Economic Policies on November 16–30, 2008

Macroeconomics

Internal growth vs. external consequences…

Authorities have recently stated that the economic growth for nine months of this year was 7.7 percent, though official statistics did not confirm these data yet. On the other hand, international institutions such as IMF, EBRD, and EIU commented the evolution of key economic indicators and some of them forecasted that the growth will slow downRO. However, the growth declared by governmental officials is somehow surprising, particularly after it has slowed down much in the last two years. The surprise is as bigger as accounts cover a period of the year when the agriculture, a key sector of Moldovan economy, was not covered much by estimates. However, despite last summer calamities, the agriculture had a great contribution to the GDP rise. The GDP has particularly grown due to the rise of public and private consumption, contribution by service sector, which exceeds 60 percent of the GDP, and incomes collected from taxes on goods, products and services (reports by the Ministry of Finance reveal that more than 60 percent of incomes collected to the state treasury are “extorted” from indirect taxes such as VAT, excises, customs fees).

However, many economists fear that the economic growth will slow down because of consequences of the economic crisis. But this would happen should the banking system face a crisis, which would challenge serious collateral damages to the real economy. The domestic banking system would unlikely face such a crisis in a predictable future, despite the high dollarisation and euroisation of loans. Also, there are important changes of relative prices of basic products (energy and some food products), rise of the cost of credit (in conditions of the international financial crisis), and this reduces the profit margins and may turn into a rout of costs. These shocks could be severe and companies would experience them and salaries would be under pressure. But it is hard to believe that all these factors could reduce the economic activity, so that to annul any economic growth.

As regards foreign deficits, a serious decline of remittances would reduce the imports and consumption. But this would not affect the internal consumption so much that to reduce it in absolute terms. Worse could be the effect of reduction of funding lines for some banks from Moldova, as well as the ceasing of crediting by foreign donors. But a drastic cutting is unlike anyway. The crediting pace would rather decrease gradually. There are more and more alarming allegations related to the immensity of the trade deficit and gravity of the current account deficit on one hand. But, on the other hand, the current account and other components of the balance of payments such as trade balance are structural and there is no problem in this regard as long as they are completed (mostly by remittances and partly by foreign direct investments). This may be an absolutely natural situation since the country has a surplus of currency and shall be redirected to origins, and the high value of imports is a proof in this regard, too. Even more, the structure of imports shall also be considered. Or, when 23 percent of imports are made of mineral products (including natural gas) which import prices have been increased more than twofold, and the trade deficit is normally growing fast. In addition, there are incontrollable factors such as the rise of prices of natural gas imported from Russia, which fuels external deficits.

Finally, rise paces of economic activity could decline. In the event the public budgetary execution is reasoned and funds from crediting institutions are spent on developing the infrastructure, the effects will be able to partly compensate the deterioration of the international environment, and this would maintain a growth pace of approximately 5–6 percent per year.

Real sector

Industrial production up by 2 percent only…

Moldovan industrial enterprises have made production worth about 24.5 billion lei (about 2.4 billion dollars) in January-October 2008, which is by 2 percent more than in the similar period of 2007. The general rise of production in the period concerned was particularly linked to the growth of production made by food and drink industry by about 8 percent, and production manufactured by the energy sector by 5 percent. Enterprises making wines, distilled spirits, sugar, dairy, processing and canning meat and meat products, manufacturing furniture, etc., had a special contribution to the rise of industrial production.

Enterprises working in metallurgical industry, manufacturing medications and drugs, dyes, engines, processing wood and manufacturing wood items, etc., have also increased their production. At the same time, the production volume of enterprises manufacturing footwear, paper and cardboard, processing and canning fruits and vegetables, making oils and greases, cigarettes, glass and items, etc., have reduced their production.

Currency and currency market

Treasury of central bank on the decline…

The official reserve assets of the National Bank of Moldova (NBM) have decreased by about 188.7 million dollars over the last three months, particularly due to the fluctuation of the exchange rate of reserve currencies, which were rather volatile in the last period. Fluctuations of rates had a significant influence on reserves in dollars among all other reserve currencies.

According to an NBM communication, the depreciation of exchange rate of currency reserves versus USD has reduced the reserves by 136.6 million dollars over the last three months. Other factors including sales on domestic currency market (about 60.6 million dollars net or 3.4 percent of reserves) have influenced the currency reserves less. Interventions operated on currency market in the period concerned have balanced this market, preventing excessive fluctuations of the exchange rate. In addition, other factors such as external payments by NBM and Ministry of Finance (29.82 million dollars in the last three months) influence the level of international reserve currencies.

The official reserve assets were worth about 1.59 billion dollars in late November 2008, by about 188.7 million dollars less than in late August, when they amounted to approximately 1.78 billion dollars. Reserve currencies of NBM are maintained in several currencies and expressed in dollars, as this currency has the highest share on monetary market of Moldova (between 60 and 70 percent).

Banking system

Central bank reduces monetary policy rate by 1.5 percent…

This decision was made at a sitting of the Board of Directors of the National Bank on November 27. It also decided to reduce by 1.5 percent the norm of mandatory reserves from means attracted by banks in Moldovan lei and unconvertible currency, as well as from means attracted in freely convertible currency.

The reduction of the mandatory reserve norm will let the National Bank render liquidities worth about 232 million lei, 8.8 million dollars and 9.8 million Euros to the banking system.

The inflation rate of 9.8 percent for the last 12 months recorded in late October 2008, compared with October 2007, fits the NBM objective for 2008. The inversion of inflation trend and continuous trend of inflation to decline registered in May-October 2008 is a strong proof of the right monetary policy promoted by the National Bank, supported through the budgetary-fiscal policy of the Government. However, the reduction of inflation was possible through the direct intervention of the state into administrated prices.

Labour market

ILO forecasts lower wages…

The International Labour Organisation forecasts that salaries will grow by 0.8 percent in developed countries and by 1.7 percent in the world in 2008. In 2009, wages will decrease by 0.5 percent in developed countries and will grow by 1.1 percent in the world. According to the ILO report, while wages will tend to grow in the world, they will be on the decline in some countries. Food prices in some countries will be so high that they will seriously hit incomes of employees. The inflation on food products could reduce the living standards should governments fail to take immediate actions. Thus, the share of incomes allocated for food will grow in 2008–2009. In particular, this will be higher for poor population and people earning low wages from developing countries.

According to ILO, 75 percent of earnings of poor people in Moldova went to foodstuffs in the last years. In a related top by ILO Moldova is followed by Romania -78 percent, Armenia — 81 percent and Nigeria 83 percent. ILO noted that increasing expenditures on foodstuffs while salaries will not grow much will reduce expenses of families for other necessities such as services and other goods needed for a normal living. In consequence, the ILO warns that the health condition of children, pregnant women and nursing mothers could worsen.

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