Macroeconomic landscape in 2025: key drivers and risks to watch out for.
At the beginning of 2024, we were well aware that it would not be an easy journey. The same description can confidently be applied to 2025. However, 2024 was not only about challenges but also about significant changes and achievements that mitigate risks for the following year and became possible through the synergy of efforts.
The partners' decision to redirect revenues from frozen Russian assets to benefit Ukraine is one such important example. This is the result of interaction, political will, effective diplomacy, and maximum focus and expertise on this issue from the Ukrainian side: the president, the government, and the National Bank.
The transition to flexible inflation targeting, the second year of non-monetary budget financing, the complete adaptation of the currency market to managed exchange rate flexibility, the easing of restrictions, the development of lending, and record numbers of program reviews by the IMF – these are just some of the achievements.
These changes lay the groundwork for economic recovery and strengthen the country's capacity on the path to victory. Incidentally, this is one of the goals of the IMF program. However, the risks generated by the war remain significant.
How we are closing the year 2024
Russian shelling of Ukraine's energy infrastructure has not managed to halt the Ukrainian economy. It is recovering despite greater energy deficits and lower harvests. The economy is largely supported by significant budget expenditures, which will remain substantial in the next year, considering the announced volumes of international aid. Consumer demand is slowly recovering, and the adaptability of businesses is truly impressive.
The uninterrupted operation of the banking system and the efforts of the NBU to maintain the stability of the currency market and curb inflationary processes form the foundation for recovery. According to our forecast, the economy will grow by about 4% in 2024.
Inflation is rising from the second half of 2024, but this trend is expected. Anticipating a reversal in the inflation trend, the NBU suspended the reduction of the discount rate mid-year. However, inflation is rising faster than we and most analysts had predicted, primarily due to the significant impact of drought and, consequently, the reduced supply of food products.
We are keeping a close eye on inflation, as there is a commitment to bring it down to the target of 5% within the policy horizon. We will discuss our actions and plans further.
International assistance is substantial, and the uncertainty regarding its sufficiency in 2025 has significantly decreased. This is good news. Since the beginning of 2024, Ukraine has received nearly $42.5 billion, and in 2025, it is expected to receive $38.4 billion.
Together with the government's borrowings on the domestic debt market, international aid enables financing the budget deficit. International reserves are sufficient to maintain the stability of the currency market. According to our forecast, by the end of 2025, reserves will amount to about $41 billion.
The task for 2025: transitioning to reducing inflation
The transition to sustainable inflation reduction will be supported by the exhaustion of temporary factors. The arrival of the new harvest will support the supply of food. Expenditures on energy autonomy will decrease, as businesses have already purchased equipment and incorporated expenses into prices. It is expected that inflation in partner countries will also decline, which will reduce "imported" inflation.
The monetary policy of the NBU will be an important part of this process. In December, the NBU raised the discount rate from 13% to 13.5% to contain inflationary processes in 2025 and maintain control over inflation expectations.
While the acceleration of inflation is primarily driven by temporary factors, we see that public attention to inflation is growing. Without a proper response from the NBU, this could lead to a deterioration in expectations regarding future inflation and, consequently, an escalation of the inflation spiral. It is crucial for the NBU to prevent this.
While those who have made criticizing the NBU their profession claim that the discount rate is ineffective, banks have already paused the reduction of rates on hryvnia deposits. The opportunity to protect savings through hryvnia deposits and government bonds remains. As a result, in 2024, there has been an increase in term deposits of the population in hryvnia, specifically, the hryvnia portfolio of government bonds held by citizens has grown more than 1.5 times.
It is essential for us that the hryvnia remains attractive for savings. In the coming months, the NBU will tighten its interest policy if signs of stable inflation processes and threats of expectation imbalances persist.
Another critical element in returning inflation to a downward trajectory will be maintaining the stability of the currency market. This does not mean that the exchange rate will remain unchanged. It will fluctuate in both directions in response to changing market conditions. At the same time, such fluctuations will be moderate and will not hinder our commitment regarding inflation.
The economy will continue to recover despite the consequences of war
We expect the economy to grow by 4.3% in 2025. The GDP growth dynamics will be supported by continued state incentives thanks to significant international aid and further recovery of domestic demand. Steady external demand for Ukrainian export goods and investments in recovery, particularly in the energy sector, will also contribute. This is not solely about international support.
Ukrainian banks are actively involved in the recovery of the energy sector through lending. As part of a joint memorandum banks have started financing business projects for energy needs amounting to over 8 billion UAH since June. The total financed generation capacity through loans provided to businesses exceeds 400 MW.
Increased competition among banks. We analyzed the reasons for loan refusals. It turned out that the primary reason was that the borrower found a better offer from another bank.
Loan rates for businesses are currently at pre-COVID levels - below 15%. Overall, since the beginning of 2024, the loan portfolio for enterprises has increased by more than 20%, and the portfolio for individuals has risen by nearly 40%. This has exceeded banks' expectations by twofold.
I am optimistic and convinced that the banking sector's contribution to economic recovery will be significant, particularly due to the accumulated resilience. The NBU will make every effort for this. Additionally, we will focus on developing sectoral lending. Specifically, in 2025, we plan to begin developing a strategy for mortgage lending.
A few words about the labor market. Enterprises report that one of the biggest challenges is recruitment. In certain regions, this issue is even more significant than security risks. Unfortunately, we forecast that this situation will persist. Discrepancies in the market will remain, despite a gradual increase in the number of resumes, a trend we have observed recently.
Stable demand for workers will gradually reduce unemployment levels. The shortage of workers will stimulate further increases in wages. It is expected that in 2024, real wage levels will reach figures seen before the large-scale war. The good news is that this will support consumption, which is a significant driver of economic recovery. However, in 2025, the pace of wage growth is expected to slow, which will help curb inflation.
The war remains the main generator of risks
Due to the war, risks of loss of people, territories, production, and the associated reduction of economic potential persist. The speed of the economy's return to normal conditions will depend on the nature and duration of the war.
Among other war-related risks are the emergence of additional budget needs, possible tax increases, further damage to infrastructure, primarily energy and port infrastructure, deepening migration, and expanding labor shortages in the labor market.
Positive scenarios may also materialize, related to the acceleration of Eurointegration processes and recovery efforts in the energy sector.
It is evident that uncertainty is enormous.
However, compared to the beginning of the full-scale invasion, this uncertainty has significantly decreased. Banks and payments operate smoothly. Energy workers have demonstrated their ability to perform wonders time and again and restore the energy system, while businesses and the population show exceptional adaptability.
The hryvnia serves as a full-fledged currency, remaining a measure of value, a means of payment, and a savings vehicle. The risks of receiving international financing have noticeably diminished. The NBU has transitioned to flexible inflation targeting and has committed to returning it to the 5% target within an acceptable policy horizon. Now, despite the war, we are implementing one of the most powerful reform packages in the history of independent Ukraine.
We, Ukrainians