Economic Policies on April 1–15, 2009

Prices and inflation

Moldova records deflation for 4th month…

Moldova records a deflation for the third month in a row this year. The Consumer Price Index (CPI) in March was 99.2 percent compared with February 2009 and 101.2 percent compared with March 2008 (CPI in March 2008 was 101.1 percent, compared with February 2008 and 115.4 percent, compared with March 2007), according to the National Bureau of Statistics. The decline of average consumer prices by 0.8 percent was linked to the fall of food prices by 1.5 percent, manufactured goods by 0.4 percent and tariffs for public services by 0.1 percent. Meanwhile, tariffs for public interurban motor transportation services decreased by about 5 percent in March, while handmade house repairing services by 1.5 percent. Prices have decreased by 1.8 percent this year. Thus, the consumer market of Moldova undergoes deflationary processes starting December (prices decreased by 0.2 percent in December, 0.1 percent in January, 1 percent in February and 0.8 percent in March).

Investment climate and external position of Moldova

Economic impact of political battles will be strong…

The political instabilities and the last week’s developments in Chisinau will hit the investment climate in general and foreign investors in particular for sure. They were reticent until now with placing their business in Moldova, but their reticence will double from now on.

In addition, fears of foreign investors who are or have plans to come to Moldova receive a confirmation from outside, too. For example, the international financial evaluation agency Fitch has raised concern about situation in Moldova, warning that Moldova’s rating could fall from “B-” currently. Moldova’s rating is part of the junk category, which does not recommend investments.

According to Fitch experts, the political and economic situation in Moldova is very difficult and already poses a high political risk and dangers will be experienced in continuation on a long term and will hit the economy, so that its quality will worsen and this fact endangers the crediting relations with international financial giants such as IMF, WB, EC, etc.

It is well-known that Moldova’s Memorandum with the IMF is almost over (May 2009), the WB relations with the Government are relatively strained, though two tranches have been disbursed in the last half a year for infrastructure projects, and a similar situation is observed in the relationship with the European Commission. But their further relations with the Government will be mainly conditioned with an IMF memorandum. Even more, it is worth recalling that besides main international crediting structures there are investment projects of other countries such as Spain, the Netherlands, Lichtenstein, Japan etc., which may complete their mission at any moment because of the lack of elementary freedoms and democratic principles in Moldova.

In addition, since Bucharest supported Moldova in the European integration process, the introduction of visas for Romanians will hit the business environment, particularly that many foreign businesses in Moldova are managed from Romania, an EU member state. Therefore, the economic impact of political battles will be strong, particularly because Moldova is dependent on external funds, from EU funds to remittances by nationals working abroad.

The global economic crisis has contributed to tensions in the country, since remittances by Moldovans working abroad have decreased. Moldova’s external debt of about 4 billion dollars or 70 percent of the Gross Domestic Product of 2008 is very high, though it is not bigger than in other small, developing countries. The figure includes both the public and the private debt. This year, Moldova still has to pay 12 million dollars from a bond issue with a fluctuating interest rate maturing in October, and this will press the state budget.

Macroeconomics

Crisis effects: forecasts by IDEA club…

The IDEA Club has released eventual forecasts in the current economic conjuncture in a commentary by Sorin HadircaRO within a sitting on world economic recession and its impact on Moldova. A question “going about” and troubling all is: is Moldova able to use the world economic recession for its interests. Club members agreed that the recession per se is not an opportunity and brings just problems: reduces the confidence, the consumption, builds a vicious circle born by price fall, cuts the sales, brings external vulnerability and enhances the unemployment.

However, it is reasonably to assume that some countries will get rid of the recession sooner and others later, depending on their exposure and policies. Then countries which will get rid of the crisis sooner will be in a more advantageous position in terms of competition on international markets, and will be the first to collect the fruit of regained confidence of consumers, strengthening their shares on those markets this way.

Advantages for some…

It was also discussed that some companies will be advantaged inclusively during the crisis. These companies are either competitive in terms of costs, or “rich” in liquidity.

As regards the second group, IDEA experts indicated commercial banks from Moldova which, enjoying high liquidity and solvency indicators (the least for the time being), could make an expansive move forward markets from neighbouring countries. Of course, this step is associated with a certain risk level, while an in-depth market analysis is absolutely necessary. However, much is to be gained. It is known that prices of shares fall below their fair market value during a crisis for clear reasons: panic, liquidity deficit, repatriation of some investments. When the panic is over the quotation of companies which survive on market undergoes a correction — prices of shares regain their market value. This activity is called “cherry picking” in the financial world, suggesting that shares of companies are bought for very low prices. In a medium prospect, the expansion of some banks on neighbouring markets would do a favour to exporters and competitiveness per total.

Some forecasted macroeconomic indicators…

The same sitting used the expert method which produced pessimistic rather than optimistic results: the PIB will be 1.4 percent in 2009, inflation (December 2009/December 2008) — 5.8 percent and the unemployment rate will grow up to 9.6 percent.

Indicators	Min.	Average	Max.
GDP	-4.0	1.4	5.5
CPI	3.0	5.8	9.0
Unemployment rate	7.1	9.6	15.1

Considering the GDP, IDEA experts tried to regard it in the light of performance of its components: consumption, investments (inclusively expenses and public investments) and net export. Therefore, a negative impact of the consumption and household investments is expected and it will be partly compensated by performance of the net export (which could have a positive influence on GDP for the first time after many years). The rise of budgetary expenses and available funds to cover the deficit could also have a positive impact on GDP.

The performance of CPI is “positive” due to the reduction of the aggregated consumer demand. In these conditions, Moldova records a deflation for several months in a row and this situation would change should the Moldovan leu depreciate.

	Min.	Average	Max.
Recession term (years)	0.0	1.0	2.5

Opinions regarding the duration of recession in Moldova were likely polarised. Speaking about the end of recession requires a clear term of its beginning. Or, the classical definition — the GDP decreased two quarters in a row — does not stand on in the current conjuncture, as the GDP increased by 7.3 percent in 2008. However, assuming a beginning of recession which is currently developing (the decline of industry by about 27 percent is a proof in this regard), IDEA experts forecast that the economic growth pace will be resumed in the 1^st quarter of 2010. They indicated the need of an anti-crisis plan aimed to support the overall demand and protect the banking system. For more details, see http://clubulidea.wordpress.com.

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