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Syntheses of 2005 and major financial uncertainties of 2006
Ion Basiul, January 17, 2006
Year 2005 was one of the most difficult and provocative years. It began with the signing of the Moldova-European Union Action Plan. The March 6 event that was waited and experienced with emotions came later. The story of interdictions against Moldovan goods on the market in the Russian Federation that seemed to be endless started on spring, too. The economy was coming after a year with an impressive growth of over 7 percent and it was evident that such rises will never be registered again but accidentally. It is a paradox or not, but preliminary statistics for 005 show that the economic growth will probably exceed 8 percent, a remarkable rise at regional and European level.
On the other hand, the internal consumption that dropped at the same time with appreciation of exchange rate has fuelled the imports. Moldovans assaulted supermarkets with frenzy, spending the money that they saved from reduction of fiscal taxes, rises of salaries and remittances from abroad. As a result, imports have alarmingly grown and deepened the trade deficit and current account deficit, as the Moldovan economy cannot adapt itself to this huge demand rapidly. Moldova registered in 2005 the highest trade deficit in all these years of transition. Statistics show that the trade deficit for 11 months of 2005 accounted for 1,055 million dollars. It is hard to finance such a deficit in any economy. Mexico, some Asian countries, Hungary, Poland, all these states have faced financial crises marked by massive devaluations of domestic currency in the past ten years at such levels.
It should be mentioned, however, another very important indicator: unemployment rate is 7 percent at present, a level comparable to the rate of the most developed countries. Either the reduction of fiscal taxes has disclosed jobs, or the leaving for work abroad has especially kept this figure low, but the unemployment does not "seem" to be a problem.
According to a governmental forecast used to build the budget, a 10-percent inflation rate and a 6.5-percent economic growth are expected in 2006. Perhaps, 2006 will be a better year... This seems to be a provocation for some potential financial forecasts.
In 2006, maybe more than the precedent years, inflation (variation index of consumer prices) will be the target of targets. The other macroeconomic indicators with impact on wide public will develop in dependence on its conduct.
It can be said so far with an official... probability that the annual inflation rate will be in the limits of the rate registered in 2005, but it may exceed the forecasts if we take into account the rise of prices of imports of hydrocarbons and fuels. Inflation remains the indicator with the biggest impact on economy.
Indeed, the National Bank of Moldova (BNM) like any independent central bank should admit that the annual inflation in 2006 will be at the superior margin of distance of variance (+/- 1 percent) compared with the target. Thus, if the target is 10 percent, we may expect an 11-percent inflation for late 2006. Perhaps, the inflation will be finally close to the proposed target of 10 percent, though it may grow significantly especially in the first half of the year, but it may reach negative values on summer.
BNM will probably practice a directed currency regime in 2006 as well, in a move to control the inflation above all. Many international experts forecast a decline of the dollar in 2006, while the main cause of the "collapse" of dollar should be searched in the United States. Although the dollar is losing ground and value on all international and national markets, the leu/dollar exchange rate remains relatively stable and the leu has even depreciated a little bit. Performances of American economy and European economy, petrol price, policy of BCE and American Federal Reserve will influence the exchange rate at world level.
It is important to understand the macroeconomic impact of developments on international currency market on payment balance of Moldova. The trade balance is worsening, since most of export contracts stipulate prices calculated in dollars and the import prices (except for energy resources) are calculated in euros (or on basis of euro). We may experience a "super performance" of trade deficit in 2006, too.
In addition, the exchange rate will have an impact on all families who owe currency. The bank world uses the term effect of wealth and balance. It is simple - when the leu/euro or leu/dollar exchange rate drops (the leu grows) you pay less lei for reimbursement of the loan, so that you have more money in your pocket. It should be noted that BNM likes a strong leu because it helps the reduction of inflation as we have said above, but exporters and, finally, Government do not like it because it affects the external competitiveness of economy.
There is another hot problem at macroeconomic level. BNM would like higher interest rates for deposits in lei, so that savings grow and inflation decline. On the other hand, high interests would encourage inflows of speculative capital (which would also gain from an appreciation of leu) and this would increase the quantity of money on market and would overturn the calculations of BNM and Government as regards inflation.
At the same time, BNM seems to be interested of lower interests for credits in lei (but commercial banks do not like this), in order to enhance the crediting in national currency because the central bank can control macroeconomic balances easier through monetary policies when most of credits are in lei.
Finally, it is hard to estimate the chances of higher active interests (on credits) and lower passive interests (on deposits). Many banks announce some reductions of interests on credits in lei. However, this measure is a partial victory since they lowered the interests on deposits, especially on deposits for maximum one year, once they reduced the interests on credits.
Prices of utilities
We have entered the new year on a classic music of price rises - the final price of natural gas will grow, so that the tariffs for energy (electricity, heating), public transport and other utilities could increase. There are all chances for implementation of rises (officially, they are named adjustments) as regards the utilities.
Thus, it will be discussed the period, not the possibility of new price rises. The uncertainty is related to the rise pace, on one hand, and to the pace when the Government will transpose the higher tariffs on households, on the other hand.