Ukraine is set to face a challenging year ahead. With the external commodity market remaining fragile, GDP is likely to stay in the negative territory next year, and any meaningful improvement is unlikely to come earlier than 2H13. The NBU seems to be determined to maintain hryvnia stability at all costs even though the widening external financing gap clearly indicates local currency is overpriced. While we don't rule out that the NBU's administrative measures will prevent a sharp hryvnia fall in the coming months, depreciation seems to be just a matter of time. We pencil in end-2013 rate of UAH 9.0 / USD, and this projection assumes resumption of Ukraine-IMF cooperation next year. Fiscal policy is set to become more prudent as deficit financing remains a challenge. We think the current version of the 2013 state budget law will have to be amended to narrow the deficit.

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