ICU Bond Market Insight: September 9, 2022

Muddling Through the Labyrinth of War

Ukraine suffered huge losses in the first months of russia’s full-scale invasion. The economy clearly survived, but it is set to be facing numerous headwinds in the years to come. The loss of physical assets and human capital against the backdrop of a tense safety situation implies the recovery of real GDP is going to be marginal.

Inflation, expectedly, accelerated, but it did not spin out of control. The broad expectation is that it will start to slow in early 2023.

External imbalances are huge, as Ukraine lost a significant part of its export capacity and capital flight continues in sizable volumes. July’s one-time hryvnia depreciation had a quick positive impact on the FX market, but more rounds of depreciation may be needed through end-2023 to further slash excess demand for foreign currencies.

The Ukrainian economy will remain heavily dependent on international financial assistance in the coming years. Foreign grants and loans will be critically needed to patch the fiscal deficit and replenish NBU reserves. External funding will reach nearly US$30bn for 2022, but the inflow of aid is likely to decline next year. By our estimates, the economy will need at least US$20bn in 2023 to keep running relatively smoothly. A significant part of this amount is likely to come from the IMF. We assume no major changes in the war situation through end-2023.

RESEARCH TEAM: Vitaliy Vavryshchuk.

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