Economic Policies on February 15 – March 1, 2009

Banking system

Crisis hits crediting…

Overall credits released by Moldovan banks in January dropped by 60 percent due to dearer loans and more exigency of banks to provide loans. Credits in Moldovan lei have decreased the most. NBM accounts reveal that overall loans in lei worth more than 510 million lei were threefold lower than the last month, when credits in domestic currency accounted for 1.62 billion lei.

This situation may be explained by several factors, but three of them could be most important:

Firstly, it is very clear that commercial banks have hardened their credit requirements for both individuals and economic agents. This decision is based on some reasons:
- Inclusively potential consequences of the crisis on domestic banking system that experiences eventual shortage of liquidity;
- Value of unreimbursed loans on system is high, which means that credits contracted by businesses reached their maturity terms and they are not disbursed (in particular, in building sector);
- The decreasing deposits by individuals in banks (many contracts on deposits are cancelled upon their terms and they are not extended) — an important source of banks’ portfolio, and therefore banks provide less credits for personal needs.
Secondly, individuals or businesses are more reticent and even worry to contract credits under these conditions, given the unstable monetary and currency markets, potential insolvency risks at reimbursement, and uncertainties of tomorrow;
Thirdly, the reduction of the NBM reserve currency by more than 200 million dollars in one month may be regarded as an alarm signal for a beginning of “storm”. This may have consequences both on depreciation of domestic currency and destabilisation of macroeconomic situation, risks which seem to occur this year and could produce a deficit of domestic currency. And the depreciation will finally affect those who contracted credits in foreign currency.

Banks holding international crediting lines or those which major share package is owned by European or international banks could enjoy a better condition, though western banks face the same problems.

Crediting standards were much more restrictive in January-February 2009, both for housing credits and consumer loans. Expectations in this respect have been generally confirmed. Last quarter of 2008 confirmed stricter requirements for mortgage credits, with banks anticipating this evolution in the mid-2008. The market conjuncture reveals that prices of homes are on the decline, marking an important and stronger correction than expected in the last quarter of 2008. As regards consumer loans, their growth rate has dropped more than expected by banks in late 2008, confirming a generalised population level trend and particularly the fall of consumer appetite.

Remittances equivalent to a Moldovan budget…

Maintaining remittance inflow would be a “life buoy” for the banking in particular and economy in general. However, remittances could decrease in connection with massive personnel reduction, with Moldovan nationals working abroad being affected too, and first signals are already observed — workers in building sector in Russia, in particular, Moscow.

The central role of emigration is economically proved for Moldova, as more than 20 percent of employable resources work abroad and remittances by migrant workers were equivalent to 1/3 of GDP in 2008. Indeed, they were worth over 1.65 billion dollars, which is the equivalent to Moldova’s budget. In macroeconomic terms, remittances have fundamental implications on economic growth, balance of payments and labour market. The increased consumer demand in Moldova funded by remittances has enhanced the supply by domestic producers and this advantages the economy. But imports have increased in parallel, as the economy is incapable to meet such a diverse and big demand.

International rankings

Moldova ranked in the bottom of world welfare top…

A world welfare index carried out by Legatum Institute (Dubai) reveals that the state of public health is a key concern in Moldova. According to the index, 43 percent of the population say that they are dissatisfied with their personal health (the Gallup World Poll). The prevalence of HIV is among the highest in the region. Almost 20 percent of citizens smoke, and more than 10 percent are undernourished. Consequently, health-adjusted life expectancy is under 60 years, and the population is decreasing.

The index indicates the high education level and low unemployment rate among progresses made by Moldova. On the other hand, it notes that with an average income of less than 3,000 dollars, Moldova is the poorest country in Europe, and political instability and poor government effectiveness keep investors away, hampering economic growth. The public sector still plays a dominant role in the economy, and privatisation has been sluggish. It requires more than 20 procedures to start an enterprise, the non-salary cost of employing a worker is high, and restrictions on working hours are rigid.

Foreign investment faces hurdles from bureaucratic inefficiency and corruption. Consequently, total foreign direct investment stock barely exceeds 1.5 billion dollars. The development of a more open economy has been blocked by political tensions that, for example, have led to a drop in the country’s main export good, wine, to Russia, which is its chief target market. The growth of a more open economy is also hindered by problems of smuggling in the disputed Transnistria region. At around 2 percent of GDP, foreign aid dependency is higher than for any other European country. The outward migration rate of 34 percent is the highest in the region.

The Legatum Prosperity Index 2008 covering 104 countries ranked Moldova on the 83^rd place between Honduras and Pakistan. The top is headed by Australia, Austria and Finland, while Yemen is ranked the last place. Moldova’s neighbours Romania and Ukraine were ranked the 47^th and 68^th places respectively. As regards the former Soviet area, a better life is enjoyed by Estonians (36^th place), Latvians (46th). Kazakhstan is ranked the 56^th place, Russia the 57th, Belarus the 78^th, and Uzbekistan the 80th.

Labour market

According to NBS accounts, the average wage on national economy accounted for 2,555 lei in January 2009 and rose by 12.8 percent, compared with the similar period of 2008 (the real salary increased by 6.7 percent). Average wage in budgetary institutions amounted to 2,096 lei and non-budgetary sector to 2,834 lei (Table 1).

Table 1. Average wage, lei
Sector	January 2009	January 2009 compared with January 2008, %
Total	2555,4	12,8
Agriculture, hunting and forestry	1260,0	21,7
Fishing, pisciculture	1348,7	12
Industry:	3070,4	11,4
Extractive industry	2638,8	-0,3
Processing industry	2738,6	8,8
Electricity and heating, gas and water	4522,1	15,6
Construction	2832,1	1,7
Whole sale and retailing	2531,9	13,7
Hotels and restaurants	2162,6	7,1
Transport and communication	3335,7	-2,7
Finance	5822,8	10,3
Real estate	3164,0	17
Public administration	3017,6	21
Education	1766,6	18,2
Healthcare and social assistance	2239,7	16,2
Other collective, social and personal services	2070,7	15,7
Entertainment, culture and sport	1841,8	17

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