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Economic retrospectives for 2008
Iurie Gotisan, December 31, 2008
In economic terms, 2008 seems to be one of the best years for Moldova after 1998. The economic growth pace of about 8 percent (according to official statistics) made 2008 a special year in terms of dynamic of Moldovan economy in the last years (despite all disasters that hit it, climatic, financial or economic) and any critical spirit should probably admit this fact.
Diagram 1. Dynamic of key economic indicators, annual values in %
Source: NBS, NBM, IMF, Government’s forecasts and estimates by author
However, the current economic growth pace will be unlikely maintained, given external dangers (effects of financial crisis…) and internal risks (…and its implications on domestic productive sector and exports). Even more, the present economic growth is due to many conjuncture-related factors and less to healthy policies. The economy was propelled by a great agricultural production, a high consumption (both private and public), high development rate of building sector, gross fixed capital formation and a pretty attractive service sector (with a contribution of more than 60 percent of GDP).
However, if considering the factors of the growth closer, one may observe that its base is not so strong. The agricultural year 2008 will not repeat because the crop was rich due to favourable weather rather than to agricultural policy. The consumption is very high so far and it fuels imports (taxes on products and services, etc.), but it could decrease should the demand fall (in particular through decline of remittances), and the building sector has developed thanks to earnings of Moldovan nationals working abroad. In fact, the structure of economy did not change much in 2008. The agriculture is underdeveloped and extensive so far, massive imports fuel the trade deficit and current account deficit (about 20 percent), while funding for constructions is not programmatic and long-term, and it depends on international labour market.
Effects of the financial crisis did not affect Moldova much, perhaps our country is not tightly connected to international commercial inflows and financial deals or the economic system is not so dependent on outside that to experience consequences, but developments will be followed. An internal problem in 2008, which will be experienced in 2009, too, is related to "twin" trade and current account deficits. But it depends in which light they are regarded, as the deficits have actually contributed to the economic growth (imports/consumption/taxes) and modernisation of economy, but so far they are a risky zone for Moldovan economy.
The domestic real estate market has undergone a correction, like in case of the world crisis. That means a potential fall of prices on this market. But the problem of real estate market is more complicated than the one related to the price, particularly the blocking of funding for ongoing projects and transactions.
On the other hand, effects of the 2008 economic growth went to social salaries rather than to social policy elements. Other reasons than economic ones directed important amounts from the public budget to social payments (inclusively for 2009) typical to a maintained, assisted population. But the public budget is growing poor (budget deficit is on the rise…). It could fail to satisfy the vital needs of economy and assumed international obligations which mean much funds.
Authorities had a very good relationship with international financial organisations, particularly with IMF and WB, and this is a wonderful signal for investors. Relations of the Government with the European Commission have improved, with the latter disbursing funding worth tens of millions of Euro. It is noteworthy the productive cooperation between Government and Millennium Challenge Corporation, in which Moldova was declared eligible for funding the Compact programme in 2009.
Keeping under control the world crisis will be the No.1 problem of developed economies in 2009, too, and the Moldovan economy will be unable to avoid this situation. However, the crisis could have a stabilising effect on economy through decline of inflation (reduction of demand/consumption), freezing of salaries (accordingly to some employers) and a lower demand by population. People will start making more savings. The economy will redress by the end of 2009 or early 2010, but the recovery will also depend on regional and international developments.
In fact, in 2009 Moldova will enjoy two advantages capable to guarantee a quick recovery. Firstly, the financial system (particularly the banking) was not affected – banks did not go bankrupt and Government’s intervention was not needed like in other countries. It is easier to get rid of a recession when the financial system is well. Secondly, Moldova recorded an economic growth of about 8 percent in 2008, accordingly to preliminary statistics, which is much higher than the European average, and an eventual fall would not be fatal.
Prices on real estate market could decrease in 2009, but those willing to buy housing would be wise to wait and follow developments of the real estate market. One should not forget that 2009 is an electoral year and the course of economic reforms or potential changes could change after the election of a new government. Fiscal policy and afferent budget for 2009 will be topics of talks between international financial organisations, especially IMF and Moldovan authorities. But they could also focus on salary policy, exchange rate and evolution of prices.
In 2009, perhaps more than in the last years, the inflation will be the target of targets. Other macroeconomic indicators with an impact on people will depend on inflation. One may already affirm with an "official" probity that the annual inflation rate will be in the limits of 2008, but it could be higher than forecasted, should prices of fuel and energy imports go up. Indeed, the inflation will keep being the indicator with the biggest impact in economy. It could reach the 10-percent target (-/+1%), but it could grow much in the first half of the year and decrease much on summer.
The central bank will probably practise a directed currency regime in 2009, too, especially to control the inflation. But it will depend on developments on regional and international markets as well. The memorandum with IMF is over in 2009 and a new document shall be negotiated for sure, but this would be a competence of the new government.