Several of our now tens of hundreds of subscribers have asked me to write about Ukraine’s economy during this (Phase 3) stage of the war.
Like most macroeconomists, I rely on Ukraine Economic Outlook and their team for weekly and monthly updates about the country’s balance of payments, macroindicators, trade balance, monetary policy, budget fulfillment, etc.
Here is the summary of the group’s August monthly report:
Summary
2023
GDP. We maintain our forecast for the recovery of the dollar equivalent of Ukraine's GDP from $157 to $170-180 billion (+8-12%). However, the share of the private sector of the economy (including sectors whose income is supported by government spending), according to our estimates, will continue to decline to $47 billion (-11%), from $53 billion, in 2022.
For annual real GDP growth, we improve our previous estimate from 2.7% to 4% (equivalent to 74% of the 2021 real GDP level).
However, given the possibility of a significant renewal of electricity shortages during the heating season and the risks of new terrorist attacks from the Russian Federation (following the example of the explosion of the Kakhovska hydroelectric power station and the subsequent shelling of the ports of Odesa and on the Danube River), prospects for an active recovery of real GDP by the end of the year may deteriorate..
Inflation. We are significantly improving our inflation forecast (CPI) in 2023 to 6-7% (versus the previous forecast of 11%), given the significant slowdown in prices in August. Prices for Ukrainian exports, as we predicted, have bottomed out, so we maintain our forecast for a slowdown in industrial inflation (PPI) of 24%. Headline inflation (GDP deflator) will fall to 19.5% in 2023, compared to the previous forecast of 24%.
Salary. Given the continuation of active hostilities throughout 2023, we maintain our assessment that the average monthly salary in the country will resume to UAH 16,000–17,000.
Recall that the pre-war wage level in the country reached $514 (average for 2021). Since the start of the full-scale invasion, wages in the country have fallen for just three months, bottoming out at $400 in June 2022. They have been steadily recovering since then. In June 2023, wages in the country resumed to $445 (+12.5% per year from the bottom point of the decline), and by the end of 2023 we expect wages to reach $524.
Change in harvest forecast 2023/24: According to the June estimate of the Ukrainian Grain Association (UGA), a decline in the grain and oilseed harvest was expected to 67-68 million tonnes compared to 73 million tonnes last year (-5-10% yoy). However, against the backdrop of the progress of the harvest campaign, along with the persistence of favorable weather conditions for late crops, in its September estimate, UGA significantly improved its forecast for the current year - to 80.5 million tonnes, or +10.2% compared to last year.
Budget. The trend of implementation of the 2023 state budget for eight months (UAH 1,338 billion of own revenues, UAH 317 billion of grants, a total of UAH 1.65 trillion) clearly shows that it will be exceeded by 53% relative to the initial version of the budget adopted by parliament, or by 30% relative to the already revised “April” version of the document.
According to our forecast, by the end of the year, the state budget’s own revenues will amount to about UAH 2.4 trillion (+35% to the current plan of the Ministry of Finance - UAH 1.77 trillion). Considering the potential receipt of an additional UAH 260 billion in grant assistance, in addition to the UAH 317 billion already received, total budget revenues will exceed UAH 2.6 trillion.
Total expenses, according to our estimate, will amount to UAH 4 trillion (+30% to the figures in the law), which will create a fiscal budget gap of UAH 1.6 trillion ($43 billion UAH in foreign currency equivalent at the current NBU exchange rate).
Balance of payments. We are improving the forecast for exports of goods to $34.5 billion (+5% compared to the July estimate). The forecast for imports of goods was increased to $64.2 billion (+$2.8 billion compared to the July estimate). Overall, the trade balance (goods) deteriorates to -$30.6 billion versus -$28.1 billion in the base case scenario (-$2.5 billion). The trade balance (goods and services) will be -$38.1 billion in 2023 (versus -$23.7 billion in 2022).
The current structure of the balance of payments, which emerged during the war, continues to stabilize and adapt. It follows the deficit in private sector operations of -$26.5 billion is financed by international support ($46 billion). At the same time, the main factors shaping the outflow of currency from the country from the private sector remain unchanged: the growth of the trade deficit, the continued significant expenses of Ukrainian refugees abroad and the high demand for cash currency as a form of savings.
The balance of public sector operations in 2023 can be estimated at +$28.4 billion excluding grants and +$43.6 billion including them. If the attraction plan is implemented and the annual volume of interventions is at the level of -$26.3 billion, international reserves by the end of 2023 will be at the level of $45.5 billion.
The net inflow of currency into the country, taking into account all factors, in 2023 will be $17 billion.
Exchange rate. We expect the NBU to maintain its fixed exchange rate policy at UAH/USD 36.57 throughout 2023. Until the end of 2023, the exchange rate will continue to serve as the main “anchor” of sentiment among the population and business.
2024
GDP. We forecast that real GDP growth will accelerate to 5% next year, while fighting is likely to continue throughout 2024. We optimistically admit the possibility of partially unblocking Odesa seaports for the export of the entire range of products, which, if the project is fully implemented, will significantly expand and further accelerate economic recovery.
Inflation. We expect the Consumer Price Index to range between 5-8% for the full year 2024, while the Producer Price Index will average 10-12% for the year. The GDP deflator for 2024 is 10.5%.
Budget. According to the law on the state budget 2024 presented by the government, revenues will amount to UAH 1.75 trillion, expenses - UAH 3.3 trillion, and the deficit, respectively, - UAH 1.59 trillion. The main conclusion: all three indicators are 5-15% higher than the planned budget indicators for 2023, but already lower than the actual budget implementation figures for this year. Therefore, in the 2024 budget, as in the current year’s budget, we expect to see a “hidden trillion hryvnia” of additional expenses.
Salary. If the official exchange rate remains at UAH/USD 36.57 in Q3, our forecast for the currency equivalent of the average salary in 2023 is $460.
Balance of payments. The structure of the balance of payments in 2024 will be largely a continuation of the structure that emerged in 2023. Thus, the deficit in private sector operations of -$26.9 billion is financed by international support ($39 billion). At the same time, the preservation of the deficit in private sector operations at the 2023 level is due to the relative stability of the balance of goods - exports will decrease by 1.5%, to $32.3 billion, and imports will increase by $2.7%, to $65.9 billion. Balance of services , on the contrary, will improve in 2024 to -$1.4 billion (by 81.4% from -$7.4) due to a decrease in the forecast import of services to $18.6 billion. The balance of primary income is estimated in 2024 at the level of 2023 - $7 9 billion (+3%). The balance of secondary income will decrease by 27% compared to 2023 - to 18.1 billion.
The balance of public sector operations in 2024 is estimated at +$21.4 billion excluding grants and +$36.4 billion including them.
If the attraction plan is implemented and the annual volume of interventions is at the level of -$30.7 billion, gold and foreign exchange reserves by the end of 2024 will be at the level of $56.6 billion.
The net inflow of currency into the country, taking into account all factors, in 2023 will be $11 billion.
Exchange rate. We expect the exchange rate to remain at UAH/USD 36.57 until the end of 2023. While in Q2 2024, depending on security risks and the achieved KPIs for the currency liberalization strategy, a return to a floating exchange rate is possible. Thus, in Q2 2024 we expect a devaluation of up to 6% with its gradual increase to 10-11% at the end of the year (UAH/USD 40.3-40.6 [+- UAH/USD 1]) and the average annual rate for the next year at the level of UAH/USD 38.3.
In other news, I have inherited an Iphone and am enjoying playing silly games with it.
