Economic Policies on October 16–31, 2007

Prices and inflation

Inflation target almost failed…

The Consumer Price Index (CPI) for October was not made public so far, but it will not be lower than in September (1.6 percent) or even higher, so that the inflation could reach 11 percent. The price rise in October could definitively dash the Government’s below 10 percent inflation target. The high currency inflows, growth of consumer demand, particularly on account of bank consumer credits, as well as consequences of the last summer drought which strongly increased the prices of food products encouraged the August-September inflation expansion. In fact, the developments in the past years indicated that the inflation like the Gross Domestic Product (GDP) is very sensitive to the evolution of agriculture.

The worsening of the country’s external position (advance of trade deficit and current account deficit) has also encouraged the growth of inflation. Such a conjuncture could strongly press the domestic currency later and the currency inflows will be incapable to compensate the pressures. Under these conditions, the leu will depreciate versus main reference currencies on long term, rather than appreciate, contrary to the recent statements by NBM governor. If the appreciation of domestic currency was the main weapon of the disinflation process in the precedent months, it could stop being a support factor to reach the inflation target by the end of this year.

Labour market

Medium salary on economy stagnating…

The medium salary on economy amounted to 2,130 lei (185 U.S. dollars) in August and September, by over 10 percent more than the average pay in 2006. The average wage in budgetary sector accounted for 1,695 lei (147 dollars) in September, which is by 149 lei more than in August, while the pay in real sector has decreased by 55 lei, down to 2,352 lei (205 dollars). All workers in agriculture sector earned the lowest salaries, notably 1,278 lei (111 dollars) on average. Of course, the appreciation of the leu versus dollar was a strong factor to increase the salaries converted into dollars.

Moldovans earn lowest salaries in Europe…

In fact, Moldova is one of countries which pay the lowest salaries in the region and the low earning is the main reason of migration. Salaries in Central Europe are five-fold higher than in Moldova and Moldovans working abroad may earn 10-fold higher salaries than at home. For example, Moldovans working in Spain earn the highest salaries in transportation, building and industry sectors, and their salaries are up to ten-fold higher than in Moldova. The medium salary in the Spanish transportation sector amounts to between 1,200 and 1,900 Euros, while Moldova pays 190 Euros on averageRO. Of course, many illegal migrants earn these salaries and they do not enjoy medical or social insurance, but these wages reveal the economic handicap of Moldova.

For example, Spanish building employers pay between 1,000 and 1,600 Euros while those working in the Spanish industry earn between 900 and 1,300 Euros. Moldova pays approximately 209 Euros and 156 Euros in the same sectors. Moldovans working in the Spanish agriculture may earn between 800 and 1,100 Euros a month, which means at least ten-fold more than in Moldova. At the same time, one must also envisage the cost of labour force while speaking about salaries. Thus, one hour of work in the European Union (25) cost about 22 Euros on average in 2006 (more than 25 Euros in Euro land), while Moldova paid 0.8 Euros per hour, compared with 1.5 Euros in Bulgaria, 2.3 Euros in Romania, 4.8 Euros in Slovakia, 6.2 Euros in Hungary, and 6.7 Euros in the Czech Republic.

Banking

Bank assets exceed 30 billion lei…

The bank assets have grown by over 32 percent in nine months of 2007 and approximately 1.44-fold compared with the similar period of 2006. Thus, the overall assets of the banking exceeded 30 billion lei (more than 2.6 billion dollars) in late September or the equivalent of 63 percent of the 2007 GDP. The assets have grown due to the rise of people’s deposits in commercial banks influenced by massive remittances (they were worth about 730 million dollars in eight months of this year), and general advance of salaries.

Foreign investments in banks’ portfolio stimulated the growth of bank assets, too…

The continuous rise of the share of foreign investments in banks’ capital has also influenced the growth of bank assets. Many experts forecast a new growth of the share of foreign investments by the end of this year. The share of foreign investments in domestic banks rose by more than 12 percent in 2006 and exceeded 62 percent of the total, this being the highest growth in the past years. However, the positive trend was preceded by a decline of the share of foreign investments in the capital of domestic banks down to 50.7 percent in 2005.

Finally, the supply of deposits in commercial banks rose by about 30 percent in January-September 2007. A comparable advance was registered for the credit portfolio of commercial banks. It has increased by more than one third in the period concerned. At the same time, deposits and credits have increased by 41 and 51 percent, compared with the similar period of 2006.

Foreign trade

Relations with Russia “thawing”…

Chisinau has recently hosted a meeting of the Moldovan-Russian intergovernmental commission. It focussed on commercial and energy areas. Russian and Moldovan officials said that the relations between the two countries have greatly developed. However, speaking about a revival of economic-commercial relations between Moldova and Russia is premature even after the recent resumption of wine, vegetable and meat exports to the Russian market. Unfortunately, Moldova has lost very much during the 1.5-year commercial blockage, which affected the economic system of the country, in particular, domestic producers and exporters.

However, the Russian Federation still holds an important share in the structure of Moldovan exports (more than 20 percent, the 1^st place) and 20 percent of imports (the 2^nd place after Ukraine), in spite of the long stagnation of commercial-economic relations. It would be possible to speak about a real revival of the Moldovan-Russian (commercial-economic) relations at the end of the year or in early 2008, when some statistics will be available. A comparative analysis could be made on their basis in order to find out a quantity revive. Finally, the present “thawing” of Moldovan-Russian relations reveals the seriousness of existing problems between the two countries.

Gas prices will grow again, up to 190 dollars per 1,000 cubic metres…

In fact, they have always topped the working agenda of bilateral relations. As regards the gas price, it was known long ago that it will grow again. It was also noticed that this will not be the last rise. Or, Moldovans will pay a price like western consumers by 2011.

Even more, Moldova will pay a higher price, given many circumstances including the normative losses in system, which are much bigger than in European countries. Finally, that means a chain price rise, as the share of energy resources in the cost of a series of domestic products is quite important.

Domestic consumers will also experience the burden of dearer gas for sure, in particular those who have gas heaters. If taking into account the fact that the gas price will fuel other prices and tariffs of utilities, in which cost the gas is dominant, the situation is not good at all apparently.

Gazprom insisting to participate in domestic gas distribution network…

Chisinau and Gazprom have signed a one-term contract in late 2006, which stipulates a 170-dollar price per 1,000 cubic metres of natural gas (and it did not increase the price up to 230 dollars like for other states), but the Russian concern demanded more freedom to implement investment projects, including on building of gas pipes. For example, this year it was worked hard to build the Drochia-Floresti gas pipe, with the participation of the Russian side.

In addition, the sides have signed then a cooperation agreement on gas sector until 2011, but unfortunately the conditions of the agreement remain secret as usually; for example, the results of the Chisinau-Moscow negotiations on gas take place behind an impenetrable curtain for the public.

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