The year 2025 will be one of great expectations along with hope for a sustained ceasefire agreement with russia. The US President-elect has yet to reveal his recipe for peace, which we expect after the inauguration. However, the growing economic and human toll of the war leaves no other options for the two sides but to seek a settlement and the sooner the better. Yet, we remain skeptical that a solution will be reached quickly. Rather, we expect that the Ukrainian economy will continue to operate under the conditions of a full-fledged war for most of the coming year.

Fortunately, the financial commitments made by Ukraine's key partners for 2025 are entirely sufficient to ensure that macroeconomic and financial stability is preserved and that businesses and households do not face significant economic challenges. The financial support from foreign partners will be primarily funded with interest incomes generated by russian frozen assets. This is a bold move in the right direction.

Economic growth will likely decelerate on fiscal consolidation and moderation in household income next year. Inflation delivered an upside surprise recently due to surging food prices, but good preconditions are in place for the CPI to decelerate to about 7% by the end of 2025, implying some roo for monetary-policy easing in 2H25.

Gaps in external accounts will remain significant, with the foreign trade deficit hovering near 18% of GDP and demand for FX cash from the population hitting all-time highs. Yet, foreign financial aid will be fully sufficient for the NBU to address the shortages in the FX market and keep it reasonably balanced. We see little appetite from the NBU for further near-term hryvnia depreciation. However, after inflation decelerates, the central bank may be more inclined to weaken the hryvnia in 2H25. In any case, we think depreciation vs US$ of more than 10% over the next 12 months can be completely ruled out under a baseline scenario.

Fiscal challenges will remain high as outlays on the army will continue to exceed 50% of state budget expenditures. Fortunately, foreign aid is estimated to be just sufficient to cover the planned fiscal gap of 19% of GDP in 2025.