Identifier
Created
Classification
Origin
08CHISINAU1273
2008-12-30 08:22:00
UNCLASSIFIED
Embassy Chisinau
Cable title:  

GLOBAL ECONOMIC CRISIS IN MOLDOVA

Tags:  ECON EAGR EINV EFIN ETRD PGOV KTDB MD 
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VZCZCXYZ0000
RR RUEHWEB

DE RUEHCH #1273/01 3650822
ZNR UUUUU ZZH
R 300822Z DEC 08
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 7480
INFO RUEHMO/AMEMBASSY MOSCOW 3267
RUEHKV/AMEMBASSY KYIV 0627
RUEHBM/AMEMBASSY BUCHAREST 4313
RUEHSF/AMEMBASSY SOFIA 0685
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0743
RUCPCIM/CIM NTDB WASHINGTON DC
UNCLAS CHISINAU 001273 

STATE FOR EUR/UMB, EEB/IED, EEB/ESC, EEB/IFD/OMA
STATE FOR EEB/EPPD

SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR EINV EFIN ETRD PGOV KTDB MD

SUBJECT: GLOBAL ECONOMIC CRISIS IN MOLDOVA

UNCLAS CHISINAU 001273

STATE FOR EUR/UMB, EEB/IED, EEB/ESC, EEB/IFD/OMA
STATE FOR EEB/EPPD

SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR EINV EFIN ETRD PGOV KTDB MD

SUBJECT: GLOBAL ECONOMIC CRISIS IN MOLDOVA


1. Summary: Moldova's underdeveloped banking
sector and stock market and the absence of
speculative capital have enabled the country to
avoid any initial shock from the global economic
crisis. Quite the opposite, the country is set to
finish 2008 with seven percent GDP growth and
record high levels of foreign direct investment.
However, the prospects for 2009 look less
promising for Moldova. As the economy is driven
largely by remittances from migrant workers and
foreign investments, inflows may decline as
migrants lose jobs and return home and foreign
investment slows. Domestically this could
translate into lower consumption and reduce GDP
growth. As a result, returning migrant workers
with declining employment opportunities abroad
might express their dissatisfaction with the
ruling Party of Communists (PCRM) and support
opposition parties in the upcoming elections. A
more serious economic downturn is developing in
the more-industrialized separatist region of
Transnistria, where industrial production and the
level of exports have dropped significantly. End
Summary.

THERE IS A FINANCIAL CRISIS WHERE THERE IS A
FINANCIAL SECTOR
-------------- --------------
--------------


2. In a news conference held a few weeks ago the
National Bank governor Leonid Talmaci said that
the banking sector was sound and ready to weather
financial turmoil. According to Talmaci the
country's financial system has a resilience
learned from the financial crisis during the 1998
Russian ruble collapse and an economic crisis with
the 2006 Russian wine embargo of Moldovan
products. Johan Mathisen, IMF Resident
Representative in Moldova, agrees that local
commercial banks are well capitalized. They have
the highest liquidity levels in Eastern Europe at
31.4 percent although the minimum required is 20
percent. The National Bank has done a good job of
raising foreign exchange reserves to unprecedented
levels, adequate to keep at bay any immediate

pressure on the exchange rate of the national
currency, the leu.


3. The underdeveloped credit market has enabled
Moldova to avoid a financial crisis. Moldova's
banking sector plays a relatively minor role in
financing economic activity unlike western
economies and the size of the country's stock
market is insignificant. The non-resident share
of total deposits is low at around 8 percent and
does not arouse concerns of capital flight.
Mortgage financing is only at its nascent stage.
In a remark at a recent news conference Valeriu
Lazar, a former Minister of Economy and Trade,
noted that there is a financial crisis where there
is a financial sector and there is economic crisis
where there is an economic sector. Lazar's
conclusion was that Moldova has little of either.


4. While the financial sector is underdeveloped
both it and the economy continue to grow. The GOM
expects to finish off the year with seven percent
GDP growth, record high FDI inflows of up to USD
650 million, an inflation rate of less than 9
percent, a 20 percent increase in exports and a 30
percent increase in imports. The GOM's outlook
for next year's state budget is optimistic
assuming six percent GDP growth.

MOLDOVANS STILL WARY OF BANKING SECTOR
--------------


5. Many Moldovans remember the skyrocketing
inflation of the early 1990s that wiped out
lifelong savings and the subsequent 1998 Russian
financial crisis that caused the national
currencyQs devaluation almost overnight.
Officials have made numerous statements to
reassure everyone that the banking sector is safe.
In early November the newspaper Moldavskie
Vedomosti published an article stating that
President Vladimir Voronin told the National Bank
Governor to freeze early withdrawals of deposits
from banks and suspend licenses of several banks.
The National Bank was quick to deny and dismiss
the information as "intentional misleading of
public opinion with the aim of destabilization of
the situation."


6. Rumors and uncertainty on financial markets
abroad seem to have alarmed some Moldovans and in
October bank deposits decreased 4.6 percent.
Today there seems to be general confidence in the
banking system. The initial tension in the
banking sector has abated, yet the situation can
change on unfavorable news about the struggling
financial sector of Russia and Ukraine. The GOM
offers deposit insurance of up to $450 for an
account in a bank. Moldovans having more than
$450 in savings are aware of the deposit insurance
and have accounts in more than one of the 16 banks
in the country since the IMF reports that up to 90
percent of all deposits are covered.

MIGRANT WORKERS, REMITTANCES AND POLITICS
--------------


7. Moldova's economic growth over the recent years
has been spurred by large remittances from the
countryQs migrant workers. Estimates of the
number of Moldovans working abroad range from
350,000 as reported by the International
Organization for Migration to estimates of even 1
or 1.1 million. Moldova ranks second in the World
Bank global 2007 rankings on the reliance of
economic growth on remittances at 38.5 percent of
GDP. Last year remittances were around USD 1.3
billion and by the end of this year are projected
to reach USD 1.7-1.8 billion. High consumption
fueled by growing remittances has stimulated
imports into Moldova. The IMF Representative
warned recently that the recession on the world
markets may lead to a drop in exports and lower
demand for Moldovan labor abroad. The latter may
lead to fewer remittances from Moldovans abroad
and thus lower consumption and reduced imports.
These developments could lead to a decline in VAT
and customs taxes which represent the main sources
of income for the state budget.


8. Moldovans working in construction in the CIS,
primarily in Russia, will likely be the first
migrants to return home. Authorities estimate
that up to three quarters of the over 120,000
Moldovans in Russia are working in construction,
where the sector has ground to a halt. Igor
Dodon, Deputy Prime Minister and Minister of
Economy and Trade, recognizes this as a concern.
He says his Russian counterparts have assured him
that many Moldovan workers will continue to be
employed in large infrastructure projects such as
the Sochi Winter Olympics site. Dodon speculates
that some 25,000 migrants may be forced to come
back in the first quarter of 2009 but asserts that
the Moldovan economy will be able to employ them
in domestic infrastructure projects. The GOM
reports 310,000 Moldovan migrant workers are
employed in the European Union. They work
predominantly in the service sector in Italy which
will not experience an immediate economic
recession. Some migrants may lose their jobs but
given the dire economic situation in Moldova many
would prefer to stay unemployed in the EU.
Returning migrants are a source of concern for the
ruling PCRM because they could possibly express
dissatisfaction with the government in upcoming
elections.
REAL ESTATE SLOWDOWN IN MOLDOVA ACCELERATES
--------------


9. There are signs that the crisis has taken a
toll on the real estate market. The construction
boom that fueled higher real estate prices and
strong annual growth rates of over 20 percent in
recent years is now slowing. Data from official
statistics show that construction work was down
8.8 percent in the first nine months of 2008.
Local analysts now say the current situation
reflects what a local newspaper called "a price
stabilization with a tinge of stagnation." The
local Russian-language newspaper Ekonomicheskoye
Obozrenie conducted a survey of realtors to assess
the impact of the global financial crisis on the
real estate market. Some realtors indicated that
Moldovans are no longer rushing to invest in new
apartments. The frenzy of 2005 when it took three
weeks to find a buyer for an apartment is over.
Nowadays it takes at least five and a half months
to find a buyer. Moldovans are waiting and
expecting realtors to cut prices or are making
other choices with their money. According to one
realtor, sellers of commercial and industrial
space are ready to cut asking prices by up to a
half.

EVIDENCE OF AN ECONOMIC SLOWDOWN
--------------


10. Deputy Prime Minister Dodon says that exports
of food products to CIS may suffer and has called
on exporters to be careful with payments on
eastward deliveries reminding them of the 1998
Russian ruble crisis. Moldovan media also
reported that importers were asking advance
payment for deliveries from retailers. Lower
imports have also affected the transportation
sector. Moldovan state-owned railways and
trucking companies complained to reporters that as
consumers tighten their belts they have fewer
goods to transport.


11. There is anecdotal evidence that a few
Moldovan private TV stations are finding it
difficult to renew advertising contracts for 2009
because many major businesses are not rushing to
make budget commitments given the uncertainty on
the global markets. Some of these companies
representing world brands operate out of
neighboring Romania and Ukraine where the effects
of the global crisis have had a more immediate and
significant impact on the national economies.


12. In a meeting with the World Bank Regional
Director Martin Raiser to discuss the World Bank
Moldova Cooperation Strategy, Prime Minister
Zinaida Greceanii mentioned the GOM's
precautionary measures for 2009. She said the GOM
is closely watching the global financial crisis
which has not affected Moldova so far but the
country has to undertake precautionary measures to
avert a crisis next year. The two major
challenges are exports and payment capacities on
export markets as well as a possible return of
Moldovan citizens working abroad. Greceanii sees
the return of Moldovan citizens as beneficial
given the stringent need for labor in all sectors
of the economy.

THE GOM IS PLANNING
--------------


13. It took officials some time to come out
publicly with statements about the impact of the
global crisis on remittance-driven Moldovan
economic growth. After the initial reaction of
talking up the mood of the public, officials are
now half-heartedly admitting to some impending
fallout from the international markets. The GOM
is looking at measures that will focus on four
priority areas but has not presented any specifics
on actions it will take to support these areas.
First the government would like to ensure
sufficient liquidity for the banking sector and
avoid volatility in the leu's exchange rate.
Secondly, the GOM would like to prepare programs
to accommodate migrant workers returning home as a
result of downsizing in such sectors as
construction and transportation in Russia and the
EU. Such programs will offer consultancy and
financial assistance to those willing to set up
and run their own businesses. Thirdly, the GOM
would like to begin large construction projects
such as roads, gas pipelines and water supply. In
particular, the GOM plans to initiate
infrastructure development projects estimated at
USD 300-400 million in the first half of 2009 when
the impact of the crisis will be felt. The GOM
will allot 550 million lei (USD 53 million) from
the 2009 state budget and expects 116.5 million
euros and USD 73 million from the international
donor community. Fourthly, the GOM will focus on
helping local manufacturers finance their
activities through partial coverage of interest
payments to banks or through direct government
lending to businesses. The GOM plans to use
proceeds from privatizations to finance this
program. (Note: The GOM has recently announced
the pending sale of state shares in 80 enterprises
estimated at 4.1 billion lei (USD 395 million)
before the end of the year. Opposition and
independent media criticize the timing of the
privatizations during a global economic crisis.
Deputy Prime Minister Dodon commented that these
privatizations may help prevent a drop in foreign
direct investment.)

TRANSNISTRIA'S INDUSTRIAL BLESSING TURNS INTO A
CURSE
-------------- --------------
---


14. Transnistria's industry-based economy has
always been a source of pride for the break-away
region's authorities. However, this concentration
has also made it more susceptible to the economic
crisis. Tiraspol has been vocal about the effects
of the global crisis on its export-oriented,
heavy-industry enterprises. Production in the
region has been in continuous decline since
September. In November the region's industrial
output was down 19 percent. Average monthly
exports were cut 40-60 percent. The downturn in
export markets triggered production cuts and
temporary layoffs in the export-oriented Ribnita
Metal Plant and Ribnita Cement Plant. Other
industrial manufacturers located in the region
have also been suffering. Prices on metal
products and cement were halved reducing sales
further. With the Ribnita Metal Plant accounting
for two-thirds of the region's exports and
contributing at least one-third of the
Transnistrian budget, the "government" in Tiraspol
is grappling with difficulties in payment of
pensions which in some instances are as much as
two weeks late. The region already estimates a 30
percent drop in budget revenues. Authorities of
some towns in the region have come up with
proposals for hiring those laid off to clean town
parks and streets. Transnistria's parliament, the
Supreme Soviet, intends to address the Russian
Duma to request material and financial aid for the
beleaguered region.

COMMENT
--------------


15. The ruling PCRM of Moldova is striving to
maintain a stable macroeconomic situation in the
months before the parliamentary elections in
spring 2009. Coming up with the proposed measures

to fight off the recession, the GOM has few
financial resources of its own to fund such
projects and will have to rely on the
international community for assistance. A tough
IMF fiscal framework has enabled Moldova to
weather the initial financial shock of the crisis
safely. The banks have high rates of liquidity
and the NBM has supported a stable currency. The
IMF continues to emphasize that the GOM will have
to do more to improve its investment climate, step
up regulatory reform and fight corruption to
simplify the operation of businesses and attract
investments. There has been no major decline in
remittances but the export markets for
agricultural goods may suffer since two major
markets, Russia and Ukraine, are experiencing far
greater economic downturns than Moldova.

CHAUDHRY