Economic Policies on November 17–30, 2007

Prices and inflation

Prices still are on the rise…

Prices of a number of products continued to grow in November. In particular, prices of food products have grown. Consequences of the last summer drought fuelled much the prices of food products. The inflation of food prices could have serious impacts on Moldovan people, who spend much of their earnings on food. Moldovans consume two-fold more food products (as share in the consumer basket) than other Europeans because they are poor. The poorer one is the more food products it consumes as share in the total because the need of food is a priority and all the earning is spent on it. The November evolution of prices is expected to raise the monthly inflation rate up to about 20 percent and the cumulated rate for 11 months could reach 13 percent. The higher November inflation rate will be also linked to dearer fuels on domestic market.

NBM “will control” inflation…

The National Bank of Moldova governor has said two weeks ago that the direct inflation targeting process will begin soon. The initiative of the central bank to officially introduce the inflation targeting is welcome in general. In addition, it is important that the monetary authority is very concerned with evolution of Moldovan inflation. However, there are many risk factors that the central bank cannot control and, therefore, the NBM is not prepared yet to introduce the direct inflation targeting. The new regime could be introduced only after a series of premises: when the annual inflation rate counts for a single figure (it is about 14 percent in Moldova); the central bank enjoys a full operational independence; the financial sector is stable and strong, in spite of the need to enhance the financial intermediation; the fiscal dominant is not a problem any longer (the public debt and the budgetary deficit are on the decline); the inflation targets for next years were agreed with the Government; the bank strengthened its inflation forecast capacity; the success of disinflation process in the past years strengthened the credibility of NBM. These premises are not accomplished here and there.

…in spite of clear risks

NBM will face major dilemmas even if it introduces the inflation targeting. They would come from dearer petrol, natural gas and energy agents in general; inflationist expectations of population; speculative market trends; massive remittances and, of course, the relation between leu and main reference currencies (USD and euro). The later, in particular the cost of NBM interventions on currency market, the cost of sterilisation of liquidity of currency excess could affect the inflation targeting process. The leu has appreciated very much versus dollar even in nominal terms (more than 12 percent this year) and versus euro in 2007, and this fact produced a major controversy regarding the impact on exports, external deficits. The export-oriented sectors are strongly affected and foreign deficits have boomed compared with last year.

Real sector

Moldovan industry is on a continuous decline…

The industrial production decreased by more than 9 percent in October and it registered a handicap of 0.7 percent in ten months. Thus, the very optimistic 8.5-percent growth forecast estimated by Government for 2007 is failed. According to official statistics, all industrial enterprises manufactured goods worth over 21.1 billion lei (1.8 billion dollars) in current prices. The decline of industrial production compared with January-October 2006 was linked to the reduction of wine production by 34.2 percent, sugar by 53.3 percent, distilled spirits by 31.7 percent, cigarettes by 9.5 percent. Even more, the production volume of food and drink industry has decreased by 7.6 percent. The Moldovan industry declined by approximately 7 percent last year including because of the Russian embargo on Moldovan wines.

Financial-banking sector

Bank assets up to 2.75 billion dollars…

The overall assets of the banking system rose by 950 million lei in October up to about 31 billion lei (2.75 billion dollars). They rose by more than 36 percent in January-October 2007 and over 1.5-fold compared with the similar period of 2006. The rise of assets of commercial banks was particularly due to the growth of the credit portfolio and deposits by population, as well as to the continuous advance of investments in banks’ capital. The supply of deposits attracted by banks rose by about 33 percent in January-September 2007. A comparable growth was registered for the credit portfolio of banks. It has increased by more than one third in the period concerned. At the same time, deposits and credits rose by 40 percent and 52 percent compared with the similar period of 2006.

Bank deposits estimated at over 1.7 billion dollars…

Bank deposits rose by more than 380 million lei in October, up to about 19.2 billion lei or over 1.7 billion dollars. They rose due to higher interest rates on credits in lei and foreign currency introduced by banks. Thus, the medium interest rate on forward deposits in lei rose by 0.6 percentage points in October, up to 15.47 percent, while the rate on deposits in foreign currency increased by 0.2 percentage points, up to 6.12 percent on average. The growth was particularly due to the rise of deposits in Moldovan lei by more than 3 percent, while deposits in foreign currency increased by one percent. The rise of deposits was also influenced by attractiveness of deposits in lei, following the continuous appreciation of Moldovan leu versus dollar and euro. This trend could be observed till the end of this year.

…while credits up by over 40 percent

The supply of credits released to economic agents and population has grown by more than 40 percent in 10 months of this year, up to about 19.18 billion lei (1.7 billion dollars). The rise was linked to a 2.5-percent growth of the supply of credits in Moldovan lei and a 4.6-percent advance of credits in foreign currency. Banks released credits in lei worth more than 1.32 billion lei in October. Legal entities received 71 percent of these credits. The medium interest rate on credits in lei remained at the level of 18.97 percent in October, like in September, while the medium rate on credits in foreign currency decreased by 0.8 percentage points, down to 10.8 percent.

Moldovans face most barriers to financial access, World Bank report says…

Moldova is part of the last four countries in Central and East Europe regarding the financial access among 24 states covered by the latest World Bank report on this issue. Poland faces most barriers to financial access, followed by Moldova, Bulgaria and Romania. Lithuania, Estonia and Latvia envoy the easiest financial access in the region, and they approach the rate 2. The top is based on rates from 1 to 5, with Lithuania being rated the highest mark — 4.5, and Moldova, Albania and Ukraine 0. At the same time, Romania was rated 0.5. The “Finance for All” Policy Research Report is based on data for 2006.

The report underlines the importance for emerging states to adopt the Basel II provisions, estimating this way a considerable development of financial information system. The more sophisticated the statistic researches on risk of credits are the more important advantages small borrowers enjoy due to cheaper loans, say World Bank experts. According to the research report, the entry of big international players on emerging financial-bank markets does not necessarily ensure an easier access to financial information. Many foreign banks are relatively big groups which could face difficulties in understanding some aspects of the domestic business culture. Big banks have an advantage regarding major transactions, but small domestic banks are advantaged regarding loans released to small and medium businesses, it added.

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