Economic Policies on February 17 – March 4, 2007

Foreign trade

One third of Moldovan exports go to E.U…

The European Union is becoming a main destination of goods made in Moldova. The share of this market in the total of Moldovan exports rose up to 35 percent in 2006, compared with 29.7 percent in late 2005. For comparison, the share of the E.U. in Moldovan exports was 13 percent only in 1998. According to official statistics, Moldova exported products worth about 370 million dollars to the E.U. last year, which is by nearly 14 percent more than in 2005.

Commercial relations with E.U. member states have developed, though the implementation of the GSP Plus system in trade with Moldova did not produce the expected effect. However, larger incomes could be raised from implementation of GSP Plus in 2007, but with the condition that companies improve the quality of products. Deliveries of Moldovan goods to E.U. will grow after Romania and Bulgaria have joined the E.U., though a slower free exchange regime will affect the trade exchanges with these countries at a first stage.

Banking

Share of foreign investments in capital of banks reached about 64 percent…

The share of foreign investments in capital of Moldovan banks is estimated at 63.85 percent of all investments. In comparison with late February 2006, investments of foreign capital in the banking have grown by about 14 percent. The share of foreign investments grew in early 2007 after the French group Societe Generale has acquired 70.6 percent of shares in Mobiasbanca. In 2006, Dutch and Slovenian investors purchased important stocks in Moldova-Agroindbank after new actors have joined the domestic bank market.

…but bank market did not grow up enough

Of course, the arrival of new players on market will have a positive impact, especially on medium and long terms. They will contribute to investment of cheaper funds for a longer term, while new tools of operation and stronger competitiveness will have a favourable effect on development of Moldovan banking. On the other hand, the domestic market did not grow up enough regarding relationship between clients and bank. Also, banks are not very transparent when they present costs of crediting, since the commissions are still high and interests are low. Unfortunately, Moldovan banks particularly focus on attracting new clients and enhancing the market share, not on developing or selling new products like western banks.

Real sector

Industry still follows a negative trend…

The volume of industrial production made by domestic enterprises dropped by 10.2 percent in January 2007. The decline of industry was due to a 5-fold fall of wine production, 3-fold fall of spirits, 23-percent decrease of cigarettes, etc. At the same tine, the production volume of food and drink enterprises has decreased by more than 28 percent because of economic calamities and external shocks. We may certanly affirm that the industry suffered in January 2007 the biggest decline in the past seven years.

…While agriculture declined by nearly 5 percent in 2006

Nor the agriculture enjoyed a better condition. The agricultural production dropped by 4.6 percent in 2006 because of a strong decline of cereal products, tobacco and fruits. According to preliminary estimates, the agricultural production was worth about 13.7 billion lei (1.1 billion dollars) in current prices. Low temperatures last winter have compromised many crops and the production of cereals and beans decreased by 21 percent compared with 2005. The reduction of fruits by 13.6 percent and of grapes by 10.5 percent had also a sensible impact. The vegetal production has decreased by 8.5 percent in general, so that the 4.4-percent rise of animal production could not reduce the handicap.

Currency, exchange rate, foreign debt

The leu appreciated visibly this year…

The appreciation of the leu versus main reference currencies this year is a primary cause of some capital inflows, remittances of citizens working abroad and evolution of the euro/dollar pair. For example, official remittances of Moldovans exceeded 850 million dollars in 2006 and rose by 25 percent compared with 2005. According to estimates by IMF, remittances and labour compensations of Moldovans working abroad legally or illegally amounted to 1.16 billion dollars in 2006.

In addition, if we study the number of transactions we may observe that half of them are commercial and another half are financial; it means that appreciation or depreciation occurs on background of confidence of financial investors, not only on performances of economy. However, other factors, which have a certain impact on evolution of domestic currency such as deficit of trade account (that rose by more than 90 percent in 2006 compared with 2005), foreign direct investments (they accounted for about 204.5 million dollars in 2005), consumption, inflation, budgetary deficit, etc. must not be neglected beside these factors.

Another element with a bigger influence on evolution of domestic currency, notably the monetary policy of the National Bank of Moldova must be superposed on impact of these indicators. At the same time, the globalisation also influences the leu. Evolutions of economies in the region and particularly of domestic currencies versus euro will have a growing influence on leu. Although the correlation is not very tight, we estimate intensification for the following period.

Foreign debt is on the rise…

Moldova’s gross foreign debt amounted to about 2.49 billion dollars in 2006 or more than 80 percent of GDP. The stock of public and public guaranteed debt has grown by 13.2 percent up to 876.7 million dollars, while the unguaranteed private debt has increased by 23.4 percent up to about 1.62 billion dollars. According to data of the National Bank of Moldova, the private debt has particularly grown after new loans were contracted from affiliated companies and new arrears for credits were raised. The private sector benefited of new credits worth nearly 344 million dollars, of which the banking contracted more than 20 million dollars. In addition, the Government’s commitments toward IMF have grown by 47.8 percent. Under these conditions, the direct governmental debt has grown by 10.2 percent.

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