Economic Analysis
Moldova, Republic of

Moldova, Republic of

Population 2.7 million
GDP per capita 4,458 US$
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 4.0 3.6 -4.5 4.0
Inflation (yearly average, %) 3.1 4.8 2.8 2.3
Budget balance (% GDP)* -0.8 -1.4 -8.0 -4.3
Current account balance (% GDP) -10.7 -8.9 -8.3 -10.5
Public debt (% GDP) 31.6 28.4 37.8 39.0

(e): Estimate (f): Forecast *Grants included

STRENGTHS

  • Agricultural potential (wine, fruit, vegetables, sunflower, wheat)
  • Association and free trade agreements with the EU (2014)
  • International financial support
  • Relatively inexpensive labour
  • Managed floating currency regime

WEAKNESSES

  • Europe's poorest country, high emigration (1 million emigrants out of 3.4 million inhabitants)
  • Large informal sector, low productivity
  • Corruption, weak governance, oligarchic system and cronyism
  • Credit not very developed (20% of GDP in 2020)
  • Dependence on transfers from expatriate workers
  • Secessionist desires in Transnistria

RISK ASSESSMENT

Return to growth expected in 2021

In 2020, the economic and health crisis hit the Moldovan economy at a time when its growth was already decelerating. Although hit by falling consumption and falling exports, Moldova should however return to growth in 2021, Indeed, in normal times, private consumption, which accounts for more than 80% of GDP, is an engine of growth for the country. Its fall in 2020 is explained in particular by the health measures implemented (closure of shops and restaurants until June) and the loss of household income (rise in unemployment and fall in remittances in the first half of the year, which represent half the disposable income of 15% of households). However, these effects were partially offset by the government's support plan, which included lower taxes and higher social benefits. In 2021, the easing of health measures and the return to growth in remittances will allow consumption to grow. In addition, after a slump in 2020, investment is expected to rebound in 2021. However, some major projects could be maintained in 2020. This is notably the case for the inauguration of the 120km Ungheni-Chisinau gas pipeline, which will connect the Moldovan gas network to the EU via Romania and will allow the country to diversify its supply routes and thus increase its energy security.

Moreover, the country is heavily dependent on agriculture (12% of GDP and 30% of the workforce), a sector that has managed to maintain moderate growth in 2020. The agricultural sector, as well as the agri-food sector, will support foreign trade (35% of exports).

 

High twin deficits

In April 2020, the government announced a stimulus plan of 2% of GDP aimed in particular at lowering VAT on certain services (restaurants, hotels) and helping companies and households in difficulty. The implementation of this plan, coupled with a decline in revenues, has increased the public deficit. Consequently, the country has seen its public debt (70% external) increase. In 2021, the decrease in spending will allow the deficit to be reduced without reducing the country's debt.

The current account deficit narrowed slightly in 2020 thanks to an improvement in the large balance of goods deficit (about 30% of GDP) due to a decline in domestic demand. The decline in exports (half of which are agricultural and capital goods exports) has in fact been offset by a greater fall in imports (machinery and minerals in particular). The sharp decline in remittances in the first half of the year had a limited effect on the year thanks to their recovery from June onwards. In 2021, the deficit will widen following the recovery in domestic demand, which will fuel the trade deficit. The financing needs of the deficit will be met by international assistance, including USD 235 million in financing from the IMF (around 2% of GDP), a Russian loan of USD 217 million, and USD 109 million in aid from the EU. Finally, the reserves held by the Central Bank (more than 6 months’ worth of imports in September 2020) are comfortable and the exchange rate has remained relatively stable despite the crisis.

 

Political instability but improvement of the broken financial system

After several months of instability, Maia Sandu, pro-European candidate of the Action and Solidarity Party (PAS), was elected president on 15 November 2020, defeating outgoing President Igor Dodon of the pro-Russian Socialist Party. Although her victory was a surprise, she received nearly 58% of the votes thanks to the strong mobilisation of the diaspora, who voted massively in her favour. Nevertheless, the result of the election shows more the importance given by public opinion to the fight against corruption led by Sandu rather than to his positions towards Europe. The country is indeed plagued by this scourge and is 120th out of 180 in the 2019 ranking of the Transparency International index. However, the PAS and its allies have only 25 seats out of 101 in Parliament while the socialist opposition holds 37, which will necessarily slow down the new President's attempts at reform.

Moreover, the country remains prey to separatist tendencies. Indeed, the Russian-speaking region of Transnistria has enjoyed autonomous status since it self-proclaimed its independence in 1992 under the name of the Pridnestrovian Moldavian Republic. Russian forces are present there, which fuels internal conflicts in the country, especially since this lawless region is home to most of the country's heavy industry and electricity production.

Finally, the banking and financial system, at the heart of a banking fraud scandal in 2014, has been improved. Several new regulations applied since February 2020 have strengthened the supervision of the sector (banning the non-banking sector from accepting deposits from the general public and reporting activities to the administration). Furthermore, transparency regarding the shareholding of the top four banks has been increased and they are now majority owned by foreign shareholders, including BRED. Non-performing loans, which still accounted for 10% of outstanding loans as of October 2019, had fallen to 8.3% of total outstanding loans as of October 2020.

 

Last updated: February 2021

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