Reading a year ahead in a country under pressure: a method rather than a forecast

Published annual outlooks for a country in Ukraine's position have a poor record, and the reason is structural rather than a failure of the forecasters. Too much of the outcome depends on decisions taken outside the country and on events that are not forecastable in principle.

What can be done usefully is to identify which variables the outcome depends on, weight them, and specify what would count as evidence in each direction. That is a framework rather than a forecast, and it is more useful than a number.

The variables that determine the outcome

External financing continuity. The largest by a wide margin. The civilian budget depends on it, and its absence would force an adjustment severe enough to overwhelm every other variable. Watch commitment schedules and disbursement pace rather than announcements.

Export route security. Determines foreign exchange earnings, which determine the currency, which determines inflation and therefore interest rates and therefore investment. A single chain, and the first link is the maritime corridor.

Energy system stability through winter. Determines industrial output and the cost base of every energy-intensive business.

Labour supply. The slowest-moving and most structurally consequential. It constrains the ceiling on any recovery and it does not respond to policy on an annual timescale.

The variables that are mostly noise

Monthly output figures, which are volatile, revised substantially and dominated by base effects.

Individual reform announcements, which have a poor conversion rate into implementation and should be assessed by the criterion set out elsewhere in this archive — does the design require cooperation from those whose position it reduces.

Rating agency actions, which lag rather than lead and which measure sovereign debt service probability rather than commercial conditions.

And political personality changes, which have historically mattered much less to commercial conditions than the coverage suggests.

How to weight them

The financing variable dominates. If it holds, the other three determine whether the year is difficult or manageable. If it does not, nothing else is decisive.

That is an uncomfortable structure to state plainly, because it means the most important variable for a Ukrainian business is one that Ukrainian actors do not control. But it is the accurate description, and planning built on a more comfortable premise is planning built on something false.

What this means for a company operating here

Build the plan around the variables you can observe rather than the ones you would like to predict. Financing disbursement schedules are public. Corridor throughput is reported. Energy system status is reported daily.

Hold more liquidity than a comparable operation elsewhere would, because the tail risks are wider and the cost of that insurance is lower than the cost of being caught without it.

Match currency exposure structurally rather than through instruments, for the reasons set out in this archive's discussion of the exchange rate.

And keep the relationships that would let you operate through a disruption, because the record of the past four years is unambiguous that this is what determined which businesses continued and which did not.

The closing observation

The most useful thing this archive can offer about any year ahead is not a projection. It is that the structural position going into it is stronger than the headline situation suggests: a diversified export base that did not exist in 2013, a banking system that survived a shock that would have destroyed the pre-2015 one, an energy system with genuine redundancy, a legal framework anchored externally, and a workforce that has demonstrated it can operate under conditions almost no comparable economy has faced.

None of that is a forecast. All of it is a starting position, and a starting position is what a company assessing a market is actually buying.

Related in this archive

• The third year: an economy that learned to function under conditions it was never designed for
• A year in review, and the one ahead: what the second full year settled
• The first year of full-scale war: an economic assessment

I gave up forecasting years ago; instead I track which variables actually change our plan. For us that list is short: energy, border capacity and the payment calendar. The rest is interesting and does not alter a decision. The only useful way to read a year ahead is to know which three things determine your own decisions.