Moldova

Moldova Macroeconomic Snapshot

1. Overview
Although Moldova has limited exposure to international financial markets, the global economic downturn has hit the country through the decrease of remittance flows and foreign investment to the country. While Moldova has proven resilient to previous external shocks in the 2006-2008 period, the magnitude of the current crisis is projected to affect Moldova severely. Due to the ongoing poor economic outlook for its major trading partners, it is projected that the economic conditions of Moldova will deteriorate further in the second half of 2009.

2. Economic Growth
Moldovan GDP contracted by 6.9% year over year in the first quarter of 2009. This deterioration should be attributed to the 10.2% decrease in household consumption and the sharp decrease of 36.4% in gross fixed capital formation. The EUI forecast for 2009 is that real GDP will contract by 10%. Rising domestic unemployment will further constrain household consumption. Weak investors confidence in the Moldovan economy along with tighter lending conditions will lead to decreased FDI. With Moldova's main export markets all in recession, foreign sales are projected to drop significantly; Russia and Ukraine, Moldova's largest export markets, are forecast to contract by 7% and 17%, respectively in 2009/ and will not return to growth before 2010; Neighboring Romania, another important export market, has entered recession in 2009. A gradual improvement of the external environment in 2010 should allow the economy to begin to recover, but growth will be limited, with a forecast of a 1% increase (EUI).

3. Balance of payments
The large trade in goods deficit is likely to narrow sharply in 2009, as recession in important markets will lead to a steep fall in exports. However, a drop in private consumption and investment, along with lower oil prices, is projected to cause a decline in imports. The trade deficit will expand moderately in 2010 as imports slowly recover. The sizeable trade deficits expected in 2009-10 will be partly offset by continuing inflows of earnings sent by Moldovans working abroad, although these are also set to fall substantially under the impact of the global slowdown. The contracting trade gap will allow the current-account deficit to narrow from around 17% of GDP in 2008 to an average of just over 11% of GDP in 2009-10. Inflows from foreign direct investment (FDI) and private-sector borrowing are likely to be negatively affected by the poor global economic environment.

4. Inflation-Monetary Policy
The interest rate policy of the National Bank of Moldova is balancing between attaining balanced inflation rates (in order to promote growth during the 2009 recession) and supporting the currency. EUI forecasts inflation at 1% for 2009 and 3% for 2010, due the poor outlook for economic growth in the above period .

5. Fiscal Position
Fiscal performance is projected to worsen significantly in 2009, due to the recession and the disruption to policymaking brought about by the political situation. EUI forecasts that the full-year budget deficit will be 7% of GDP, from the previous forecast of 5%. Fiscal tightening and a return to economic growth in 2010 are likely to bring down the deficit in 2010.

6. Business Environment
Although Moldova improved or remained steady in the five available scored rankings, it ranks below regional averages in all of them. According to the WEF Global Competitiveness Report, the three most problematic factors for doing business in Moldova are access to financing, corruption and tax regulation.

7. Key Issues
Moldova has entered a protracted period of political instability since April 2009, which has hindered the formation of policies in respect to the financial crisis. IMF has indicated that it will engage in negotiations with new government (formed after the July 2009 elections), in order to replace the poverty reduction and growth facility that expired in May 2009. It should be noted that this agreement with the IMF is of outmost importance for the country, both in terms of advancing structural economic reforms as well as improving Moldova's business environment.