RECENT ECONOMIC DEVELOPMENTS
After a recession in the second half of 2015, the economy grew at 1.3 percent year-on-year in the first semester of 2016. Private consumption rebounded by 2.2 percent, while change in inventories added 3.9 percentage points (p.p.) to growth. Meanwhile, net exports subtracted 4.3 p.p. from growth due to weak external demand and the stabilization of the exchange rate. Investments continued to decline, by 3.6 percent, as real interest rates were high and public investments were low.
Consumer inflation is decelerating, with the dissipation of the pass-through effect from the 2014-5 depreciation, due to weaker internal demand, lower import prices and good agricultural yields; 12-month inflation has decelerated from a peak of 13.6 percent in December 2015 to 3.6 percent in August 2016. In response, the NBM sharply has reduced the base interest rate from a peak of 19.5 percent in September 2015 to 10 percent since July 2016.
The external position has slightly improved. Lower import commodity prices and anemic domestic demand compensated for the reduction in remittances, so that the current account deficit narrowed to 7.8 percent of GDP, 2.7 p. p. lower than last year. As a result, foreign reserves have grown to more than 5 months of imports.
Public finances are under pressure due to donors’ withholding external budget support. The 2016 state budget law was adopted only in July, and it relies heavily on external support (from the EU, World Bank, Romania) to finance the planned deficit of 3.2 percent of GDP. In the first half of 2016, with low external financing available, the deficit was only 1.1 percent of GDP. As a result, total spending decreased 9.6 percent in real terms, as most procurement and capital expenditure were stopped.
Poverty rates increased less than expected in 20151. Higher consumption growth and stabilization of remittances supported household incomes and kept the moderate poverty rate (5 US$/day, 2005 PPP) at 41 percent in 2015 after 40.7 percent in 2014. The extreme poverty rate (2.5 US$/day, 2005 PPP) was stable at 2.9 percent. However, in the first half of 2016 the unemployment rate remained above historic levels, compounding the impact of high inflation and lower remittances on poverty. These effects have been partly offset by a decrease in food prices due to a good year in agriculture and by the pension indexation in April 2016.
We expect the economy to grow 2.2 percent in 2016, supported by the recovery in agriculture. The agricultural sector is going to rebound in double-digits from last year’s drought-led contraction. Still, high interest rates and political risks around presidential elections (October 2016) will keep investments subdued. An agreement with the IMF would unlock official external financing, and allow an increase in public expenditure within the deficit ceiling. Despite the projected increase in the price of utilities, consumer inflation is expected to remain within the target range of 5±1.5%. The current account deficit is projected to narrow to below 6 percent of GDP.
Moldova’s growth is expected to reach around 3 percent in 2017-18. The base case assumes modest recovery in major trading partners, including Russia, and improved consumer and investor confidence, supported by an IMF program and official financing from development partners. The fiscal deficit is projected to gradually decline to 2.5 percent of GDP to ensure fiscal sustainability, while the current account deficit will likely remain below the historical average.
The rebound of the economy and especially of agriculture will continue supporting household incomes. Despite the tight fiscal situation, the real value of transfers to households is likely to be preserved. However, inflationary pressures stemming from increases in utility tariffs would add to the burden on lower income groups who spend proportionally more on utilities. The poverty headcount is projected to decline to the level of 40.4 percent in 2016 followed by a rebound to 37.1 percent in 2017.
Last Updated: Oct 03, 2016