Dragon Capital publishes 2026 macro forecast
Baseline Scenarios and Key Assumptions
Our economic forecast assumes that active hostilities will continue at least through the end of 2025. Recent developments suggest that the conditions necessary to compel Russia to end the war are unlikely to emerge in the near term. However, there remains a possibility that Russia may return to negotiations later, potentially following more decisive actions by the United States. In light of this, we develop two scenarios for 2026:
(i) a continued war scenario, where hostilities persist through the end of the year and are accompanied by renewed attacks on critical infrastructure, and
(ii) a settlement scenario, based on the current battle lines, where a lasting and stable ceasefire is achieved at the beginning of the year, though parts of Ukraine’s territory remain temporarily occupied.
Cooperation with the IMF and External Financing
As previously noted, Ukraine is set to receive more than sufficient external financing this year, supported by the ERA mechanism—allowing access to future income from frozen Russian assets—and other financial aid packages mobilized under the ongoing IMF program, which runs through Q1 2027.
The IMF program assumes a reduction in security risks by end-2025 and, accordingly, a sharp decline in financing needs in 2026. If hostilities continue into next year, the confirmed external financing will fall short, and there will be too little time left within the current IMF program to achieve its core goal of restoring the country’s external resilience.
In the absence of clear signs of a near-term end to the war, we expect that the current IMF program will be replaced by a new arrangement by the end of 2025, likely a four-year Extended Fund Facility covering 2026–2029. We estimate the size of the new program at around $10 billion, including $2.8 billion in 2026—slightly exceeding the amount allocated under the current program. Nonetheless, successful cooperation with the IMF remains a crucial anchor for securing broader financial support from partners and international institutions, including the mobilization of additional resources for 2026 and beyond.
We estimate Ukraine’s additional external financing needs in 2026 at approximately $8 billion, assuming that partners continue to provide adequate military aid to support national defense. This would allow defense-related budget expenditures to remain at 2025 levels, keeping the overall fiscal deficit near $44 billion. However, securing sufficient funding for the entire duration of the new IMF program will be a prerequisite for its approval.
Ensuring adequate external financing in 2026 and beyond is one of the key challenges facing the authorities, as it is critical to financial and macroeconomic stability. We expect the government to fulfill all conditions under current support programs in order to access already committed budget support of $79 billion for 2025–2026. Without this, further external assistance would be difficult to secure. Additional financing needs could be reduced through fiscal measures aimed at limiting tax evasion, broadening the tax base, and improving spending efficiency, including in the defense sector.
Economic Growth
Real GDP growth slowed to 0.9% y/y in Q1 2025, down from 2.9% in 2024 and 5.5% in 2023, due to the fading impact of earlier growth drivers (macroeconomic stabilization and the full reopening of Black Sea ports) and war-related losses in production capacity. Nonetheless, growth remains supported by strong consumer demand and further expansion of domestic military production.
We expect growth to accelerate in H2 and reach 2.0% for the full year, helped by the absence of significant electricity shortages or infrastructure destruction. However, a shortage of skilled labor will continue to weigh on economic potential.
In 2026, we forecast real GDP growth will slow to 1.5% y/y under the continued war scenario. Defense industry production will remain the main growth driver, provided continued budget and partner financing—particularly under the “Danish model.” According to our estimates, the sector’s output could reach $20 billion in 2026, more than doubling from $9 billion in 2024. Consumer demand, supported by rising nominal wages and slowing inflation, will also remain robust. However, ongoing production losses due to the war and labor shortages will constrain broader growth.
Under the settlement scenario, GDP growth could accelerate to 5.0% y/y, driven by a rebound in consumption and investment amid easing security risks, the start of reconstruction, and partial return of refugees. Export growth, including military tech (miltech) products, is also expected to pick up. On balance, these positive effects should outweigh the negative economic impact of lower defense spending.
Inflation and Policy Rate
As expected, the inflation trend reversed in June 2025, with CPI slowing to 14.3% y/y from 15.9% in May, following 15 months of acceleration. The reversal was driven by easing underlying pressures and a high base effect in regulated prices. Contributing factors include stable energy conditions, fading impact of past increases in electricity costs, a stable FX market, and tighter monetary policy from the National Bank of Ukraine (NBU). We expect underlying pressures to remain contained, although rapid wage growth will continue to fuel demand. These factors, along with a high base in food prices, should contribute to further CPI deceleration to 9.3% y/y by end-2025.
In 2026, we expect inflation to keep declining in the absence of supply shocks in agricultural commodities. We forecast CPI to slow to 5.3% y/y under the continued war scenario and to 7.5% under the settlement scenario. The higher inflation outlook in the latter reflects stronger demand-side pressures and expected increases in utility tariffs.
We anticipate that the NBU will begin easing monetary policy this year as inflation steadily declines, cutting the policy rate by 100 bps to 14.5%. With inflation continuing its downward path in both scenarios in 2026, we expect further rate cuts. However, the pace will be slower in the settlement scenario due to stronger underlying inflationary pressures. We project the policy rate at 11.5% in the continued war scenario and 12.5% in the settlement scenario.
Balance of Payments and Exchange Rate
We now forecast the trade deficit to widen further in 2025 to a record $44 billion, from $34 billion in 2024. This deterioration stems from lower grain exports (due to normalized harvests and reduced stockpiles) and higher imports of natural gas, dual-use goods, energy equipment, and personal parcels (now included in import statistics). Excluding parcels, import growth is driven by urgent economic needs and partly financed by capital inflows, posing no immediate threat to the balance of payments.
In 2026, we expect the widening trade deficit trend to level off in the continued war scenario, though the deficit will remain high at $44 billion due to elevated import needs. In the settlement scenario, the deficit is projected to narrow to $36 billion, supported by export recovery, including miltech supplies to partner countries. At the same time, reduced imports of gas, weapons, and dual-use goods will be largely offset by higher imports of reconstruction-related and consumer goods.
A surprising positive development in early 2025 was the sharp drop in private sector capital outflows—from $5 billion in the first five months of 2024 to near zero in the same period of 2025. The exact reasons are unclear, but likely factors include increased financing from international institutions to private firms, improved export revenue repatriation, and reduced unproductive capital flight following measures by the government and NBU.
We expect private capital outflows to remain moderate over the forecast horizon. Combined with strong external financial support, this should allow NBU reserves to remain elevated. We project NBU reserves to temporarily rise to $52 billion by end-2025 due to excess external financing, then decline in 2026 as accumulated buffers are used. Specifically, we forecast reserves to fall to $42 billion in the continued war scenario and to $45 billion in the settlement scenario—still well above the pre-war level of $31 billion.
This strong reserve position will allow the NBU to continue using exchange rate policy as a tool for meeting its inflation target and maintaining macro-financial and external stability. We maintain our expectation of moderate hryvnia depreciation against the U.S. dollar in H2 2025, amid lower inflation and seasonally stronger FX demand.
We forecast the exchange rate at 43.5 UAH/USD at end-2025 and 46.0 UAH/USD at end-2026 under the continued war scenario. Under the settlement scenario, the NBU is likely to maintain the exchange rate near 44.0 UAH/USD, reflecting stronger inflationary pressure but also an improved balance of payments position.