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Evolution of GDP

The country's economy has grown by 6.2% in the first half of this year. This is a pretty strong growth, given the internal and external shocks faced by economy in the period concerned. On the other hand, certain experts have thrown doubts on correctness of this growth, raising dissatisfaction more than once with methodology of calculation of GDP and we should finally trust them. If adding the rise of inflation, which erodes the economic growth in a bigger or smaller measure, to this halting evolution of GDP, the situation is not optimistic at all like described by authorities. Despite an economic growth, this rise is unbalanced and depends on imports too much. If the crisis in industry continues in the second half of this year and affects other sectors of economy, the scenario that the year will end with a downfall of leu is possible. We anticipate a growth of between 5% and 5.5% for 2006, with the upper level depending on agricultural year, too.

Sectorial skidding

Indeed, the skidding is unavoidable, given the set of unplanned "shocks" that influenced the evolution of economy: the higher price of crude oil; the rise of the natural gas price transposed through higher local tariffs; Russia's interdictions on Moldovan exports of wines and agro-food products; evolution of salaries, plus the expansion of internal credit as an effect of the reduction of interest rates. All these taken together and some uncalculated decisions on economic policy have deepened the problems.

The pace of industrial production has dropped by 6.4% compared with January-June 2005, mostly due to the reduction of production volume in wine, glass, paper and oil making sectors. However, the Moldovan industry was adversely affected by a low productivity, reduction or annulment of state subsidies and intensified competition on domestic market. The weak reorganisation or insufficient modernisation of enterprises is also a cause. Nor the agriculture was very progressive in the first half of this year, but the trends observed in the second half-year hint that we will have a growth at the end of the year, with the condition that the dog-days will not affect the agricultural production grown in the summer-autumn period.

Although the corporate income tax dropped in 2006, the growth of gross capital formation this year has slowed down compared with 2005, at least so revealed by statistics. On the other hand, investments in fixed capital are more important than the gross capital formation, and the situation could improve, if investments grow. The infrastructure, which covers about half of the GDP formation, is not competitive in continuation and it is a sore point of the economy. A small number of infrastructure objectives have been privatised in the latest period, while the raised small resources have not been used appropriately through viable projects and practices.

The problems faced by economy are growing. The trade deficit boom and the decline of industrial production and the rise of external deficits indicate an inadequate pace of economy. The capital inflow and the still large remittances from abroad have fuelled the consumption, and thus the current account deficit has grown. Its reduction depends on efficiency of measures to moderate the consumption credit and the evolution of exchange rate.

Most of mortgage loans are released in foreign currency and an eventual depreciation of leu will lead to a true social shock. The fact that only half of the current account deficit is financed from direct foreign investments makes Moldova very vulnerable to short-term changes of attitude of investors. The concerns of many local analysts, who fear that the taken measures of tax policy focus on a rise of budget incomes rather than on a growth of production or production investments, are perfectly understood. All these might lead to a slower economic growth rate and could worsen the medium-term economic problems.

Perpetuation of inflation

Nor the trends of inflation are encouraging, since it exceeded 7% in the first half of this year. We consider that the 10-percent inflation target adopted by the National Bank of Moldova and Government will be unlikely achieved due to the big influence of higher administrated prices (gas, energy, transportation, fuels, etc.) and credit expansion.

Indeed, the national production is not in step with evolution of internal demand, and this is a pressure which turns into higher inflation and external deficits. Thus, we need a professional dialogue between BNM and the Ministry of Finance, which would allow a conciliation of the monetary and budgetary policies in order to continue the stability of prices and to limit the external deficits. We think that BNM will face further many dilemmas and compromises related to prices. We forecast an inflation of 12.5-13.5% for the end of 2006.

Exchange rate

As regards the Moldovan leu, we think that it will face big pressures the next period because of the rise of internal prices, weak promotion of exports, and negative influences of some financial markets in the region. The leu will continue to have a big volatility and it is hard to predict the trajectory of the national currency till the end of this year. However, we estimate an exchange rate of approximately 13.5-14 lei per dollar and 16.8-17.3 lei per euro for late December.

We do not rule out the scenario of a sudden depreciation of 3-5% of the leu versus main currencies, which may take place in September-November 2006. In our opinion, the remittances of Moldovans working abroad and imports of energy and consumption goods in autumn-winter are the only parameters that seem to be rhythmic this year in a certain measure and maintain the exchange rate at least at the current level.

Instead of conclusions

And finally, "as one-way traffic does not exist in economy", interventions and corrections in economic policy become unavoidable at a moment. However, it is important that these interventions not to mean economic recession or a depreciation of the exchange rate, which would increase the inflation. Domestic enterprises must function by gaining from productivity; they must invest more, must control their production costs better and absorb new technologies capable to enhance their capacities; must permanently train their staffs. Foreign investments will be crucial in future as well for a good functioning of economy. It would be good to insert some segments of our economy in vital European industrial networks.