Economic Policies on May 16–30, 2006

Financial-banking sector

Depreciation of leu has shaken currency market…

A clear depreciation of the Moldovan leu versus dollar and euro, notably by 0.5% and about 1%, was observed in May. The evolution of European economy was a primary cause, as it has grown more visibly than the American economy, which has also influenced the evolution of the euro. As the domestic market is dependent on the external market in a big measure, the evolution of the pair euro/dollar was visible on Moldovan leu, too. Media reports said that the depreciation of leu is a consequence of restricted wine exports to the Russian market and it could have a negative impact on the system. As a response, the National Bank of Moldova has denied the local press reports in a press release, describing them as speculative attempts aimed at a groundless depreciation of domestic currency.

On the other hand, we must admit that the National Bank purchased much currency in May, injecting this way more money on market, a phenomenon that leads to a depreciation for sure after the rules of the market. In addition, we suppose that BNM has deliberately used this measure to grant a respiro to exporters, given the blockade of Russia on Moldovan products and knowing that exporters harvest benefits from depreciation. The trends on currency market are influenced by developments on international oil market and performances of economies in the region. The Moldovan leu inverted its trends in late May and it appreciated a little versus dollar and euro.

At the same time, commercial banks in Moldova hold liquidities estimated at about 3 billion lei, an indicator which rejects an eventual crisis of default of Moldova from the very beginning. In addition, the credit portfolio of banks granted to vine growing, wine making and trading of vine and wine products hold a relatively small share in their assets — 8%, and 14% in the total credit portfolio. Finally, the currency reserves of BNM were estimated at over 646 million dollars (8.41 billion lei) in late May, reserves confirming that there are no premises for a potential crisis on domestic currency market.

…but rating of country risk was improved

The international bond rating agency Moody’s Investors Services has improved the rating of long-term country risk of Moldova from Caa1 la B3 after modifying the rating methodology. The perspective for the rating awarded for the long-term credits in foreign currency was appreciated as stable. Indeed, the methodological changes improved the rating for 70 states. The methodology has changed for the ratings for bonds in currency. The short-term rating for Moldova is Caa2 for deposits in foreign currency and Caa1 for domestic currency. Last time the country risk of Moldova was rated in May 2003, when Moody’s improved the long-term rating from Ca to Caa1.

Moody’s started estimating the rating for Moldova in 1997. The rating for external securities of Moldova was reduced from Ba2 to B2 because of late payment of interest and stop of external financing in 1998; from B2 to B3 in April 2000, down to Caa1 in July 2001, and down to Ca in July 2002, after the government was late to redeem the Eurobonds placed on international markets.

What does this madness of ratings mean? International rating agencies such as Fitch IBCA, Moody’s Investors Services and Standard & Poor’s are aimed to rate the country risk in dependence of evolution of main macroeconomic indicators, focussing mostly on health and security of financial-banking sector. The studied countries are rated on a value scale from A to D (Standard & Poor’s and Fitch IBCA), respectively from A to C (Moody’s Investors Services), and investors are advised to credit and to start or not business in these areas depending on ratings.

The risk of long-term external debt in currency is the main rating of country risk. Also, the ratings forecast the rating perspectives of countries. In general, the agency will retrograde the country in the next rating if this prospect is negative. At present, all the three agencies rate Moldova as a “stable” country regarding investments.

Real sector

Wine crisis pulls down industry…

The industrial production of Moldova declined by 5.9% in January-April 2006, down to 6.4 billion lei (488 million dollars). According to experts, this reduction is explained through the crisis in wine making sector. Exports of wines to Russia, the main market for Moldovan wineries, suspended in late March have limited or even stopped the production of many wine plants. According to data of MoldovaVin, wineries use less than ? of capacities at present.

Associated with negative trends in wine making sector besides serious declines in engineering and equipment industry (-21%), tobacco (-7%) (though this fall was absorbed by some important rises in stone processing sectors (+64%) or cement production (64%), but less important as share in the total of industrial production), the industrial sector is on the continued rise. The government did not modify yet the forecast of industry growth estimated at the level of 6.5% for 2006, but nor it rules out a long-term negative impact of situation in the sector on industry in general.

“However, Chisinau is trying to recover the Russian market by resuming the wine exports on summer,” Speaker Marian Lupu has stated to the Russian radio channel Yekho Moskvi. He said the sides have agreed that the deliveries will be resumed only if wine makers introduce stricter conditions of control on quality of production. Indeed, “the wine war” was a good lesson for Chisinau, which has confirmed the need to diversify the exportation markets and to respect the quality for wine production made in Moldova.

External sector

Trade deficit give serious headaches…

The Government has updated its trade deficit forecast for 2006. It forecasts now a trade deficit of 1.59 billion dollars for this year, compared with 1.33 billion dollars estimated earlier this year. It motivated the change through the continued rise of energy price, which will be a source of uncertainty for economy in 2006. According to updated macroeconomic indicators, exports will grow by 15% in 2006, while imports will advance more rapidly, by 23%. The negative trade balance of Moldova grew 1.5-fold after the first three months of this year, compared with the similar period of 2005, up to 295 million dollars. The external deliveries rose by 4.6% in the 1st trimester, while imports grew by 25.7%.

Labour market

Medium salary in budgetary sector declined…

The medium remuneration in budgetary sector dropped by 21.2 lei in April, down to 1,254.6 lei, while the medium salary in real sector grew by 57.2 lei, up to 1,731.4 lei (133 dollars). According to a monthly report by the National Bureau for Statistics, the average salary on economy accounted for 1,564.8 lei in April, by 31.2 lei more than in March.

The highest salary in April was traditionally paid by financial institutions — 3,798 lei, but by 66 lei less than in March. The average remuneration in industrial sector declined by 14 lei in April compared with March, down to 1,965 lei, while the medium pay in construction sector rose by 154 lei, up to 2,163 lei. Teachers earned 1,140 lei on average last month, by 31 lei less than in March, while doctors and social assistants were paid 1,325 lei.

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