Economic Policies on December 1–15, 2009

Inflation and prices

Zero inflation likely to be recorded for 2009…

Official statistics reveal that the inflation rate for November increased by 1 percent compared with October 2009. On the other hand, the cumulated rate for 11 months was minus 0.5 percent that means deflation. Prices of foodstuffs rose by 1.6 percent last month, those of manufactured goods increased by 0.9 percent, and tariffs for public services went up by 0.2 percent. This dynamics or better saying state of things was very clear for common people, as it concerned prices of housing, food products and public services etc.

Well, at a first glance, one should be happy unless this indicator does not show something else. However, thinking about a worse combination of factors than in this case is hard, first of all:

Reduction of consumption due to the fall in people’s incomes;
Reduction of remittances;
Reduction of salaries and other incomes, inclusively from investments;
Forced vacations or even dismissal of employees etc;
Reduction of companies’ revenues, actually their lock, as little is sold and little is purchased respectively;
Use of savings and reduction in population and businesses capacity to get loans.

These facts altogether give birth or encourage deflation directly or indirectly. There are winners and losers in such a situation. Of course, deflation advantages all consumers in Moldova, especially those earning little. As well, deflation advantages the Government as consumer when it carries out public procurements of foodstuffs and manufactured goods for orphanages, kindergartens, elderly asylums, military, and others. And falling prices will make consumers happier. But happiness with falling prices is short, as it may turn into discontentment in a long term since a lasting deflation makes businesses reduce or even cease production and often become insolvent and/or go bankrupt.

This fact amplified by falling incomes of Moldovan population reduces revenues of national public budget and people’s wages. In consequence, everybody suffers: employees from private and public sectors, retirees, students and even businesses that provide the state with goods, works or services. There are cases when employers tell their employees to agree with salary cuts in order to keep being competitive. This way, households are more embarrassed to get rid of the debts raised during economic boom, as deflation fuels debts. On the other hand, the latest evolution of exchange rate could reverse this trend and this would easily increase prices.

Macroeconomics

Economic recession of 7.7 percent recorded in nine months of 2009…

In January-September 2009 the Gross Domestic Product was worth about 44.17 billion lei in current market prices and decreased by 7.7 percent, compared with January-September 2008 (www.statistica.md). The gross value added on economy dropped by 8.3 percent compared with January-September 2008. The gross value added in commodity sector declined by more than 19 percent compared with January-September 2008 along with a serious fall (by 23.3 percent) of gross value added in industry, followed by decline (by 10.6 percent) of gross value added in agriculture, hunting, forestry and fishing sectors. In terms of contribution to GDP formation, the gross value added in commodity sector decreased by 1.4 percent, compared with the similar period of last year, reducing (by 4.2 percent) the GDP.

The gross value added in service sector dropped by 4.5 percent compared with the similar period of 2008. Serious falls were recorded in building sector (by 30.8 percent), followed by transport and communication (by 14.8 percent) and wholesale and retailing (4.5 percent), while production volume in “other sectors” exceeded by 5.9 percent the accomplishments recorded in the similar period of the last year, covering 52.2 percent of the service sector and 34.2 percent of GDP, compared with 46.2 percent and 29.5 percent respectively in January-September 2008.

The gross value added rate (gross value added compared with output volume) on economy exceeded by 3 percentage points the level recorded in the similar period of the previous year, and in commodity and service sectors by about 2 percent and 2.3 percent, respectively due to the fall in the volume of intermediary consumption out of output volume (from 62.6 percent in January-September 2008 down to 59.6 percent in January-September 2009 — total on economy and from 75.5 percent in January-September 2008 down to 73.6 percent in January-September 2009 for commodity service, and from 52.3 percent in January-September 2008 to 50.0 percent in January-September 2009 for service sector).

Diagram 1. Evolution of GDP and inflation rate

Source: NBS

Currency market

Recent evolutions of exchange rate…

The up to date evolution of the currency market seems to be natural, as such fluctuations were observed in different periods. On the other hand, the depreciation of leu by about 10 percent versus dollar and by more than 8 percent versus euro would go out from recent statements delivered both by the central bank and economists that these sudden deviations of exchange rate would be linked to some seasonal factors. For example, the exchange rate for the similar period of 2008 or even 2007 was among lowest ones — 10.4 lei/USD and 14.5 lei/Euro. Therefore, saying that this devaluation would be mainly linked to some seasonal factors would be wrong.

Seasonal factors…

The leu should go up in this period for several reasons or at least many people would expect so. But one should not forget that many things have changed in one year. One should carefully look at economic developments in the current conjuncture. The economic system, particularly the productive sector, was the prey of economic crisis. The increasing external and internal debts, rather high budgetary deficit, decline in almost all indicators are serious reasons for Government to take an attitude. And it would do so via NBM, which intervenes into market by slightly devaluating the leu, as the state is very “hungry” of money, giving a respiro to exporters as well in these hard times. So, as formal data are unavailable, one may just suppose that this would be a NBM intervention in the market, which could bring advantages on a short term only.

Developments on international markets…

The conjuncture on international markets and evolution of Euro-dollar pair unlikely influenced so strongly the ascension of these currencies on domestic market. Yes, the domestic market is connected to the exterior one or another way, but not at the extent at which effects of international exchanges would have a strong influence and immediate effect. Even more, financial markets did not achieve such evolutions like the domestic currency market does.

Forecasts

Stability of exchange rate is probably more important than liberalisation in current economic conjuncture. Of course, a weaker leu would advantage exporters, and one may expect it given the blocked foreign markets, which are not avid of Moldovan products. In addition, a stronger, more stable leu encourages a lower inflation or Moldova makes great progress in this respect. That’s why running a risk would not be recommended, as devaluation would resuscitate the panic of people, this being worse than downfall of some economic indicators.

One knows: some businesspersons or economic agents who see an exchange rate of 18–19 lei per Euro (particularly exporters), but on the other hand, estimates by some analysis centres indicate an exchange rate of 17–17.5 lei per Euro, while the country’s budget for 2010 is built on an exchange rate of 12.5 lei per dollar and authorities will do their best to not exceed these limits too much. Let’s hope that Moldova will be able to prevent a sudden depreciation of leu.

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