Identifier
Created
Classification
Origin
09CHISINAU330
2009-04-24 14:43:00
UNCLASSIFIED
Embassy Chisinau
Cable title:  

MOLDOVAN 2008 MACROECONOMIC OVERVIEW

Tags:  ECON EFIN EINV EREL ETRD MD 
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VZCZCXYZ0001
RR RUEHWEB

DE RUEHCH #0330/01 1141443
ZNR UUUUU ZZH
R 241443Z APR 09
FM AMEMBASSY CHISINAU
TO SECSTATE WASHDC 7920
UNCLAS CHISINAU 000330 

STATE FOR EUR/UMB, EUR/ACE, EEB/OMA

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: MOLDOVAN 2008 MACROECONOMIC OVERVIEW

REF: CHISINAU 08 0227

UNCLAS CHISINAU 000330

STATE FOR EUR/UMB, EUR/ACE, EEB/OMA

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: MOLDOVAN 2008 MACROECONOMIC OVERVIEW

REF: CHISINAU 08 0227


1. (SBU) SUMMARY: Economic growth continued to
be strong in Moldova in 2008, according to
recently released official statistics, with GDP
growing 7.2 percent. However, economic trends
were not uniform during the year and fourth
quarter data reflected the increasing impact of
the world economic crisis on Moldova. GDP growth
was driven largely by soaring remittances while
industrial output grew a disappointingly 0.7
percent. The 2008 Consumer Price Index (CPI)
remained below double digits for the first time in
six years at 7.3 percent. The local currency, the
Moldovan Leu (MDL),remained stable and even
appreciated over the year. The total external
trade grew with a sharp increase in imports.
Moldova continued to increase exports to the EU
with the share growing to 51.6 percent. The
National Bank of Moldova (NBM) intervened in the
foreign exchange market buying foreign currency
and in the last four months of the year also
selling foreign currency to support the MDL. By
the end of 2008, it became obvious that MoldovaQs
modest macroeconomic success in the first eight
months of 2008 was being affected by the impact of
the global economic crisis, and that the negative
trends would persist into 2009. END SUMMARY.

GDP GROWTH SLOWED IN THE LAST QUAURTER OF 2008
-------------- -


2. (U) Moldova's GDP was (MDL) 62.840 billion
(around USD 6 billion) in 2008. This amount
represented an increase of 7.2 percent compared to
2007 according to Moldova's National Statistics
Bureau (NSB). This growth exceeded the 6 percent
forecast by the Government of Moldova (GOM) for
the year. GDP growth more than doubled from 3
percent in 2007, when Moldova suffered a severe
drought decimating the agricultural sector.
Although GDP was strong for the year, economic
growth was very uneven. GDP grew by 4.3 percent
in the first quarter, 6.2 percent in the second
quarter, 10.8 percent in the third quarter and
slowed in the fourth quarter. The NSB has not
provided the figure for the final quarter.


3. (U) According to official statistics, GDP
growth was driven largely by good performances in
goods and services, including transportation,
retail and construction. Large remittances

equaling 27 percent of GDP from Moldovans working
abroad continued to drive the increase in the
populationQs purchasing power. According to the
NBM, remittances for yet another year grew
substantially from USD 1.2 billion in 2007 to over
USD 1.6 billion in 2008.

INDUSTRIAL OUTPUT INCREASED A MODEST 0.7 PERCENT
-------------- ---


4. (U) According to NSB preliminary data, the
overall industrial output in 2008 was MDL 29.66
billion (USD 2.85 billion) in current prices which
was, adjusted for inflation, a very modest 0.7
percent more than in 2007. The monthly industrial
production index based on 2007 numbers was up and
down during the year. (Note: In 2006 industrial
output fell by 4.8 percent and in 2007 by 1.3
percent. The economy was hit hard in 2006-2007 by
RussiaQs ban on Moldovan wine imports and by an
increase in natural gas prices effective April

2006. End Note). Despite the efforts of the GOM
to project confidence that Moldova had dodged the
global economic crisis in advance of general
elections in April 2009, it was obvious that the
downturn began affecting Moldova in late 2008.
For the last three months of 2008, the industrial
production index dropped below 100 to 97 percent
in October, 94.9 percent in November, and 95.5
percent in December.


5. (U) In 2008, the food processing and beverages
subsector, which represents some 43 percent of the
industrial sector, grew by 10 percent.
Improvement in this sector was substantial due to
the poor harvest in 2007 because of the severe
drought and the Russian embargo on wines and
agricultural products in 2006 and 2007. In 2005
this subsector was around 50 percent of Moldovan
industrial production. Some of the best
performing areas registering increased production
were sugar by 82 percent, wine by 26 percent,
bread by 7.1 percent, distilled alcoholic drinks
by 6.2 percent, dairy products by 6 percent, and
processed and canned meat by 3.8 percent. Strong
performance in this subsector contributed to a 4.1
percent increase in overall industrial production.
The economy also increased output in metal
production by 30.5 percent, chemical production by
15.4 percent, wood processing and manufacture of
wood articles by 13.4 percent, furniture by 8
percent, and apparatus and precision medical
equipment by 4.2 percent. However, the share of
each of these subsectors in total industrial
production was minimal varying between 1.5 and 0.2
percent. Some of the subsectors that showed a
significant decline in production included
textiles by 8.8 percent, articles from textiles by
15 percent, footwear by 2.3 percent, paper and
cardboard production by 29 percent, machine
production by 13 percent, cement and gypsum
production by 12.5 percent, and glass and glass
items by 2.6 percent. The decline in these
subsectors resulted in a large negative impact on
overall industrial production.

AGRICULTURAL PRODUCTION JUMPED 31.9 PERCENT
--------------


6. (U) Annual agricultural production in current
prices was MDL 16.41 billion (USD 1.58 billion)
for 2008, an increase of 28 percent over the
previous year. In constant prices, i.e. prices
adjusted for inflation, agricultural output was
31.9 percent greater than in 2007 when the country
suffered a severe drought. As a result of a good
harvest in 2008, growth in agricultural production
was 69 percent in the crop-growing sector.
Unfortunately for farmers, the bumper harvest in
the region led to lower prices for agricultural
products. Meanwhile, animal production decreased
by some 20 percent as a result of many farmers
having slaughtered their livestock during the
drought the previous year. The 2008 agricultural
performance appears more impressive compared to
2007 when agricultural production dropped by 23
percent from the previous year because of the
drought.

SINGLE -DIGIT INFLATION
--------------


7. (U) The CPI rose by 7.3 percent for 2008.
This increase compares favorably to 2007 when CPI
rose by 13.1 percent. Food prices grew by 6.5
percent, non-food items by 2.1 percent, and
services by 17.5 percent. The greatest price
increase in the services was due to more expensive
energy resources. Moldovans saw the tariff for
utilities increase 29.2 percent. The greatest
increase in utilities was in central heating which
grew by 75.9 percent. Interestingly, the city
government in the capital of Chisinau continued to
charge the lowest tariffs for central heating in
the country. The municipality subsidized tariffs
and ran up huge debts with the heating company.
The consumer costs for public transportation
increased by 20.1 percent.


8. (SBU) The GOM and NBM both took credit for the
first year of single digit inflation since 2002.
For the past five years, Moldova experienced
double-digit inflation rates, ranging from 15.7
percent in 2003 to 10 percent in 2005. Since
2006, the primary objective of the BNM has been to
maintain price stability and a stable market-based
financial system. Prior to 2005, the BNM's main
objective had been to maintain local currency
stability. Much of the credit for the GOM's
performance in controlling inflation goes to the
IMF which had pushed the government to enact tight
fiscal policies by running small to zero budget
deficits.

NATIONAL CURRENCY APPRECIATED OVER 2008
--------------


9. (U) For the year, the official nominal
exchange rate of the national currency, the
Moldovan Leu, appreciated against the USD by 8.12
percent, from MDL 11.3192 per USD as of December
31, 2007 to MDL 10.4002 at the end of 2008.
During the year, the exchange rate was influenced
by the significant interference of the NBM in
buying and selling dollars at various times of the
year. From January to May, the BNM bought USD 61
million, and in the following three months, July
to August, another USD 222 million. Beginning in
September, the BNM intervened by both buying and
for the first time in 2008 selling USD. The BNM
purchased USD 118.5 million and sold USD 163
million in the last four months of the year.

EXTERNAL TRADE WAS UP AND THEN DOWN
--------------


10. (U) The total trade figure for 2008 was 29
percent greater than in 2007. According to the
NSB preliminary data, annual external trade was
USD 6.496 billion for 2008. The trade consisted
of USD 1,597 billion in exports and USD 4.899
million in imports representing a 19 percent
increase in exports and a 32.8 percent increase in
imports. The stronger growth in imports led to a
sharp increase in the trade deficit, which
exceeded USD 3.3 billion. Moldovan exports
remained concentrated in the EU market, with the
share slightly increasing to 51.4 percent in 2008
compared with 50.6 percent in 2007. At the same
time, the share of exports to CIS countries
decreased to 39.3 percent from 41 percent in 2007.
Imports from the EU comprised 43 percent, compared
with 45.6 percent in 2007. Imports from CIS
countries also decreased, dropping to 35.5 percent
from 36.1 percent in 2007. Imports from countries
other than the EU or CIS increased to 21.5 percent
from 18.3 percent in 2007.


11. (U) As in previous years, Russia, Ukraine and
Romania remained Moldova's largest trading
partners. Moldovan-Russian trade totaled USD 985
million, or 15 percent of total trade. Moldovan-
Ukrainian trade was almost the same at USD 982
million (15 percent). Moldovan-Romanian trade was
USD 927 million (14 percent). Moldova's other
important trade partners were Italy with USD 473
million (7.3 percent),Germany with USD 428
million (6.6 percent),China with USD 325.5 (5
percent),Belarus with USD 292 million (4.5
percent),and Turkey with USD 265 million (4
percent).

CHANGES IN MOLDOVA'S IMPORT AND EXPORT MARKETS
-------------- -


12. (U) In 2008, for the first time, Romania
became the leading export nation for Moldovan
goods with USD 336 million of imports, 21 percent
of all Moldovan exports. Russia was the second
largest market for Moldovan exports with USD 318
million or 19.9 percent of Moldova's total
exports. The following export markets by country
were Italy (10.5 percent),Ukraine (9 percent),
Belarus (5.8 percent),and Germany (4 percent).
(Note: In 2006, the Russian ban on imports of
Moldovan wine and agricultural products led to a
47.6 percent drop in Moldova's exports to Russia
and an increase in exports to Romania, Ukraine,
Belarus, some partners from the EU, and several
other countries. The share of Moldovan exports to
Russia declined considerably from 31.8 percent of
total exports in 2005 to 17 percent in 2006-2007.
Nevertheless, Russia remained the leading market
for Moldovan exports until 2008. End Note)


13. Ukraine has been Moldova's main supplier of
imports since 2001. In 2008, imports from Ukraine
were USD 839 million (17 percent of total
imports). Imports from Russia were USD 666
million (13.6 percent),followed by Romania with
USD 591 million (12 percent),Germany with USD 365
million (7.5 percent),China with USD 325 million
(6.6 percent),and Italy with USD 306 million (6.3
percent). Imports from all the major importers
increased considerably compared to the previous
year. The increases were 22 percent from Ukraine,
33.6 percent from Russia, 32 percent from Romania,
14 percent from Germany, 60 percent from China,
and 14 percent from Italy.


14. (U) Moldova's major exports were textile and
articles from textile (USD 314 million or 20.6
percent of total export),food stuffs (processed
animal and vegetable products) and wines (USD 312
million, or 20.6 percent),and products of
vegetable origin (fresh, dried or frozen fruits
and vegetables) (USD 210.1 million or 12 percent).
Major imports were mineral products (USD 1,126
million or 23 percent of total imports),
machinery, apparatus and equipment (USD 765.5
million or 15.6 percent),chemical products (USD
416.8 million or 8.5 percent),and transport means
(USD 391 million or 8 percent). Both exports and
imports declined in the last quarter of the year.

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


15. (SBU) Although the end-of-year numbers for
the Moldovan economy were still positive, the last
quarter of 2008 indicated that the economic crisis
had already begun to affect Moldova significantly.
The GOM continued to display confidence in the
economy through the first three months of 2009
leading up to the general elections on April 5.
However, we expect the numbers for the first
quarter of 2009 to tell a different story. IMF
informed us that remittances have dropped
significantly in the first quarter of 2009. The
GOM derives approximately 70 percent of its
revenue from taxes and duties on imports which
will decline as remittances drop and imports
decrease. There are reports that the government
has not paid Moldovan embassy staff overseas for
two months. According to EU sources the GOM
diverted the most recent tranche of 12 million
Euros that was meant for budget support to pay
foreign debt. These actions might be consequences
of the GOM's aggressive intervention in the
financial market to prop up the Leu in the months
leading up to the elections. The new government
will have to focus on the economy and face up to
IFIs recommendations including reducing government
payrolls and procurement. Since the April 5
elections, Moldova has been bogged down in a
political crisis and it will still take some time
before a new government is named.

CHAUDHRY