The document provides a macroeconomic forecast and update on monetary policy for Ukraine. It summarizes key indicators for 2018-2021, including real GDP growth of 2.5% in 2019 slowing from 3.3% in 2018 before picking up in future years. Inflation is forecast to remain around the 5% target. Fiscal policy will continue to be restrained with the budget deficit around 1.5% of GDP. The current account deficit is projected to remain in the 3-4% range despite counterbalancing domestic and external factors. Monetary policy has been tight but began easing in 2019 to ensure hitting inflation targets while monetary conditions ease over the forecast horizon.

1. Macroeconomic Forecast and
Monetary Policy Update
Kyiv, 09 July 2019
Sergiy Nikolaychuk
Director of Monetary Policy and Economic
Analysis Department

2. Key macroeconomic indicators in April Inflation Report
Source: Inflation Report, April 2019, in brackets – previous NBU forecast (Inflation report, January 2019)
2
2018 2019 2020 2021
Real GDP, change, % 3.3
(3.3)
2.5
(2.5)
2.9
(2.9)
3.7
(3.7)
Nominal GDP, UAH bn 3 559
(3 553)
3 970
(3 965)
4 342
(4 336)
4 750
(4 744)
CPI, y-o-y, % 9.8 6.3
(6.3)
5.0
(5.0)
5.0
(5.0)
Core CPI, y-o-y, % 8.7 5.0
(5.0)
3.7
(3.6)
3.7
(3.7)
Current account balance, USD bn -4.5
(-4.7)
-4.9
(-4.5)
-5.8
(-5.6)
-6.7
(-6.2)
% GDP -3.4
(-3.6)
-3.3
(-3.1)
-3.6
(-3.6)
-4.0
(-3.9)
BOP (overall), USD bn 2.9 -0.3
(-1.1)
-0.1
(-0.1)
-0.7
(-0.7)
Gross reserves, USD bn 20.8 21.2
(20.6)
21.9
(21.4)
21.8
(21.4)

3. The Ukrainian economy has been recovering at a solid pace
despite military conflict headwinds
 In 2018, GDP grew by 3.3% thanks to favorable terms of trade, robust domestic demand and
record harvest of crops
 In 2019, the growth is forecast to temporarily decelerate to 2.5% due to waned effect of record
high harvest, less benign external conditions and tight monetary and fiscal policies
 In the forthcoming years, the growth will pick up as political uncertainty abates and monetary
policy eases
 Compared with April forecast: better terms of trade, easier global financial conditions, stronger
domestic demand, higher grains harvest
Contributions to Real GDP Growth, pp
Source: SSSU; NBU estimates and forecast (April 2019 IR).
3
-9.8
2.4 2.5 3.3 2.5 2.9 3.7
-15
-10
-5
0
5
10
2015 2016 2017 2018 2019 2020 2021
Consumption Investment
Net exports Inventories
GDP
Source: SSSU, NBU staff estimates.
Index of Key Sectors Output, cumulative, % yoy
-4
-2
0
2
4
6
8
05.17 11.17 05.18 11.18 05.19
Agriculture Industry Construction
Domestic Trade Transport
1.9
IKSO, % yoy

4. Fiscal policy has largely been in check over the last four years;
in 2019-2021, fiscal policy will continue to be restrained
Consolidated Budget Balance, % of GDP Public Sector Deficit, UAH bn, and Public
Debt-to GDP Ratio, %
Source: MFU, NBU calculations and forecast (Inflation Report
April 2019).
Source: MFU, SSSU, NBU calculations and forecast
(Inflation Report April 2019).
 In 2018, the general government deficit moderately widened, spurred by larger social spending (pension
expenditures and wages) and capital expenditures. However, the deficit remained well below the IMF
target and the primary surplus was preserved
 Given also favorable FX market performance, this helped the public debt to GDP ratio to slide further,
gradually approaching 60% threshold
 The consolidated fiscal deficit is forecast to remain in the range of 1.5% of GDP in 2019-2021 primarily
because of the Government's limited capacity to raise its public debt during the peak pay-off period
4
-4.5
-1.6
-2.3
-1.4
-1.9 -1.5 -1.5 -1.5
-6
-4
-2
0
2
4
2014 2015 2016 2017 2018 2019 2020 2021
Structural balance excluding transfers with NBU
Cyclical balance
Total balance
Primary balance
"+" surplus
61
0
20
40
60
80
100
0
50
100
150
200
250
2014 2015 2016 2017 2018 2019 2020 2021
Bank recapitalization & other
Naftogaz
General government deficit
Public debt, % of GDP (RHS)

5. CA deficit remains in the range of 3-4 percent of GDP as domestic
and external factors counterbalance each other
 Imports continues growing fast, driven by solid consumer and investment demand
 In 2019, CA deficit is almost unchanged: better ToT and large stocks of record high corn harvest
are offset by the slowdown of MTP’s economies which puts drag on exports and remittances
 In 2020-2021, CA deficit will widen due to a decrease in pipeline transportation, lower than record
2018 grain harvests and reviving investment activity after the elections
 Compared with April forecast: better terms of trade, higher grains harvest, stronger domestic
demand, precautionary gas imports
Current Account Balance
Source: NBU, Inflation Report April 2019.
Trade Balance and REER of the Hryvnia
Source: NBU, Inflation Report April 2019.
5
-2.1
-6.0
-7.9
-8.7
-3.4
1.8
-1.4 -2.2
-3.4 -3.3-3.6 -4.0
-20
-15
-10
-5
0
5
2010 2012 2014 2016 2018 2020
USD bn as % of GDP
0.7
0.8
0.9
1
1.1
1.2
-30
-20
-10
0
10
20
2007 2009 2011 2013 2015 2017 2019 2021
Energy balance, USD bn
Trade balance (w/o energy goods), USD bn
REER (12.1999=1), RHS

6. After the 2014-2015 crisis, investment demand was the initial
driver for the recovery in imports
CA Balance and Imports by BEC, 2008=100 CA Balance and Imports by BEC, 2013=100
 During 2009 - 2013, buoyant consumer demand, mainly on cars and non-durable consumer
goods, was the key factor, driving the widening of the current account deficit
 Investment growth also contributed in 2011-2012, but it was partly boosted by Euro-2012 football
championship projects
 After 2014-2015 crisis, the CA deficit has been also gradually widening. However, unlike in the
previous periods, it was mainly driven by robust investment activity, including due to high demand
from agricultural sector and green energy projects
Source: NBU. Source: NBU.
-10
-8
-6
-4
-2
0
2
0
20
40
60
80
100
120
2008 2009 2010 2011 2012 2013
Capital goods
Intermediate consumption goods
Consumer goods
Current Account Balance,
% of GDP (RHS)
6
-10
-8
-6
-4
-2
0
2
0
20
40
60
80
100
120
2013 2014 2015 2016 2017 2018
Capital goods
Intermediate consumption goods
Consumer goods
Current Account Balance,
% of GDP (RHS)

7. In 2018, reserves reached a 5-year maximum. However, large public
debt repayments will put a drag on further reserve accumulation
 In 2018, FA inflows were generated by both public and private sectors, exceeding the CA deficit.
This allowed to increase international reserves to a 5-year maximum of USD 20.8 billion as of
end-2018
 In 2019-2021, FDIs and debt capital inflows to the private sector are forecast to increase.
However, due to peak repayments of external public debt, the overall balance of payments is
expected to be in a moderate deficit, limiting the building up of reserves
 Compared with April forecast: termination of IMF SBA program, higher portfolio investments into
Government bonds in UAH
Gross International Reserves, USD bnFinancial Account (FA): Net Inflows, USD bn
Source: NBU, Inflation Report April 2019. Source: NBU, Inflation Report April 2019.
7
3.3 2.6 2.4 2.9 3.0 3.0
-4
-2
0
2
4
6
8
10
2016 2017 2018 2019 2020 2021
Others FX cash outside banks
Public sector Net private debt flows
FDI FA balance (IR January)
FA balance (IR April)
13.3
15.5
18.8
20.8 21.2 21.9 21.8
0
1
2
3
4
5
0
5
10
15
20
25
2015 2016 2017 2018 2019 2020 2021
Reserves, $ bn (IR April)
Months of future imports, RHS (IR April)

8.  Monetary policy stance in 2017-2019 remained rather tight. The real key policy rate ranged from
10% to 11% in 2019 – far above the neutral level (3-4%)
 Yields on hryvnia government bonds in real terms are among the highest across emerging markets
Real interest rates are high compared with other EM countries
Nominal and Real NBU Key Policy Rate*, % pa
* Nominal rate is NBU’s average rate on 14-days CDs.
** Real ex ante is nominal rate deflated by inflation expectations
of fin. analysts.
# Real ex post is nominal rate deflated by current core CPI.
Source: NBU.
Real Sovereign Bond Yields in Selected EM*, % pa
* Real interest rate is calculated as a difference of average
monthly 1-year bond yield on the primary market and inflation
forecasts as of end-2019. For Ukraine ‒ based on NBU`s
estimates.
Source: DekaBank, Consensus Economics, Thomson Reuters,
Bloomberg, NBU`s estimates.
8
0
3
6
9
12
15
18
21
01.17 07.17 01.18 07.18 01.19 05.19
Nominal* Ex ante** Ex post#
-10
-5
0
5
10
15
Ukraine
SouthAfrica
Indonesia
Russia
India
Brazil
Thailand
Turkey
China
Romania
Chile
Poland
Hungary
Argentina
December 2018
June 2019
J.P. Morgan EMBI+ (June 2019)

9. 9
In April 2019, the NBU started the easing cycle.
However, its evolution is contingent on inflation risks
17.5
18.0
18.0 18.0 18.0 18.0
17.5
17.5
12
13
14
15
16
17
18
19
20
21
07.18 08.18 09.18 10.18 11.18 12.18 01.19 02.19 03.19 04.19 05.19 06.19
Key rate, %
Monetary Policy stance is sufficiently tight to bring
inflation back to its mid-term target
Monetary Policy
tightening as a
reaction to:
 higher-than-
expected domestic
demand
 less interest on the
side of investors in
Ukrainian
sovereign debt
 inflation
expectations that
continue to exceed
the NBU’s inflation
targets
Monetary Policy
tightening in
order:
 to neutralize
increase in
external risks:
 higher pressure
on the
currencies of
developing
economies due
to capital outflow
 escalation of
large-scale trade
conflicts
Monetary Policy easing
because of:
Postponing of Monetary Policy
easing because of:
 steadily declining of
inflation towards the target
of 5%;
 benign situation on the
financial market;
 improving inflation
expectations;
 other factors behind the
further decline in inflation:
• slower growth in wages;
• hryvnia appreciation;
• lower global prices for
natural gas;
• larger supply of both
domestic and imported
food products
 signs of higher-than-expected
domestic demand
 raised threats to financial stability
due to:
• speculative information about
external public debt in the media;
• delay of the IMF financial support;
• current court proceedings
(PrivatBank)
 external risks that remain relevant:
• global recession and lower
commodity prices;
• escalation of trade conflicts;
• uncertainty over the volume of gas
transit through Ukraine;
• military conflict development and
new trade restrictions introduced
by Russia

10. Monetary conditions ease on forecast horizon, but ensure the
hitting inflation targets in 2020-21
10
in ( ) – previous forecast (IR, January 2019)
average 2018 2019 2020 2021
REER,
% change
5.9 8.6
(+6.3)
-0.4
(-0.6)
-1.8
(-2.0)
REER index (1.2016=1)
(Compared with April forecast:
better ToT, higher portfolio investments
into Government bonds in UAH)
0.95
1.00
1.05
1.10
1.15
1.20
1.25
IV.16 IV.17 IV.18 IV.19 IV.20 IV.21
REER REER previous
appreciation
0
2
4
6
8
10
12
IV.16 IV.17 IV.18 IV.19 IV.20 IV.21
real policy rate neutral
Real policy rate*, %
* deflated by model-based inflation expectations
!!! The NBU is going to publish projected
path of key policy rate in July Inflation
Report

11. The NBU remains committed to a floating exchange rate policy
 The NBU continues to play an active role in the FX market, but its interventions are performed to
achieve clear and specific tasks – smooth exchange rate volatility, replenish international reserves,
and enhance monetary policy transmission
 Over the last couple of years, hryvnia has strengthened against the currencies of MTP
 The new currency regulation system has started working on 7 February 2019. It deregulates
investing procedures, eases cross-border transactions with currency valuables, and enlarges the
list of authorized FX operations
Reaction to FX Market Pressures: Reserves vs
Exchange Rate, as of 08.07.2019
Source: NBU calculations.
11
International Reserves and Adequacy
Criteria, %
Source: NBU calculations.
0
50
100
150
200
250
0
5
10
15
20
25
І.16 III.16 І.17 III.17 І.18 III.18 I.19 II.19
International reserves, USD bn
In months of future imports (normalized to 3m), RHS
As a ratio to 20% of broad money, RHS
As a ratio to short-term debt, RHS
In percent of composite IMF measure, RHS
0
5
10
15
20
25
30-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
I.08 I.09 I.10 I.11 I.12 I.13 I.14 I.15 I.16 I.17 I.18 III.19
Ratio of interventions to gross reserves, %
UAH per USD (end of quarter, RHS, reverse order)

12. In 2018, consumer inflation slowed down to a 5-year minimum and
temporary surged in April-May 2019
 In April - May 2019 disruptions to the supply of oil products and speculative demand for certain raw
food products due to their limited supply drove the acceleration in the growth of fuel and raw food
prices
 By contrast, core inflation declined more tangibly than projected, including due to the NBU’s tight
monetary policy
 Stronger Hryvnia also contributed to improving inflation expectations despite elections
12
Source: SSSU, NBU.
Headline and Core Inflation, % yoy
Source: NBU, GfK Ukraine surveys.
Inflation Expectations for the Next 12 Months, %
0
5
10
15
20
01.17 05.17 09.17 01.18 05.18 09.18 01.19 05.19
Inflation target range Headline CPI Core CPI
0
5
10
15
20
01.17 05.17 09.17 01.18 05.18 09.18 01.19 06.19
Banks Corporates
Households Financial analysts

13. Monetary policy is directed to bring inflation to the target range
in 2020
Headline CPI, % yoy
Source: NBU Inflation Report, April 2019.
13
(Compared with April forecast: stronger ER and lower gas prices vs
robust domestic demand growth)
0
2
4
6
8
10
12
14
16
18
II.17 IV.17 II.18 IV.18 II.19 IV.19 II.20 IV.20 II.21 IV.21
Tolerance bands
Target
Current forecast
Previous forecast
Forecast
Policy
relevant
horizon

14. Key messages
 Ukraine’s economy embarked on the recovery path in 2016, thanks to improved
macroeconomic management, strong support from donors, and a favorable external
environment
 Disinflation successfully proceeds, but its speed is altered by idiosyncratic shocks, further
adjustment of administered prices and recovering wages and domestic demand. Tight
monetary policy will ensure inflation falls back into the target band over the forecast
horizon
 Fiscal and external sustainability have improved remarkably over the last few years, but
risks remain, stemming from a peak in the domestic political cycle, potential risk of a full-
scale global trade war and global recession
 The longer-term prospects of the economy remain strongly dependent on the realization
of key structural reforms, which have to tackle major weaknesses such as the poor
business climate, unfavorable demographics and deteriorating infrastructure
 NBU policy efforts will focus on securing price and financial stability, revamping the
banking system and liberalizing the capital account
14

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