MOLDOVA SUCCUMBS TO ECONOMIC CRISIS

UNCLAS CHISINAU 000227

C O R R E C T E D C O P Y (ADDED CAPTION)

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

E.O. 12958: N/A
TAGS: ECON EAGR EINV EFIN ETRD PGOV KTDB MD
SUBJECT: MOLDOVA SUCCUMBS TO ECONOMIC CRISIS

REF: CHISINAU 08 1273


1. (SBU) Summary: After the GOM's initial
confidence that Moldova might ride out the global
financial storm (backed by positive economic
figures for 2008),more recent news about a
slowdown in imports, exports and remittances
forebodes gloom for 2009. The International
Monetary Fund now projects that the situation is
far worse than was initially predicted. The
banking sector still seems sound, but there is
much speculation about possible devaluation of the
national currency after elections. With an
economy whose growth in recent years has been
driven largely by remittances from migrant
workers, Moldova may suffer severely as
international markets slide deeper into recession,
and some of these workers return home to join the
ranks of the locally unemployed. Lower
remittances will cause a decrease in local
consumption and a consequent decline in imports.
And fewer imports will result in a substantial
drop in customs duties from which the GOM derives
70 percent of its revenues. Separatist
Transnistria has been even harder hit and is in
desperate need of support from Russia. The
upcoming parliamentary elections on April 5
complicate the situation, since the ruling Party
of Communists of the Republic of Moldova (PCRM) is
fully focused on the campaign and on keeping up
the appearances of a sound economy. Such an
approach may prove deleterious after the
elections. In the post-electoral period, efforts
to put together a ruling coalition may distract
political leaders from the need to focus on
economic policy as soon as possible. End Summary.

ECONOMIC GROWTH SLOWS AT END OF 2008
--------------

2. (U) In 2008 the Moldovan economy continued to
grow as it has done each year since 2000. During
the first three quarters of 2008, the Moldovan
economy outperformed the initial projections for
the year. The last quarter of 2008, however, saw
a deceleration across the board as the global
crisis started to bite. Growth reached 10.8
percent in the third quarter, the highest in
Moldova's recent history. GDP growth slowed in
the fourth quarter, bringing the final annual rate
nevertheless to an impressive 7.2 percent.
Agriculture had a spectacular jump of 31.9 percent
in growth thanks both to a good harvest and
reflecting a recovery from the worst drought in
years in 2007. However, the bumper agricultural
harvest of 2008 has not helped Moldovan farmers
who have had to struggle with low regional
commodity prices. Many farmers have chosen to
store their crops in warehouses, barns and silos
rather than take a loss by accepting the current
low prices on agricultural products. Industrial
output edged up a disappointing 0.7 percent, while
retail soared 8.4 percent.


3. (U) MoldovaQs product competitiveness suffered
somewhat in 2008 as a result of the depreciation
of the currencies of the countryQs main trade
partners, in particular in Ukraine and Russia.
Nonetheless, the country's export growth remained
fairly strong in 2008 at 19 percent. Imports shot
up 32.8 percent, further contributing to an ever-
widening trade deficit, which equaled 54.6 percent
of GDP. Construction was down 8.9 percent,
confirming earlier media reports that the
construction boom was turning into an outright
bust.

TIMES OF TROUBLES AHEAD
--------------

4. (SBU) Statistical data for the first two months
of 2009 are beginning to show signs of trouble
ahead for Moldova. The picture will be clearer
when first quarter 2009 statistics are released.
The slowdown in the final months of 2008 now seems
to have been the beginning of a more serious
economic crisis, which will be picking up speed
during 2009. Industrial output plunged 25.1
percent year-on-year in January 2009. Imports
were down 28.2 percent in the same month. Private
trucking companies are laying off personnel.
Media have revealed copies of managersQ letters at
the state-run railway enterprise, suggesting a cut
in employeesQ working hours.


5. (SBU) At the beginning of March, the IMF
included Moldova in the list of 26 countries
highly vulnerable to the global downturn but not
requiring urgent assistance. The IMF's Resident
Representative, Johann Mathisen, told the Embassy
that in the first two months of 2009 the IMF
registered drops in remittances of 15 to 20
percent over the same months in 2008. Remittances
serve as a financial lifeline for many cash-
strapped Moldovans. These remittance-dependent
Moldovans may find themselves in need of
assistance, if the remittances they receive
decrease or cease. The state news agency,
Moldpress, attempted to put a positive spin on the
developments by noting that Moldovans abroad still
had jobs and managed to send USD 65 million home
in January. The next few months will reveal the
true impact of the global downturn on Moldovan
migrant workers. Many Moldovans go abroad in
spring and summer to work for up to six months
before returning home. Party representatives have
informed Embassy staff that increasing numbers of
migrant workers are returning home and are
unemployed. The IMF also noted that imports
dropped 50 to 60 percent in February 2009. A drop
in imports seriously undermines state budget
revenues, of which 70 percent are derived from
customs duties. Businesses are noting decreased
sales as without remittances Moldovans have less
cash to spend. At this rate, the current GOM
budget will be unrealistic because it will not
receive the planned revenues from customs duties
on imports.


6. (SBU) The GOM added "election-related" expenses
to the budget in the form of wage increases for
some government employees, e.g., teachers, at the
end of December 2008, an expense that the GOM had
not originally planned. The IMF noted that
pension increases, anticipated by many citizens
shortly before the elections, would be another
unplanned expense for the government. When the
April 5 elections are over, the new government
will face an immediate necessity to rectify the
budget. The new government will have to consider
reducing government expenditures and will likely
need international assistance.

NATIONAL CURRENCY UNDER STRAIN
--------------

7. (SBU) The GOM seems intent on depleting the
National BankQs foreign exchange reserves in order
to support the national currency. Since the
beginning of 2009 alone, the National Bank has
lost 23.5 percent or USD 392.6 million from its
foreign exchange reserves by intervening in the
currency market to prop up the Moldovan leu.
Despite the National Bank's interventions, the leu
has lost four percent of its value against the
U.S. dollar since the beginning of the year. In
the first two weeks of March, exchange offices
were overwhelmed by Moldovans wishing to exchange
Moldovan lei into foreign currency. Authorities
responded by blaming independent economic analysts
for unfounded and unprofessional statements about
the imminent devaluation of the leu in an effort
to calm citizens. Shortly thereafter, the U.S.
dollar again dropped below the psychological level
of 11 lei to the U.S dollar at exchange offices.
Critics of the National Bank's policy have been
calling for a gradual devaluation of the leu to
boost exports and to make local products more
competitive against imports. If the GOM holds to

its course of supporting the leu, imports may pick
up. Products from neighboring countries with
falling currencies will become cheaper for
Moldovans. However, Moldovan exports will likely
decrease, if the leu continues to hold steady.
Neighboring countries will be unable to purchase
increasingly more expensive Moldovan products as
their currencies continue to lose value.

RUSSIA HELPS BREAKAWAY TRANSNISTRIA DEAL WITH THE
CRISIS
-------------- --------------
--------------

8. (SBU) Crippled even more severely by the global
economic crisis than right-bank Moldova, the more
industrialized breakaway region of Transnistria
has slid into a deeper slump. Both industrial
output and exports plunged dramatically to almost
a half of last year's corresponding figures in the
first two months of 2009. The two largest
contributors to the Transnistrian budget, the
Rybnitsa Metal Plant and Rybnitsa Cement Plant,
slashed their output by over 40 percent.


9. (U) Authorities in the region have moved
quickly to adopt measures to fight the effects of
the crisis in the region. The region's
authorities were forced to postpone an earlier
announced raise in salaries for state employees
from March to September 2009. At the same time,
Transnistrian authorities froze any increases in
prices for utilities (gas, electricity, heating,
etc.) at least until September and allowed barter
transactions between enterprises.


10. (U) The Supreme Soviet, Transnistria's
parliament, reported in February that, following
earlier appeals by local authorities, Russia
granted about USD 7 million to the region to pay
pensions and bolster financing for social and
medical facilities. Few details are available
about the terms and conditions of Russia's
financial and economic support which is packaged
as humanitarian aid. This Russian assistance is
key to preventing an economic and social collapse
in the region. It is Russia's support that helps
maintain the Transnistrian ruble's exchange rate,
according to Vladimir Yastrebchak, the region's
"foreign affairs minister."

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

9. (SBU) The PCRM's focus on the campaign
paralyzes the GOM's ability to address the economy
in any other manner than to continually reassure
citizens that Moldova is doing fine. The ruling
party's short-term interests in defeating the
opposition parties in the upcoming April 5
elections trump any serious efforts by the current
government to alleviate the pending budget crisis.
The PCRM has focused most of its electoral
campaign on the country's stability and economic
growth over the last eight years and chooses to
ignore the fallout from the global economic
crisis. In an effort to project confidence in its
handling of the economy, the GOM did not engage
with a recent IMF mission to discuss a new IMF
framework to replace the current memorandum that
is due to expire in May. The IMF does not expect
the government to be in a position to discuss
fiscal and monetary policy until after the
elections. Moldova could not have been caught at
a worst possible moment for the global economic
crisis to begin taking a toll on the Moldovan
economy. The IMF and other analysts expected
Moldova to feel the crisis sharply in the next two
or three months. An effective response to the
pending crisis in Moldova depends on the outcome
of the elections and the expediency with which the
new Parliament will be able to elect a President
and approve a new cabinet to start dealing with
budget shortfalls and the economic issues at hand.
CHAUDHRY