Population 3.553 million
GDP 7.589 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
7.1 |
6.4 |
3 |
5 |
|
Inflation (yearly average) (%)
|
7.4 |
7.7 |
5.1 |
5 |
|
Budget balance (% GDP)
|
-2.5 |
-2.4 |
-1.3 |
-1.1 |
|
Current account balance (% GDP)
|
-9.8 |
-12.6 |
-12.2 |
-11.7 |
|
Public debt (% GDP)
|
26.2 |
23.2 |
22.4 |
20.7 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Support of the international financial community
- Strengthening of relations with the EU
- Small open economy which attracts foreign investment
WEAKNESSES
- Strong emigration and contraction of the population
- Dependence on transfers from expatriate workers
- Political instability and social tensions
Risk assessment
Growth dependent on the external environment
Growth is expected to pick up in 2013 despite the fall in agricultural production as a consequence of the serious drought which affected the country in summer 2012. Activity will be supported by the economic recovery in the partner countries of Commonwealth of Independent States (CIS), and infrastructure investment. Moreover, demand is expected to be sustained by the resilience of wages, the fall in unemployment and growth in credit. To deal with the economic slowdown and inflation, the monetary authorities have twice cut the key interest rate by two percentage points in 2012 (first in January, cutting the rate from 8.5% to 6.5%, then in February with a key rate cut to 4.5%). However the Moldovan economy is very sensitive to a worsening of the external economic environment. A deepening of the European crisis could lead to a slowdown in growth, given the economy’s dependence on the migrant workers’ remittances (which represent between a fifth and a quarter of the country’s GDP), on exports and capital inflows.
Because of the fall in raw materials prices and still modest growth, inflation is expected to remain close to 5%. The figure forecast for 2013 comes within the fluctuation limits set by the Moldovan National Bank (3.5% - 6.5%)
A slight fall in fiscal and current account deficits
The fiscal consolidation undertaken with the IMF has continued in 2012, enabling a fall in the budget deficit. However, lower fiscal revenues (weak growth, problem of collecting VAT…) and above-target spending (the Chisinau municipality has approved a budget which almost doubles the overall budget deficit) mean the target will be missed. Nevertheless, the authorities have renewed their commitment to budgetary prudence. In 2013 spending will be partially funded by the Extended Credit Facility negotiated with the IMF (ECF 2010-2013). Moreover, the slight economic recovery should give the authorities more latitude for tightening fiscal policy, enabling a reduction of public debt to below 21%).
In 2013 the Moldovan Leu is expected to depreciate slightly again against the euro (as in 2012), given the still high current account deficit and the low interest rate policy conducted by the Moldovan National Bank. This depreciation is expected to favour exports.
However, imports of goods and services are likely to increase more rapidly than exports, which will push up the deficit in the balances of trade and services. This effect will be offset by the surplus in the revenue balance and by increased transfers by emigrant workers. The current account deficit is thus expected to fall in 2013, but to remain at a very high level.
Improvement of the banking indicators despite the BEM’s risky loan policy
Banking sector indicators strengthened in 2011. The Moldovan banks are liquid, well capitalised and are postingnet profits. In the first quarter 2012, return on assets (ROA) rose to 2.9% against 1.8%, a year earlier. However, the stability of the system is at risk due to poor governance at the State Bank, the Banca de Economii (BEM). The bank, which holds 13% of the total assets of the sector has conducted a policy of risky loans, leading to a clear rise in non-performing (15.3% in June 2012). The bank’s new board of directors and the monetary authorities want to ensure that the BEM cleans up its asset portfolio and improves its risk management. Recapitalisation could be considered as a last resort.
Latent political risk
In March 2012 the parliament finally elected a president, Nicolae Timofti, after nearly two and a half years of political interim. This opened the way to a political normalisation and stabilisation process. However, the competition at the very heart of the coalition in power could slow down the reform process. Moreover, with the government’s financial austerity policy the risk of social tension is increasing. Regionally, membership of the European Union is the objective of the coalition in power, the Alliance for European Integration (AEI). Negotiations were opened in February 2012 between the European Union and Moldova on a free trade agreement. The government hopes that these negotiations will pave the way for an Association Agreement. In the long term, the European integration process still depends on the resolution of the Transnistria conflict. Moreover, Russia has proposed to Moldova the opening of discussions on gas prices and debt alleviation ($4.1 billion), but on condition that Moldova renounce its membership of the European Energy Community. Finally improved governance and combatting corruption remain crucial challenges for the country. According to the latest World Bank ranking published in 2012, the country ranks 141st out of 210 for quality of regulation and 146th for corruption (i.e. behind its central European neighbours Rumania, Bulgaria, Czech Republic).
