Economic Policies on June 16–30, 2008

Inflation and prices

Inflation reaching the “Code Red” limit…

According to an inflation rating by the international financial evaluation agency Fitch IBCA, Moldova is ranked the 14^th place among countries with most vulnerable emerging economies to inflationary shocks, but it has a lower risk than other European states such as Latvia, Lithuania, Romania, Ukraine, Bulgaria. Jamaica ranks the 1^st place in the rating of most vulnerable emerging states, being followed by Ukraine, Kazakhstan and Bulgaria, according to a Fitch report on evolution of emerging economies. However, Moldova is more vulnerable to emerging shocks than Estonia, Georgia, Hungary, Poland. The rating covered 73 countries.

The annual inflation rate in Moldova was about 17 percent in May. This is the highest inflation after December 2000 when the annual rate was 18.4 percent. Economists anticipate that the annual inflation rate in July will exceed 18 percent, as natural gas and electricity tariffs could be increased then. On the other hand, as a rule, a deflation is registered on summer, especially on food products. However, the present regional and international expansion of food prices will not reduce internal prices. The inflation after five months is 7.4 percent, with the Government and National Bank updating their target for 2008 from 10 up to 11.8–12 percent.

Fitch raised in June 2007 the forecast of the perspective of long-term international and national ratings of Moldova from “stable” to “positive”. The Issuer Default Ratings (“IDR”) of Moldova was rated “B-” and “B”. The agency confirmed the short-term foreign currency rating “B” and the Country Ceiling “B-”. Fitch Raiting confirmed the final asset reimbursement rating (RR4) on eurobonds.

Real sector

Economy trying to recover…

According to official statistics, the economic growth in the 1st trimester of 2008 was 4.3 percentRO, compared with 7.3 percent in the similar period of last year, but it will be hard to reach the 6-percent governmental target should trends be similar to the first quarter. The Gross Domestic Product in January-March 2008 exceeded 11.2 billion lei in comparable prices. According to NBS accounts, the production volume has increased by 6.2 percent in the first three months, intermediary consumption by 6.9 percent and net taxes on products and imports have grown by about one percent. Experts say that the rise pace of final consumption by households has decreased down to 5.5 percent. The gross capital formation advanced by 23.4 percent.

The Government forecasts a 6-percent GDP growth for this year, after the economic growth was 3.3 percent in 2007, compared with 4.8 percent in 2006. Starting 2000, the Moldovan economy has entered an increasing trend, reaching the highest growth of 7.5 percent in 2005, but the rise pace has further declined due to external shocks and drought. IMF forecasts a 6–7 percent growth in 2008, but a higher rise will be achieved should Moldova have a rich crop and resume production paces on account of wine exports.

Banking sector

The system slowing down in spite of high interests on deposits…

Overall assets of the domestic banking system were estimated at more than 35.4 billion lei (over 3.6 billion dollars) in January-May 2008 or the equivalent to over 60 percent of the 2008 GDP, growing by about 10.8 percent, compared with 16.4 percent in the similar period of 2007. According to NBM accounts, the ready cash by commercial banks has decreased by about 1.9 percent this year, down to 1.65 billion lei (while it rose by 23.8 percent in 2007), in particular due to the rise of the basic rate of mandatory reserves for attracted means (from 16 up to 22 percent), so that commercial banks had to reduce the cash. According to NBM estimates, overall assets in foreign currency recalculated in lei amounted to 19.3 billion lei and increased by more than 13 percent. The share of foreign currency in assets of banks was 72.5 percent (+0.62 percentage points).

Although interests on deposits have increased much, the portfolio of deposits by individuals has increased by 16.2 percent only (compared with 18.2 percent in 2007). The portfolio of individuals has increased by 1.6 billion lei in January-May 2007 and 2.2 billion lei in 2008. However, the sufficiency of banks’ capital has declined this year (-0.62 percentage points), but it is high so far, 28.7 percent, compared with the minimum norm of 12 percent.

At the same time, statistics reveal that individuals and legal entities deposited by 474.2 million lei more in May than in April due to the rise of the interest rate on deposits. Deposits by individuals have advanced by 12.7 percent and deposits by legal entities by 33.6 percent. Deposits in the banking system accounted for about 23.17 billion lei in late May and they increased by 497.6 million lei (2.2%), compared with the precedent month, after deposits in national currency have grown by 367.3 million lei (2.8 percent) and deposits in foreign currency by 130.3 million lei (1.4 percent). About 52 percent of deposits have a maturing term from 3 to 6 months.

Labour market

Dynamic of medium salary in January-May 2008…

The medium monthly wage in national economy accounted for 2,370 lei (237 dollars) in January-May 2008 and increased by 27 percentRO, compared with the similar period of the precedent year (the real salary rose by 10 percent). The medium salary in the budgetary sector amounted to 1,862 lei while the average wage in the real sector of economy accounted for 2,639 lei. The average salary in May 2008 was 2,537 lei, by 24 percent more than in May 2007. The medium salary in the budgetary sector accounted for 2,049 lei while in the real sector it amounted to 2,789 lei.

The net medium wage has grown in all economic areas. This evolution was due to the enforcement of governmental decisions on salary rises in 2008 for public functionaries, teachers and contractual personnel of sanitary-medical facilities. The net medium salary rose over the average on economy in industry, transportation and communications, finance, notably by 20–40 percent. The average salary in financial sector accounted for 5,328 lei in January-May 2008, constructions — 3,149 lei, real estate transactions 3,003 lei, industry 2,842 lei, public administration 2,597 lei, health and social assistance 2,075 lei. The medium monthly salary in agriculture and forestry accounted for 1,149 lei, fish breeding — 1,251 lei, education 1,632 lei in the period concerned.

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