Economic Policies on June 16–30, 2007

Real sector

Industry is still on the decline…

The industry is still on the decline. The industrial production was valued at 9.26 billion lei in the first five months of this year, decreasing by approximately 2 percent compared with the similar period of 2006. The industry rose by about 19 percent in May and this growth attenuated the handicap of decline of industry. The wine industry has generally dropped 2.5-fold after five months (covering only 5.4 percent of the total production), distilled alcohol drinks declined 2.1-fold, electricity and heating production and distribution decreased by 7.7 percent, engineering industry by 10 percent, tobacco industry by 7.3 percent. The Ministry of Economy and Commerce has anticipated a 9-percent growth of industry for 2007, but many experts doubted over this forecast.

…while agriculture could face a situation like in 2003

Nor the agriculture faces a better situation. Even more, the worst evil is that the current drought could compromise more than 30 percent of the annual agricultural crop. The drought could have serious effects, if the weather forecasts for this year become true. The unfavourable weather could reduce the profitableness of agriculture, limiting this way the capacities of farmers to finance their agricultural works in 2008. At the same time, prices of agro-food products could grow much, as the drought jeopardises the crops. For example, the agriculture declined by 14 percent because of the 2003 drought. The arid climate affected then most of cereals, vegetables, fruits and sugar beet crop.

Apparently, the situation is not so dramatic since the Government has said that it awards subsidies of up to 70 percent for purchase of insurances policies for crops. However, we fear that farmers face difficulties to gain these subsidies because they are not well-informed or the insurance system is not developed. Although there are enough working insurance companies on market, only some of them provide all services, but their costs are very high. In addition, they are not very interested to insure certain risks, particularly in agriculture. If these subsidies are allocated, they go to farmers who own large farm fields, not to small farmers who practice subsistence agriculture.

Financial-bank sector

Interests on bank credits grow in spite of lower inflation…

Interests on bank credits have increased in continuation, though the inflation rate tends to decline. The average well-balanced interest rate on credits in Moldovan lei released to individuals and businesses rose by 0.2 percentage points in May, up to 18.81 percent, while the interest rate on loans in foreign currency increased up to 11.01 percent. However, the interest rate on bank credits in lei changed insignificantly in five months of this year, up to around 18.5 percent. Also, the interest rate on credits in foreign currency has insignificantly changed, though the annual inflation rate declined from 12.9 percent in January down to 10.6 percent in May.

Commercial bank released credits in Moldovan lei worth 1.11 billion lei overall in May 2007. At the same time, deposits in lei totalled 19.94 billion lei and deposits in foreign currency recalculated in lei amounted to 7.93 billion lei. The average well-balanced interest rate on deposits in lei has decreased by 0.05 percentage points, down to 15.4 percent, while the average interest rate on deposits in foreign currency has increased by 0.06 percentage points, up to 5.9 percent.

FITCH Ratings agency updates the financial rating for Moldova…

The international ratings agency FITCH Ratings has updated the credit rating for Moldova from “stable” to “positive”, following the economic growth and tax discipline in Moldova. At the same time, FITCH has reconfirmed the Long Term Issuer Default Rating “B-” and the Local Currency Long Term Issuer Default Rating “B” for Moldova and described the prospect of ratings as “stable”. The updated ratings are due to some structural reforms implemented in Moldova and resumption of an agreement with the International Monetary Fund after three years.

At the same time, the agency has signalled a number of foreign risks that affect the short-term prospect, in particular, the Russian ban on Moldovan wine imports and doubling of gas prices in 2006. Moldova’s deficit of current account deteriorated significantly in 2006, exceeding 12 percent of GDP, the economic growth slowed down and the inflation has grown, and all these trends could change the FITCH decisions soon.

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