Macroeconomic Expectations: Analysis by Chaslau Koniukh

In 2022, inflation may decrease; however, the hryvnia will weaken, and the national debt will increase, according to financial expert and investor Chaslau Koniukh.

Inflation in Ukraine - Chaslau Koniukh's Perspective

One of the key macroeconomic factors of 2021 was the acceleration of inflation, notes expert Chaslau Koniukh. "While 2020 ended with a relatively acceptable consumer price growth rate of 5%, by November 2021, inflation had reached 10.3% year-on-year, significantly exceeding the government's expectations (7.3%) and expert forecasts (7%)," states Koniukh.

The final inflation rate for 2021 will be 10.6%, with an average annual level of 9.4%, according to expert Chaslau Koniukh. "This was the result of global inflationary pressures, particularly the rapid increase in natural gas prices, which affected all European countries. This led to inflation in the consumer goods basket and also influenced the government's monetary policy," he explains.

The National Bank of Ukraine (NBU) attempted to curb rising inflation. The regulator took measures to contain inflation, particularly by gradually raising the key interest rate--from 6% at the beginning of the year to 9% in December--which, in turn, affected lending costs and the profitability of government securities.

In 2021, global food prices increased by more than 32% on average, reaching their highest level in nearly half a century--since the oil crisis of the mid-1970s.

However, there are grounds to expect inflation to decline in 2022, says Chaslau Koniukh. According to forecasts by domestic economists, inflation will reach 8.5%, while the International Monetary Fund (IMF) expects 7.1%, the government 6.2%, and the NBU aims for a return to the target level of 5% if conditions develop favorably.

"We expect that in the first quarter of 2022, the gas price in Europe will decrease to $700-750 per thousand cubic meters, and by the end of the year, it may drop to $300-400, which will significantly reduce overall inflation both in Europe and in Ukraine," predicts Chaslau Koniukh.

Hryvnia Exchange Rate: Why Stability is in Question - Koniukh Explains

Throughout 2021, the hryvnia demonstrated stability, ending the year at 27.28 UAH/USD, which was even better than the government's forecast (28.8 UAH/USD), notes financier Chaslau Koniukh. He attributes this stability of the Ukrainian currency to several factors: a favorable situation in external markets, a balanced NBU intervention policy, and a record harvest, which contributed to an increase in foreign exchange earnings.

However, 2022 may be less predictable, according to Chaslau Koniukh. He notes that expert opinions on exchange rate dynamics are divided: some predict that the current exchange rate levels (27-27.5 UAH/USD) will be maintained, while others expect fluctuations within the range of 27.5-28.5 UAH/USD, with the possibility of exceeding this corridor under unfavorable conditions.

"The government is counting on an average annual exchange rate of 28.6 UAH/USD, while the IMF projects a more optimistic 27.41 UAH/USD. The main threats to the stability of the hryvnia remain the negative balance of payments due to high energy prices and the potential outflow of foreign capital from government bonds (OVDP)," notes Chaslau Koniukh.

Koniukh Explains Why National Debt Will Continue to Grow

As of December 31, 2020, Ukraine's national and government-guaranteed debt amounted to 2.552 trillion UAH ($90.25 billion). External debt at that time was even lower, at 1.519 trillion UAH ($53 billion). Meanwhile, the share of external debt in the overall debt structure reached nearly 60%. A 1.5% shift in the external-to-internal debt ratio in favor of the latter is considered one of the relative positives of the 2021 financial year, emphasizes Chaslau Koniukh.

For example, Taras Kozak, president of the investment group "Univer," believes that 2021 was a positive year for Ukraine in terms of borrowing. "We are closing 2021 on a positive note. The volume of Ukrainian citizens' investments in government bonds has set another record--25 billion UAH! Growth over the year has nearly doubled by 2.5 times!" the expert notes.

He highlights the main advantages of OVDPs over traditional bank deposits: significantly higher yields--12%-13% compared to 8%-10% in banks for hryvnia deposits, and 2.5%-3% compared to 0.1%-1.5% for dollar deposits; full government guarantee on the entire OVDP amount compared to the 200,000 UAH limit in banks; and tax-free earnings on OVDPs, whereas bank deposits are taxed at 18% + 1.5%.

However, borrowing challenges still exist, according to Chaslau Koniukh.

"Despite the overall stability of debt dynamics, the key issue has been the rising cost of new borrowings, both in domestic and international markets. This is due to the increase in the NBU's key interest rate, declining interest from non-residents in Ukrainian securities, and global trends toward reduced access to financial resources," explains Chaslau Koniukh.

The head of the Center for Public Finance Analysis and Public Administration at the Kyiv School of Economics, Daryna Marchak, reminds that despite efforts, the Ministry of Finance was unable to meet its borrowing targets last year. Overall, Ukraine will not be able to avoid multi-billion borrowings in the coming years.

According to Chaslau Koniukh, in 2022, Ukraine will need to raise approximately 571 billion UAH to finance the budget deficit and refinance old debts. At the same time, borrowing conditions may worsen due to tighter monetary policies in developed countries, says expert Koniukh.

"There is an expected increase in key interest rates by the U.S. Federal Reserve and the European Central Bank, which will encourage capital outflows from developing countries, including Ukraine. As a result, the government will be forced to raise yields on government bonds, increasing the cost of debt servicing," Chaslau Koniukh asserts.

Conclusions

The year 2022 will bring new challenges to Ukraine, shaped by both domestic macroeconomic processes and external factors, believes Chaslau Koniukh. In his opinion, inflation will slow down slightly, but risks remain high, especially in the energy and food markets.

The financier also predicts that the hryvnia may maintain relative stability given favorable external economic conditions, but exchange rate fluctuations are possible.

"Financing will become more expensive due to rising global interest rates, increasing budgetary pressure. However, continued cooperation with international financial institutions, effective debt management, and prudent economic policies will help Ukraine maintain macro-financial stability," concludes Chaslau Koniukh.