The Ukrainian economy continues to exceed expectations by a significant margin thanks to uninterrupted flows of international financial aid. GDP growth may exceed 5% this year, as the better safety situation helped improve business sentiment.

On the demand side, the recovery is upheld by household consumption. A gradual recovery in real incomes combined with higher propensity to consume make private spending a powerful engine for recovery.

The Kyiv-based investment boutique ICU expects security risks will continue to diminish but the base case does not assume a rapid improvement that could lead to a wave of investments and a large-scale return of refugees.

Ukraine’s counteroffensive have been underway for more than a month, but has made disappointingly little progress. Russia was given eight months to dig in and used the time effectively to build strong and deep defences.

Another issue that remains hazy is that casualties Ukraine is sustaining. Until the start of the counteroffensive Ukraine Armed Forces of Ukraine (AFU) was on the defence which has a low attrition rate, whereas now the AFU is on the offensive and can expect to lose three men for every one Russian killed. The government keeps its casualty rates a closely guarded secret, but there are reports that losses are high.

Ukrainian President Volodymyr Zelenskiy has said that he expects the counteroffensive to continue until the autumn although there is reportedly some frustration in Washington at the lack of progress.

However, the economy continues to improve. There has been a remarkable slowdown in inflation, and CPI will decelerate to 11% by end-2023 on a combination of supportive factors and will likely stay in the range of 10‒13% in 2024. The bright inflation prospects leave the NBU little choice but to start monetary policy easing from July.

“We expect the key policy rate to decline to 20% by the end of the year,” ICU said in a note. “The huge external trade deficit will remain the key economic risk in the foreseeable future, but foreign loans and grants are set to be sufficient to cover the gap. They also helped the NBU grow its reserves to an all-time high, and we expect that reserves will increase further in 2H23 and in 2024.”

The NBU is becoming increasingly inclined to introduce some degree of exchange rate flexibility so as to let market forces partially reduce external imbalances. Yet, the NBU is expected to be prepared to move away from the fixed exchange-rate regime only in late 1Q24, and the official exchange rate will remain unchanged at UAH36.6/$ till the end of 2023.

The performance of the state budget remains broadly in line with the government’s plan; external debt and grants remain the only source of the deficit financing. Public debt-to-GDP will approach 90% in 2023. However, the benign debt-servicing schedule implies high indebtedness is not creating liquidity pressures on public finances.

Economic performance in 1H23 was well above beginning-of-the-year consensus estimates. Economic activity now seems to be settled at 74‒76% of the level of 2021, which was the last full, pre-war year. There are good reasons to expect this ratio will be maintained though to year-end, implying GDP growth of 5‒6% for full-2023. Recent agriculture statistics confirm this assessment. The sector was expected to be a significant drag on economic growth, but early harvesting statistics show grain and oilseeds output will be down by less than 10% Y/y, much better than the early-year estimate of a 15‒20% decline.