Economic Policies on August 2–31, 2008

Inflation and prices

Moldova records deflation for second month in a row…

According to official statistics, consumer prices decreased by 0.9 percent in July compared with June 2008 under the influence of lower prices of food products, which declined by 3.3 percent and dearer manufactured goods which increased by 0.3 percent, as well as tariffs for public services — by 0.7 percent. Thus, Moldova recorded deflation for the second month in a row. The decline in price of foodstuffs in July was linked to the seasonal reduction of medium prices of agricultural products compared with June, in particular, prices of vegetables dropped by more than 24 percent, potatoes by over 8.3 percent, fruits by 17 percent, milk and dairy by 1.5 percent.

At the same time, prices of following products have grown in the period concerned: non-alcohol drinks by about 7 percent, honey by 4 percent, sausage products by 2.5 percent. Tariffs for following services rose in July 2008: house renting and dental services by about 5 percent, drinkable water supply and sewerage services by about 4 percent. So far, the inflation rate for 2008 (July 2008 compared with December 2007) is 5.3 percent. Medium prices have grown by 13.5 percent in the last 12 months (July 2008 compared with July 2007). In spite of the deflation in June and July, the inflation will be further high due to higher administrated prices (for gas, electricity, etc.).

Financial-banking system

Bank assets are worth 3.66 billion dollars…

The 1^st-degree capital, a key financial indicator revealing the consolidation of banks and their capacity to cover eventual losses, rose by about 13 percent in the 1^st quarter, up to approximately 5.9 billion lei. The share of foreign investments in banks’ capital was 72.5 percent, which is by 0.6 percentage points more than early this year. The average sufficiency of risk-liable capital on system is high so far — about 30 percent (the necessary minimum level is 12 percent) and indicates a high security of banks related to the potential to perform risky operations without affecting the capital.

Overall assets were worth about 36.2 billion lei (3.66 billion dollars) and rose by 13 percent compared with early this year. In particular, the credit portfolio rose by 13.6 percent up to 22.6 billion lei. The share of net credits in overall assets was 62.4 percent. As regards unfavourable loans in overall credits and share of unfavourable securities in overall securities, these indicators were 3.8 percent and 2.4 percent respectively.

In terms of risks diversification accordingly to priorities of national economy, the industry and trade traditionally received most credits — 48.3 percent. Following industry and trade, credits for real estate, constructions and development got 13 percent, agriculture and food industry about 14 percent and consumer credits more than 13 percent.

The net revenue on banks revealed more extended activities on system in the first semester of 2008, compared with the similar period of the precedent year, growing by 37.5 percent, up to 731.6 million lei, as of June 30, 2008. The return on assets and shareholder capital has increased by 4.2 percent and 24.6 percent respectively, with these indicators growing by 0.3 percentage points and 0.6 percentage points compared with early this year. The rise of bonds on banking system by 13.2 percent in the 1^st semester of 2008, up to 29.95 billion lei, particularly the growth of deposits by individuals (by over 18 percent) up to approximately 16.7 million lei reveals in continuation a high solvency and credibility of banks.

Currency and exchange rate

Authorities expect a continuing appreciation of Moldovan leu…

According to the draft budget law for 2009 delivered to the Government for examination, the Ministry of Finance expects a continuing appreciation of Moldovan leu versus U.S. dollar. Revenues and expenses of the 2009 state budget are estimated at an exchange rate of 9.12 lei per U.S. dollar. Therefore, the leu/dollar exchange rate could be like in late November 1998, when the national currency was on a free fall after the Russian financial crisis. An exchange rate of 10.25 lei per U.S. dollar was used to update estimates for 2008.

The exchange rate is used to calculate revenues on export-import operations (including VAT, which counts for 64.35 percent of the state budget incomes), consular fees, grants from external donors and expenses for external obligations towards international organisations, credits from foreign donors, maintenance of diplomatic missions, etc.

The evolution of the exchange rate of national currency supported by massive currency inflows could bring an additional pressure for the rise of imports and could have a double influence on budgetary revenues and expenses. The further appreciation of the national currency will be a risky factor for the state budget and, therefore, for the recapitalisation of the National Bank of Moldova (NBM); the Government will direct some of funds to increase the statutory capital of NBM or will issue state securities to cover the debit balance of the general reserve fund, and this requires additional funds for the internal state debt service.

Analysts from the German bank Commerzbank have recently noted after an analysis that the Moldovan leu had the best evolution versus other currencies after the Czech crown in the first half of this year. The leu was the second currency in the world which rose by 17 percent versus U.S. dollar and 15 percent versus Euro. German analysts described this evolution as a performance which reveals the real potential of Moldova. According to the National Bank of Moldova, the Moldovan leu increased by 14.16 percent versus U.S. dollar in nominal terms and by 18.17 percent in real terms in the first half of 2008. The leu/euro exchange rate reached on August 14 the lowest level after May 2004. On the other hand, exporters and nationals working abroad who send money to their families signal losses.

Macroeconomic forecasts

A 6-percent economic growth and a 10-percent inflation rate for 2009…

The state budget for 2009 was built on a 6-percent GDP growth, up to 70.5 billion lei, a 10-percent average inflation rate, a 19-percent advance of exports and 4-percent of importsRO. Macroeconomic indicators were estimated on the basis of development trends of the national economy and results for the 1st semester of this year. The Gross Domestic Product for this year is estimated at 62.7 percent, for a 7.5-percent planned growth. The advance in 2007 was 3 percent, and a nominal value of 53.4 million lei.

Social protection

World Bank estimates a 13-percent poverty growth…

According to preliminary estimates by the World Bank, the inflation rate in Moldova will be around 20 percent the next period; the country could face a 13-percent poverty growth, exacerbating more the challenge related to the necessity to ensure the access of people in need to food products. In particular, a direct nutritional challenge is the situation of institutionalised groups, inclusively children and elderly who survive at present with an intake below 2 dollars per day. This is a serious challenge for the country, as approximately 28 percent of its citizens are poor. As a rule, dearer foodstuffs affect people in need more, as they spend more of their earnings on food and they are more dependent on salaries and remittances.

e-democracy.md