastructure.

Also, a long delay in international aid or a significant reduction in its volume, especially in the first quarter of 2023, can provoke a rapid loss of gold and foreign exchange reserves by the National Bank and a forced devaluation of the hryvnia.

As Ukrainian News Agency earlier reported, in April-June 2022, real gross domestic product (GDP), according to operational data, decreased by 37.2% compared to the same period in 2021.

The level of the shadow economy in Ukraine in January-September 2021 decreased by 1 percentage point to 31% of official GDP.

The level of the shadow economy in 2021 increased by 2 percentage points compared to 2020 and amounted to 32% of GDP.

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