Economic situation of Republic of Moldova

Current Economic situation of Moldova

Economic situation of Moldova. Economic development weakened somewhat in the first months of 2017. Real gross domestic product (GDP) rose only 3.1% year-on-year in the first quarter and even shrank by 0.7% quarter on quarter. At the end of June, the central bank lowered its key interest rate by one percentage point to 8% in several steps. Inflationary pressures have declined slightly: the rate was 7.3% in June and above the target range (5% plus / minus 1.5 percentage points). The course of the Moldavian Leus (MDL) has stabilized. The dependence on guest worker remittances remains significant.

After a significant recovery in the previous year, the agricultural sector will have less impetus in 2017. Subsistence agriculture plays an essential role. The industry should continue the positive trend, especially in clothing, shoes and leather and furniture. The manufacturing industry is only limited competitive and exportable and needs capital inflows. Expansion and new investments of foreign companies strengthen the automotive supply industry. The construction industry will benefit from foreign financing for infrastructure projects. Private consumption is growing faster. Trade and services follow the positive trend.

The country's foreign exchange reserves at the end of June 2017 were $ 2,378 million. This corresponds to an import coverage (goods) of 6.5 months. The unemployment rate of 4.3% in 2017 is expected to remain at the previous year's level. One challenge is growing informal employment, especially in agriculture. The budget deficit stands at around 3.7%, with a continuing decline. General government debt is expected to reach 40% of GDP, according to IMF expectations.

Investments: recovery in sight

Investment activity will revive from 2017 onwards. However, intensity and speed do not seem clear. The agreements with the IMF and the EU provide improved access to external sources of finance. Positive assessments are therefore based on public investment and the timely reduction of the resulting investment backlog. The manufacturing sector could benefit from more flexible lending of the liquid banking system. However, the attractiveness of investments should be accompanied by an improvement in the institutional framework and the business environment.

Investments in property, plant and equipment decreased by 13.9% in 2016, but only by 1.2% in the first quarter of 2017. Negative outliers were housing (-4.2%) and non-residential construction (-17.2%). Cheaper means of transport (+ 1.5%), civil engineering (+ 5.4%) and machinery and equipment (+ 8.9%) were lower. Following a decline of 8.4% in 2016, construction activity recovered by 1.7% in the first quarter of 2017, supported by residential construction and civil engineering. The number of building permits also rose sharply by 8.7%. An improved political and economic environment is expected to boost foreign direct investment growth of just 2% of GDP (2016). German automotive supplier Dräxlmaier, for example, plans to open a production plant in the Moldovan Special Economic Zone ZEL Balti in autumn 2017 for around 31 million euros.

Consumption: Still dynamic

Private consumption will remain a significant driver of economic activity in 2017 and 2018. Real wage growth in both years is expected to be on the order of 7 to 8%. The average gross wages in the first quarter of 2017 amounted to a nominal 5,219 MDL. Real, this was an increase of 6.7% within one year. In 2016, it was 3.7%. The increase in the remittance of guest workers - in 2016 they reached around $ 1.16 billion - is likely to be stronger. In the first five months of 2017, they grew by 5.7%. This is also helped by the stabilization of the Russian economy. In addition, the banks are liquid, from which consumer credit could benefit.

In the first quarter of 2017, the average monthly disposable income per person was 2,134.5 MDL (nominal + 5.3% for the first quarter of 2016). The monthly expenditure per person during the observation period was 2,091 MDL (+ 1.6%). In terms of spending structure, food dominated (share: 44.1%), followed by housing (18.7%), clothing and footwear (9.7%), medical and health care (6.3%), communications (4 , 6%) and transport (3.5%). Retail sales in the first quarter of 2017 decreased by 4.4% compared to the same period of the previous year. For the full year 2016, the increase amounted to 1.1%.

Foreign trade: EU share continues to rise

The recovery in domestic demand will favor rising imports in 2017. Conversely, the improved growth prospects of the main trading partners indicate higher exports. Trade with the EU is growing and offsetting the losses with the CIS countries. The Republic of Moldova needs investment in export-oriented sectors and increased integration into global value chains. Foreign trade rebounded in 2016, starting from the low level of the previous year. The EU accounted for 49.1% of imports and 65.1% of exports. The CIS share remained constant for imports and declined in exports.

Positive momentum accelerated in the first four months of 2017. Imports rose 14.5% to $ 1.4 billion, while exports rose 14.7% to $ 0.7 billion. The EU increased its imports by 15.7% to 48.3%. Romania (+ 27.2%), Poland (+ 20.8%), Hungary (+ 25.6%), but also Germany (+ 15.3%) increased significantly. The demand was for mechanical engineering and vehicles (+ 22.3%), processed goods (+ 4.4%), mineral fuels (+ 16.8%) and chemical products (+ 14.7%). In terms of exports, Germany ranked fourth with $ 46.5 million (+ 19.4%), behind Romania (+ 19.8%), Russia (+ 31.1%) and Italy (+ 0.5%).