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MEGA - Moldova Economic Growth Analysis, nr. 5 - 2011

Real Economy, no.24

Moldova and EU liberalizing trade: how much for the agro-industrial sector to suffer?

Oprunenco, Alex

This publication was supported financially by Soros Foundation Moldova as part of the project 
"Promoting Good Governance through Independent Economic Analysis and Forecast" The 
information and conclusions presented in this document belong exclusively to the authors and are 
not necessarily shared by Soros Foundation Moldova. 
 
REAL ECONOMY: RADIOGRAPHY OF 
ECONOMIC YEAR 2010 IN 
MOLDOVA 
SPECIAL ISSUE, NO 16    JANUARY 2011 
1. WHAT IS AN ECONOMIC RADIOGRAPHY? 
Traditionally, at the beginning of every year, the independent think tank Expert-
Grup makes brief reviews - radiographies - for the previous economic year. Like 
in 2008-2009, the radiography of the 2010 economic year will cover three 
essential aspects: a) the most important 5 economic events of 2010; b) the most 
revealing 5 macroeconomic trends; c) the most noticeable 5 faults of the 
economic policy. On the top of this we will add another interesting element: d) 
top 5 major risks for 2011. 
We have tospecify that these tops represent a joint vision of Expert-Grup team 
on the economic developments, but do not necessarily imply a strict ranking by 
their importance. In the annual economic radiographies we try rather to identify 
the events, statements and mega-trends that in our view were the key 
determinants for the previous economic year and will mark the medium and 
short term economic developments. 
Before proceeding to these ratings, let's consider the difficult context generated 
by the 2009 financial crisis (Section 2) and how the Moldovan economy reacted 
in 2010 to the revitalization of the regional and global economic growth (Section 
3). 
2. BACKGROUND:  THE 2009  ECONOMIC YEAR  
In 2009 the global economy underwent the deepest depression in the post-war 
period, with a 0.6% decline in the global output. Among the biggest global 
actors, only a few emerging economies from South-East Asia (in particular, 
China and India) avoided the recession as such, but even their economic pace 
slowed down considerably.  
All important trade and investment partners of Moldova were in a deep 
economic recession: with a -4.1% decline of the GDP for the Eurozone, -3.7% in 
East-Central Europe and -6.5% in the CIS. The Moldovan economy was 
contaminated through a decline in exports, direct foreign investments and, the 
most important, remittances sent by working Moldovan emigrants to their 
motherland. 
3. RETROSPECTIVE OF THE 2010  ECONOMIC YEAR  
In 2010 the monetary and fiscal incentives applied in many countries around the 
world contributed to the revival of the global economic growth. (However, 
identification of the optimal exit strategy without undermining the economic 
recovery and avoiding a new mega-crisis of the sovereign debts still remains a 
large problem). According to the IMF estimations, the global economic growth 
in 2010 accounted for about 4.8%. Similarly to the 2009 recession, it was very 
patchy in regional terms: in the Eurozone the GDP increased by about 1.7%, in 
East-Central Europe - by 3.6% and in the CIS - by 4.3%. Importantly, it is 
estimated that in 2010 the South-East Asia achieved a 9.4% increase, mainly on 
account of China. The "Top 5 Economic Trends in 2010" Section will show us 
why this observation is so important. 
The revitalization of the economic growth on the global and regional arena in 
2010 pulled the Republic of Moldova from the verge of economic abyss. The 
channels which allowed the financial crisis to enter the Moldovan economy in 
2009 enabled the economic growth in 2010. The exports of Moldova increased 
by more than 20% till the end of the year. During the first three quarters the 
direct foreign investments increased by 50% and we expect quite the same 
growth to be reported for the entire year. The emigrants' remittances increased 
by almost 10% in the first three quarters. Their growth accelerated during the 
year and we think that the annual growth in 2010 amounted to about 12-13%. 
Although the economic balance of 2010 is positive, it was marked by 
contradictory economic developments. On the one hand, the most important 
economic sectors resumed the positive economic growth (even though the 
Moldovan economy still needs another year for a complete recovery of the 2008 
production level). On the other hand, this economic growth lacked any "human 
face" since it was merely a jobless economic recovery. 
 
4. TOP 5  ECONOMIC EVENTS IN 2010 
• On 29 January the IMF Executive Board approved the Economic 
Program with the Republic of Moldova amounting to USD 574 million. 
The resources were provided both to ensure external stability (for 
building up the NBM foreign currency reserves) and as a direct 
budgetary support, which gave the Government the so needed respite 
to put the public finance in order. At the same time, the IMF's approval 
of the Program inspired more confidence of other donors and investors 
as regards the economic course of the country. 
• Consultative Group Meeting: Moldova Partnership Forum of 24 March. 
"Rethink Moldova" document, which stipulates the strategic reform 
priorities of the country, was presented at this meeting. The 
international donors pledged USD 2.6 billion as financial support for 
Moldova, half of which as grants, the rest - as concessional loans. 
Besides, the event served as an important stage in the diplomatic 
campaign aimed at improving the international image of Moldova. 
• Floods Management. The floods in July 2010 had a limited geographical 
scale (mainly affecting the Hancesti and Cantemir districts), but the 
resources needed for the recovery of losses and provision of aid to 
victims were quite large, estimated at about USD 77.5 million (1.36% of 
the GDP estimated for 2010). But even more important, these floods 
revealed that the Republic of Moldova is not prepared fully to cope with 
disasters, even of a relatively small scale, let alone possible nationwide 
disasters. The physical infrastructure and technical means are in a 
precarious condition and by far do not correspond to the challenges 
posed by the climate change. The immediate warning capacities proved 
to be relatively good, but the institutional cooperation and post-crisis 
coordination were very poor. 
• Approval by the Moldovan Government, on 14 December, of the RM 
Action Plan on the Implementation of the European Commission's 
Recommendations for the Establishment of a Deep and Comprehensive 
Free Trade Area between the Republic of Moldova and the European 
Union. This document contains a range of extremely important 
obligations, some of which are very difficult to implement without 
political, financial and technical support from the EU, which Moldova 
undertakes to implement during 2011-2015. Thus, 2015 may be viewed 
as a horizon, the Government and the EU consider more or less realistic, 
when the Deep and Comprehensive Free Trade Area could be 
established. 
• Establishment of the Agriculture Payments and Interventions Agency 
and change of the subsidizing policy. Due to the lack of data, we cannot 
yet assess the systemic impact of these changes in the agriculture 
policy, but it is clear that these changes have narrowed considerably the 
loopholes used for corrupt arrangements and made the subsidizing 
policy fairer from the social viewpoint. However, considering the 
shortage of financial resources, it is extremely important to use them 
primarily to stimulate capital investments in agriculture. 
5. TOP 5  ECONOMIC TRENDS IN 2010 
• Surprisingly strong economic growth. According to the preliminary 
data, in the first nine months of 2010 the Moldovan economy grew by 
about 6.5% and our estimations for the entire year are at about 7%. This 
was determined by the revitalization of the consumption as an essential 
factor for the economic growth, growth of the agricultural output, re-
launch of the services sector and stabilization of the constructions 
sector. The economic growth of Moldova in 2010 is likely to be among 
the highest growth rates in the Eastern and Central Europe and in the 
CIS. 
• Further decline of employment. Despite the resumption of the 
economic growth, the employment rate achieved the lowest levels in 
2010. According to our estimations, the annual unemployment rate 
averaged 47% (for the population of 15-59 years). Even before the crisis 
the employment rate in Moldova was very low - 50.8% in 2008. For 
comparison, the average employment rate in East-Central Europe in 
2008 accounted for 65.6% and in the CIS - for 63.1%. 
• China's advancement as trade partner of Moldova and the increase in 
the total trade deficit. According to the trade statistics for the first 11 
months of 2010, currently China provides around 8.2% of the imports in 
Moldova, as compared to 7.5% in 2009. In 2010 China outstripped 
Germany, ranking the fourth in the list of Moldova’s import partners. 
Considering the outstanding economic growth of China in 2010 
(estimated at 10.5% by IMF) and forecasts for 2011 (9.6%), we should 
expect further augmentation of China's role in the Moldovan imports. 
We will not be surprised at all to see China ranking the third among the 
import partners of Moldova in 2011-2012. The major risk for Moldova is 
that its exports to China (USD 1.8 million) are negligible as compared to 
the imports (USD 281 million). Although the trade relations between 
Moldova and China are the most unbalanced as compared to any other 
country, Moldova has trade deficits with 102 of 117 countries it traded 
with in 2010. The total trade deficit of Moldova increased by about 15% 
in 2010, exceeding, according to our estimations, USD 2.3 billion. Thus, 
the economy returns to the traditional high trade deficits (USD 3.3 
billion in 2008, which in the context of the crisis decreased to USD 2.0 
billion in 2009). 
• Inflation recurrence. After a virtual lack of price increase during 2009, in 
2010 the prices increased by an average of 7.3% and in December 2010, 
the price level was 8.1% higher than in December 2009. The price 
acceleration by the end of 2010 caused a moderate tightening of the 
monetary policy by the NBM, which on 30 December voted for the 
increase of the REPO rate from 7% to 8%. The efficient implementation 
of the inflation targeting policy is the main challenge the National Bank 
will have to deal with in 2010.  
• Decrease of the bank interest rates and stabilization of the non-
performing loans. According to our estimations, the interest rates for 
bank deposits in MDL in 2010 averaged at 9.3% (as compared to 14.7% 
in 2009) and for credits - at 17.2% (20.3% in 2009). In the context of a 
quite high inflation in 2010, this dynamic is very interesting, suggesting 
that either the banks anticipate quite moderate inflation in medium 
term, or that the competition for clients becomes tougher. In tandem 
with the decreasing interest rate, we found the stabilization, since April-
May, of the share of non-performing loans in the total amount of bank 
credits. In 2009 we expected that their possible escalation could result 
in a systemic risk. The avoidance of a large-scale bank crisis is a 
doubtless achievement of the Moldovan Banks and NBM. 
6. TOP 5  ECONOMIC GAFFES AND FAILURES IN 
2010 
• Failure to promote competition. Although the "elimination of 
monopolies" was one of the leitmotifs of the 2009 electoral campaign, 
in 2010 no perceptible progress was achieved in the area of competition 
protection, annihilation of the anti-competitive arrangements, and 
monopolies control. The studies conducted by European experts 
showed that in this area Moldova encounters systemic flaws; therefore, 
the approach to remedial actions should be systemic, not occasional. 
• "Meat imports liberalization." High prices for foodstuff, particularly for 
meat, were another sensitive subject for voters in 2009. The 
Government's attempts to eliminate the monopoly schemes of meat 
import risked to end up as a farce, when at a certain moment the 
Government discussed the increase of the meat imports tariffs as a way 
of protecting the local producers. These tariffs are already quite large, 
while prices paid by Moldovan consumers are among the highest in the 
region.  
• The controversial declarations and decrees of the former acting 
president Mihai Ghimpu. The (un)diplomatic declarations and gestures 
of the former acting president produced neither more votes for the 
Liberal Party that Mr. Ghimpu leads, nor restoration of the historical 
truth he allegedly promoted. Instead, they annoyed the Russian 
Federation, which was not slow to find unwarranted chemical 
compounds in the Moldovan wines. 
• Failure to publish the draft budget law for 2011 and failure to pass this 
law. Obviously, the country does not halt if the state budget law is not 
passed. The major problem is that the failure to publish the budget draft 
questions the compliance with the transparency principles and the 
failure to pass the law relates rather to political issues and 
considerations, than to some objective factors. This is a failure for a 
Government that committed itself to ensure transparency and 
observance of the law. 
• Creation of the Balti Free Economic Zone. How can the creation of a 
Free Economic Zone be a failure? Quite easy, because the quick creation 
of this zone, alongside with the delay of some systemic reforms in the 
industrial policy (such as the establishment of Public-Private 
Partnerships, creation of industrial parks) shows that the Government 
prefers the path of least resistance in attracting foreign investments and 
encouraging the local ones. If German companies, with solid economic-
financial positions, feel the need to become residents of free economic 
zones to be able to operate normally in Moldova, what can be said 
about Moldovan companies?  
7. TOP 5  ECONOMIC RISKS FOR 2011 
• Sclerotic economic growth. Against the Government's wishes to 
develop a economic growth model based on investments, innovations 
and exports, the Moldovan economy returns to the pre-crises 
consumption-driven growth model. This model will persist in 2011 and 
beyond, because it is not possible to change it in the short term. But 
there is the risk that half-hearted regulatory reforms will turn the 
current economic paradigm into a permanent phenomenon. 
• Increase in the deficit of the State Social Insurance Budget. Related to 
the funding needs, the deficit increased from 14% in 2008 to 31% in 
2010. Considering the demographic realities and the labor market, it is 
difficult to believe in a recovery of the situation in 2011. From this 
viewpoint, the failure to pass the budget law for 2011 is a by no means 
a negligible risk. 
• Uncertainties related to establishment of the Government Presidium. 
Looking for a mechanism of checks and balances, it seems that the 
parties from the AEI-2 have exaggerated. In our view, the establishment 
of a Council of the Alliance and ensuring permanent political dialog 
were sufficient to ensure a good coordination of policies and avoid 
tensions. The politicians' declarations on how the decisions will be 
passed in this Presidium are controversial, but exactly these disputes 
confirm the contradictory expectations the AEI-2 actors have regarding 
this structure. There is the risk that a coordination mechanism will 
become a mechanism for mutual immobilization and paralyzing, with 
negative consequences on the reform progresses. 
• Price increase. We anticipate that during 2011 the consumption prices 
will increase by up to 6-7%, i.e. a little bit more than in 2010. However, 
the risks are high, because the consumption price indicator will depend 
very much on the monetary policy promoted by the National Bank, 
climate conditions and crop yield in 2011, as well as on the economic 
situation of the main trade partners of Moldova and the evolution of 
global commodities markets (particularly for cereals and oil). Over a few 
past months the global prices for food products surged. Considering the 
multitude of risks, it is important that besides a cautious monetary 
policy implemented by the NBM, the Government should adopt the 
structural and institutional policies that are vital for a good market 
competition. 
• Aggravation of the sovereign debt crisis in the USA and Europe. 
Although Moldova is more exposed to the financial risks stemming from 
European markets, it is clear that a possible aggravation of the 
American debt crisis will blow the entire planet. By the end of 2011, the 
relative level of the US public debt will exceed the current level of 
Greece. Recently the US Treasury requested the American Legislature to 
increase the ceiling of the public indebtedness to avoid a default in 
2011. Of course, not all European countries, neither the USA are as 
fragile as Greece, which lately had to be bailed out by the EU, but there 
are still considerable risks and uncertainties for investors, especially, 
considering that Ireland has already joined the PIGS countries and 
requested assistance. There are fears that Portugal, and then Spain 
could follow the same course. The latter is too big to fail, but also too 
big to be rescued. 
8. THE MAIN CONCLUSION  
Despite the revitalization of the economic growth in 2011, the 
Government should show more caution in respect to public 
expenditures and more courage in continuation of the key reforms. The 
philosophy underlying the change of the economic growth model 
should consists of the removal of the key constraints hindering the use 
of the country's resources (people and land) and giving priority to the 
financing of the infrastructure components that will have a multiplier 
impact on the economic growth.  


Real Economy, no.16