ANALYSIS – Global Financial Crisis, Strong Currency, Growing C/A Gap May Slow Down Moldova's GDP Growth in 2008

The analysts expect Moldova's gross domestic product (GDP) growth to fall short of the government's target of 7.5% this year. Their GDP growth forecasts for 2008 range from 5.5% on the pessimistic side to a more upbeat 7.0% at the top end of expectations.

"I expect that some negative factors by the end of the year may dampen GDP growth or halt it altogether. Those include the global financial crisis and further appreciation of the Moldovan leu, which harms the export potential of the country," Natan Garstea, director general of the Moldovan non-government rating and evaluation agency Estimator-VM, told SeeNews.

Iurie Gotisan, an independent analyst, agreed, saying: "The Moldovan leu will face major pressures in the next period because of the rise in domestic prices, poor export promotion and the negative influence of financial markets."

The Moldovan leu's average exchange rate was 10.35 per dollar at end-September, down from 12.91 per dollar at the beginning of 2008.

Gotisan added that the growing current account deficit also poses a threat to the Moldovan economy. "The fact that only half of the current account deficit is financed from foreign direct investments makes Moldova very vulnerable to short-term changes in the investor mindset."

Moldova's first-quarter current account deficit grew by 32.4% on the year to $250.2 million (175.5 million euro) due to a rapidly widening trade gap, central bank data showed. The deficit totalled 21.9% of GDP in the first quarter, down from 22.6% a year earlier.

"If we factor in inflation, which undermines economic growth to a small or large extent, the situation is not as optimistic as described by the authorities," Gotisan concluded.

Earlier this month Fitch Ratings downgraded its credit rating for Moldova from positive to stable, reflecting a deterioration in the country's external finances and continued inflation pressure, which remains in double-digits.

Fitch said that Moldova remains susceptible to negative political and economic shocks in view of its high trade deficit, rising external debt burden, low external liquidity and exposure to trade with Russia.

Moldova's main trade partner, Russia, dealt a heavy blow to the country's economy by banning Moldovan wine imports for most of 2006 and 2007 and by doubling the price of gas in 2006, and then further increasing gas prices to their current level of $253 per 1,000 cubic metres.

The International Monetary Fund (IMF) said earlier this month that Moldova's economic growth this year might be somewhat higher than was initially forecast, depending on the performance of the country's key agricultural sector, which was hit by drought last year. IMF forecasts a 7.0% GDP growth in Moldova in 2008.

"After last year's drought, we can expect a solid recovery of the agricultural sector, which will be felt mostly in the second half of the year," Garstea said.

Gotisan also hopes for better agricultural output by the end of the year: "Agriculture didn't do well in the first half, but second-half trends point to a growth for the sector at the end of the year."

The GDP growth slowed to 3.0% last year from 4.8% in 2006 due to drought.  Some 84% of the agricultural land in Moldova was affected by the drought. Losses from damaged cereal crops alone were estimated at one billion euro.

Moldova's economy grew by a real 5.4% in the first half of this year, slower than the 8.0% growth recorded in the same period last year.

"This is very strong growth, taking into consideration the floods this summer, and the internal and external shocks faced by economy […] However, this rise is unbalanced and depends too much on imports," Gotisan said, expressing doubts whether the methodology of calculating GDP is correct.

"The main reason for the GDP rise in the first half of the year was the lift of the Russian ban on imports of Moldovan wine. Apart from that, I don't see any positive changes in the structure of the GDP or in the quality of its growth," Garstea said.

($=0.7015 euro)