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Debt crisis, export evolution and exchange rate — reflections on Moldova
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Paradoxically or not, Moldova’s economy is on the rise, the least accordingly to statistics, despite the situation in the region and not only. Or, the economic growth in the 1st quarter of 2011 exceeded 8 percent, a unique level in this area. Even more, exports are on the rise, too, compared with the similar period of last year, with this indicator revealing indeed that the productive sector is recovering after falling down in 2009. In addition, the latest IMF mission which finished on July 13 the third economic development revision in Moldova in the framework of the programme on Moldova assessed that the Moldovan economy redressed after the 2009 decline, and the forecast for future is positive.
However, the situation in the Eurozone does not advantage Moldova at all. Moldova’s trade exchanges with the European Union are pretty high and cover almost half of imports and exports. Therefore, if the Eurozone faces an economic stress, the austerity measures it is taking now could affect Moldova in commercial terms, as our country has greatly strengthened its exports the last two years. Whereas Moldova’s exports do not face any contractions or negative dynamic, but one should worry about decrease of export growth rate, as more than half of Moldovan exports go to the EU and austerity measures on community market will reduce the internal consumption in the EU.
All in all, perturbations in this area could affect the relationship with Moldova earlier or later. Vulnerabilities are serious in a country which has a growth model based on a rapidly increasing crediting, foreign credits and often speculative investments. Even more, inflationist expectations and differences of interest rates (on credits and deposits) are also pretty high. World prices of basic products such as hydrocarbons or foodstuffs will likely grow the next years and this is a quite hostile factor, which will bitterly hit any still consuming economy like the one of Moldova.
On the other hand, one may say that the conjuncture in this area will not seriously hit Moldova for the time being, as our country is not a strong player on exchanges or regional financial and currency markets like Romania or Bulgaria. These turbulences will not affect the economic growth of the country for the time being. Moldova is not a sovereign debt risk. Moldova’s government-administrated external public debt counts for around 25 percent of GDP, and this is a rather acceptable level. In this respect, Moldova is not a sovereign debt risk, as any debt is translated into the need to borrow on international market, and the costs of these loans are very high in conditions of current turbulences.
Elsewhere, the financial-banking system in Moldova has pretty high solvency rates and is rated quite well and optimistically, as the National Bank updated the solvency criteria and guaranteed together with the Government their health and resistance to eventual new European shocks. The dynamic of international currency market redounds on domestic market for sure, as the domestic currency market is quite dependent on external developments. The leu/euro or dollar exchange rate may be explained from two points of view. Firstly, some objective factors crowd the euro. For example, the European currency has seriously depreciated versus majority of currencies in the world this year, both because of the crisis in Greece, Ireland and other countries, and following poor economic results in the Eurozone in particular and EU in general. However, this tendency will reverse its trend. But everything depends on the way the authorities of falling economies will realise the gravity of problems and will act appropriately. In addition, the conjuncture on domestic market could be regarded as seasonal, as the largest currency inflows come in July and August, when Moldovans working abroad come back home for summer holidays and the central bank tries by direct interventions into exchange rate to control the inflation.
One does not know and cannot anticipate developments in the EU or Eurozone because of the sovereign debt crisis, at least on a long term. The external currency war could intensify, so that to hit the international commerce and the foreign trade of Moldova, and this is already happening. External prices of basic products may also be a negative shock for Moldovan economy, especially on inflation dimension, which could seriously affect the purchase power of population in one or another manner. Thus, these are external factors and authorities shall rely on own actions or measures such as more restrictive fiscal policies like reduction of expenses and increase of some taxes and fees, or more restrictive monetary policies, that means crediting policy which could also become more restrictive on short or medium term. Thence, authorities shall not rely on unilateral actions but on a combination or mix of policies.