INTERVIEW – Moldova C-bank Eyes Rate Cut by end-2008, End-Year Inflation at 10%

"I don’t exclude an opportunity that we will cut the interest rate by the end of the year, because the inflationary pressure decreased and there is no sense in keeping the rate high," deputy governor Marin Molosag told SeeNews in an interview.

"We also are interested in having more liquidity on the market to stimulate lending," he added.

He said the Moldovan banking system was so far unaffected by global financial chaos but would be impacted if the crisis is prolonged.

Since September last year BNM raised its key rate three times from 13.5% to 18.5% in May, when year-on-year inflation quickened to 16.9% compared to 10.6% in May 2007. In September BNM moved the interest rate back to 17%, following deflation in June and July.

"The situation in the agricultural sector is much better this year and that helped us to achieve deflation in the summer months, thus the inflation fell to 10.7% in September. And if everything is fine we hope to end this year with 10% inflation," Molosag said. 

Mainly agricultural Moldova was hit by a drought last year that reduced sharply the output of the farm sector, slowing  economic growth and fuelling inflation in the country.

Molosag said that Moldova’s vulnerability to external shocks also contributed to increased inflationary pressure.

Moldova's main foreign trade partner, Russia, dealt a heavy blow to the country's economy by banning Moldovan wine and spirits exports for most of 2006 and 2007 and by doubling the price of gas in 2006. Russia's Gazprom raised the price further to $278.71 per 1,000 cubic metres for the fourth quarter this year from the $252.98 Moldova paid in the third quarter.

Ex-Soviet Moldova is heavily dependent on imports, as the country buys much of its needs, including energy resources. The country exports mainly food products, textile and construction materials, as well as wines and spirits, which make up more than a quarter of the total.

In September, the International Monetary Fund praised Moldova's efforts in curbing inflation and urged the Moldovan authorities to support the efforts of the central bank to stem the appreciation of the local leu currency.

The Moldovan leu's average exchange rate was 10.34 per dollar at end-October, up from 12.91 per dollar at the beginning of 2008.

Molosag said that the appreciation of the leu was connected to increasing remittance payments from Moldovan migrant workers abroad and also to the inflow of foreign direct investment.

"The foreign exchange market is quite stable now. There were some periods, when the market was a little bit nervous due to crisis on the external markets, but not due to any internal reasons," Molosag said. "We’ve sold certain volumes of currency on the market to calm it.”

“The inflows of foreign currency related to remittances, foreign direct investment and private loans received from non-residents allowed us to build up sufficient foreign exchange reserves worth $1.8 billion now, that covers almost four-months imports,” Molosag said.

BANKING SECTOR SEEN STABLE, NOT AFFECTED BY CRISIS IN SHORT-TERM

Molosag said the country’s banking sector is stable and well developed and is unlikely to suffer due to the crisis on the global financial markets.

“I am not very much concerned about the banking system due to the fact  that our domestic banks have no liquidity problems and their parent banks are not significantly exposed to the U.S. mortgage market,” Molosag said.

"Local banks are developing well, there is sufficient liquidity on the market and I don’t see any systemic risks now."

The main big players in the Moldovan banking sector are French banking group Societe Generale and Austria’s Erste through the Moldovan subsidiary of its Romanian bank Banca Comerciala Romana. Italian Veneto Banca also owns a bank in Moldova.

Molosag said that if the global economic crisis drags on, some investment projects in Moldova could be delayed or there could be investment cutbacks. The cost of credits could increase too.

"We can't say that Moldova is an oasis of stability, when the rest of the world is in crisis. The crisis might have an indirect effect on the Moldovan economy as a result of  decreased global demand caused by the economic recession in developed and some emerging markets," Molosag said.