Page 16 - Ukraine OUTLOOK 2024

• 2.2 FX
The current recovery is due to the increased resilience of companies and households during the war, contributing to the recovery of domestic demand and improved consumer and business sentiment, according to the IMF.
Ukraine's currency market has remained generally stable thanks to international financial support. International reserves exceeded expectations. Year-to-date foreign direct investment (FDI) inflows of about $2bn as of December 2023 and a lower-than-expected outflow of foreign currency from the banking system also helped reinforce a solid international reserves position.
The IMF praised the National Bank of Ukraine’s successful transition from the exchange rate peg toward a managed exchange rate flexibility regime on October 3, 2023, which represents an important step in strengthening resilience to external shocks.
They agreed that continued evidence of sustained disinflation and stability in the FX cash market could support further easing in monetary policy.
The exchange rate has since remained broadly stable in 2023, supported by NBU FX sales in a market still dominated by the NBU. The spread between the cash and official exchange rate has averaged in the 3-5% range throughout the year. This comes against a backdrop of a stable FX market due to robust external donor support, measures to ease demand on FX cash market and the stronger economic outlook.
The risk of a significant cut in foreign sourced financial aid is low, says Ukrainian investment bank ICU, which sees Ukraine securing at least what is needed to keep the country’s external accounts fully balanced throughout 2024 (circa $40bn). However, as of December 2023 the two main packets of aid worth $61bn and €50bn from the US and EU respectively had not been approved. Ukraine’s Ministry of Finance says $29bn of the 2024 funding was still unaccounted for.
If the funds do come that means the NBU will remain in a position to keep the FX market firmly under control and may even take decisive FX liberalisation steps. Also, all preconditions are now in place for managed and gradual hryvnia depreciation. ICU sees the end- 2024 exchange rate at UAH41/$.
Still, a managed, moderate hryvnia depreciation during 2024 is the most likely scenario, according to the analysts.
ICU says the NBU will be in a position to keep the FX market firmly under control next year without tapping its existing reserves if Ukraine receives just $28-30bn in external financial aid.
This looks realistic. In practice, the central bank should have the resources to keep the hryvnia even at the current level up to end-2024. So far, the NBU showed very little appetite for hryvnia weakening and for exchange rate volatility since it declared a move to a managed flexible exchange rate regime in early October. Yet, in our view, the NBU will be inclined to let the hryvnia depreciate gradually so as to address the growing risks related to a huge and unsustainable external trade deficit.
Dragon Capital said in December that the hryvnia is expected to weaken a bit more in 2024 than the ICU stated, yet the year’s average rate will likely reach UAH37.3 per dollar, against UAH36.5 in 2023.
16 UKRAINE OUTLOOK 2024 www.intellinews.com