Hetmantsev spoke about the main challenges for the Ukrainian economy and expectations for 2025

The main challenge has been and remains a full-scale war. Today, despite the growing prospects for a peaceful settlement, no one knows when and under what conditions it will end, as it is influenced by a large number of factors, events, and political actors.

Direct and indirect challenges related to the war

The need to increase funding for the security and defense sector. There is currently some uncertainty about external military support, which may become apparent from mid-2025.

We are getting closer to a situation where allies' military stockpiles are approaching a critical level of depletion due to the need to maintain their own security, and their defense industry has not yet gained the momentum to renew the stockpiles of weapons and military equipment transferred to us for the partner armed forces and simultaneously produce enough new weapons to supply the Armed Forces of Ukraine.

Of course, according to our calculations, in 2025, the Ukrainian defense industry's own production capabilities should increase significantly, but we risk running into the same problem that was a serious challenge in the past year - the gap between the potential scale of production and the ability to finance military orders with the resources we have (currently, this difference is about 3 times, and there are risks of its growth to 3.5-4 times).

Energy will remain one of the major factors that will influence the development of the situation in 2025. The enemy will definitely continue its attempts to disrupt it, break the entire energy system into islands, and provoke serious consequences for the economy and business.

Another very important factor, which, unfortunately, is unlikely to be significantly improved, will be the shortage of labor against the backdrop of high structural unemployment. This issue cannot be resolved in a year or two. It is difficult to determine even the trend.

On the one hand, it may increase against the backdrop of a war of the current or even greater intensity, the destruction of more and more businesses, interruptions in energy and water supply, further outflow of people abroad, and a decrease in the number of people willing to return.

On the other hand, the deficit may decrease if the war ends or the intensity of fighting significantly decreases, creating opportunities for partial demobilization, stable operation of the energy and utilities sectors, revitalization of business activity and creation of new jobs, which may have some impact on the mood of refugees abroad.

It is also important to develop effective mechanisms for the active return of IDPs to the labor market, to launch government programs to support businesses, and to create an attractive environment for attracting investment.

The war will continue to restrain investment and lending activity. At the end of 2024 , business expectations for the next 12 months remained in the negative zone.

The reasons for this are the increased intensity of fighting, renewed power outages, labor costs, logistics, a significant shortage of skilled workers, etc. Of course, there is also room for gaps in the rule of law, including in the institutions that are supposed to support it.

These issues did not arise today, but at least I hope that in the area for which our specialized committee is responsible, thanks to the restart of the most problematic institutions (BES, Customs) and the continuation of reforms in the Tax Service, these shortcomings will be minimized.

However, I would now like to highlight another, no less important, emphasis: the restart of lending. Lending has been resuming since mid-2023, but its pace, especially lending to the real sector, cannot be considered satisfactory.

In November 2024, hryvnia loans to businesses were only 12% (+UAH 63 billion) higher than at the beginning of the war. Given the decline in foreign currency lending, as well as the share of lending to residents in GDP, the loan portfolio and loan penetration rate remain lower than at the beginning of the war.

The recovery in lending is extremely uneven across economic sectors. At the same time, the volume of the corporate NPL portfolio remained virtually unchanged this year (UAH 365.5 billion as of January 1, UAH 365.2 billion as of November 1). Given the weak stock market, sluggish corporate lending remains one of the constraints.

On inflation. The acceleration of inflation at the end of 2024 will undoubtedly fuel macrofinancial risks next year. The recent acceleration in inflation is based on many factors, including situational ones related to unfavorable weather conditions that reduced the harvest and supply of agricultural raw materials.

However, the war is increasing the fundamental pressure on producer prices, which is associated with higher business costs for labor and energy. Inflation will remain on the rise in the first quarter of next year. This poses certain challenges for currency stability.

However, despite the ongoing war and the systemic challenges associated with it, uncertainty about a peaceful settlement, we are entering 2025 with more confidence in terms of economic prospects and financial resources than a year ago.

We have a more realistic budget that takes into account the basic need to finance the security and defense sector for the entire year. We have more firm guarantees of funding from our partners for 2025, including a part of the $50 billion in proceeds from frozen Russian assets.

The expected volume of international assistance is about $38 billion, which corresponds to the average level of external financing since the beginning of the war. Finally, after Hungary takes over the presidency of the EU Council in 2025, we have every reason to hope for a significant acceleration of the EU accession negotiations.

Analyzing the main challenges, we can highlight the following expectations and tasks for 2025:

Maintaining macrofinancial stability

I want to reassure you right away that despite the acceleration of inflation and the weakening of the hryvnia at the end of 2024, there will definitely be no financial catastrophe, and macrofinancial stability will be maintained next year.

There is a big difference between how we are neutralizing the macroeconomic consequences of the war now and 10 years ago. Think back to 2014-2015, when the consequences for the economy were much worse in a much smaller theater of war.

Now, we have sufficient international reserves and a predictable situation with international aid next year. We have more confidence in budget financing (compared to the end of last year).

We have a professional monetary regulator that is pursuing a cautious policy of removing currency restrictions, managing exchange rate flexibility, and gradually returning to inflation targeting. The banking system is resilient, and the external public debt has been restructured.

Under the baseline scenario, the NBU expects inflation to slow down next year and return to the single-digit range. In terms of the exchange rate, the government forecasts about the same rate of devaluation next year as this year, at around 10%. This is a moderate pace of weakening of the national currency, which should not unbalance inflation expectations and will support our exports.

Accelerating lending, especially to the corporate segment

Given the needs of economic recovery and the high operational efficiency and profitability of the banking sector, the task of increasing bank lending should be given greater focus and intensification, primarily at the level of state-owned banks, without, of course, violating the fundamental principles of macrofinancial stability.

In the near future, the main efforts should be focused on further development and expansion of specialized subsidized lending programs (defense, energy, processing), credit support for SMEs in the territories that have been de-occupied and/or remain close to the active hostilities, support for IDPs, and reconstruction of damaged housing/infrastructure.

This can be achieved by expanding lending to priority areas by state-owned banks, completing the transformation of the Entrepreneurship Development Fund into the National Development Institution as a bank with a specialized mandate for post-war reconstruction, increasing the involvement of foreign financial institutions in economic recovery, and developing financial instruments that will support lending.

No less important is the task of intensifying the clearing of bank balance sheets from non-performing loans, including, but not exclusively, by changing approaches to the restructuring of such debt in order to speed it up, developing the NPL infrastructure market, improving bankruptcy procedures, and creating a specialized rehabilitation bank that would take over all or part of the new war NPLs, primarily in the segment of state-owned banks.

Undoubtedly, the key task for 2025 is to accelerate reforms and European integration

We have to use the time remaining in this cadence of the Verkhovna Rada and the Government fruitfully and efficiently to make maximum progress on this path. In terms of joining the EU, we must do everything necessary to open the first two negotiation clusters in the first half of the year, to complete the screening sessions to create all the conditions for opening negotiations on other clusters. We also have to finalize and close 55 indicators under the Ukraine Facility Plan in 2025.

It is not only about receiving the budgeted €12.5 billion, but also about approaching the completion of the first half of this program, which runs until 2027, and its possible (not mandatory) revision in a strong position, as well as approaching the full completion of the conditions stipulated in the EU-Ukraine Association Agreement.

Among the key priorities is to successfully pass four more reviews of the IMF cooperation program. The main thing for us here is that continuing to be part of the EFF program will send a powerful positive signal to other international partners of Ukraine and open new support programs with international financial organizations.

Of course, we will pay no less attention to our "homework" on reforms, including

- consolidating and deepening the successes on the de-shadowing track;

- Improving the business climate, including accelerating deregulation and further liberalization of the business environment, reforming the system of state supervision and control, digitalization of public services and interaction between the state and business;

- accelerating privatization, improving corporate governance of strategic state property based on the principle of "result orientation";

- qualitative development of a new system of public investment projects to improve it in relation to those included in the Unified Portfolio of Public Investment Projects and scheduled for implementation in 2026 and beyond.

Undoubtedly, we need to carry out the aforementioned reboot of the Customs and the BES as soon as possible, to strengthen the fight against corruption and generally improve the quality of public administration.

The sustainable operation and growth of the Ukrainian economy depends on whether we can fully meet its energy needs. In 2025, Ukraine will have to solve several important tasks simultaneously in this area:

- implement programs to restore capacities where it is: i) unavoidable; ii) necessary and appropriate, and attract assistance from international partners (both bilaterally and through the Energy Support Fund of Ukraine, which has accumulated more than EUR 1 billion in donor contributions since April 2022);

- increase energy production, construction of alternative energy sources (primarily wind farms, solar power plants, maneuvering capacities using gas / biomass);

- scale up programs for the development of distributed generation, less vulnerable to losses, involving and stimulating public and private businesses, the public sector, and households, while expanding the implementation of energy-saving measures aimed at reducing energy consumption;

- continue to work with European partners to increase technical capabilities to increase electricity exports/imports;

- strengthen the protection of critical energy infrastructure.

Our main common expectation and task for 2025 is to achieve a just and sustainable peace. Such a peace, on the one hand, can only be possible with firm security guarantees, a strong army and the development of the domestic defense industry, and on the other hand, with accelerated economic recovery after the war, including EU membership by 2030 as an achievable benchmark in case of fulfillment of negotiating requirements, increased concessional financing and investment in post-war recovery by partners.