INTERVIEW – Political Uncertainty in Moldova Weighs on FDI Inflow

The executive director of the government's investment and export promotion agency MIEPO, Andrei Timush, told SeeNews in an interview that foreign investors doing business in Moldova have slowed the pace of their investing in the ex-Soviet country. Moldova's Economy Ministry said earlier this month that the FDI inflow could halve this year from last year's record high $679.6 million (474 million euro).

The Communist Party, which has governed Moldova since 2001, controls 48 of the 101 seats in the chamber after the July 29 snap elections. The elections were called after violent street protests against the results of the previous April 5 vote, which gave 60 seats in the chamber to the Communists, just one seat short of the three-fifths majority needed to elect the country's president, and the subsequent failure of the parliament to elect a new head of state.

The newly elected parliament is expected to convene for the first time on August 28.

Mainly agricultural Moldova ranked 103rd in the World Bank’s report "Doing Business 2009" among the 181 countries surveyed. The country, wedged between Romania and Ukraine, was 19th among 25 countries in the region of Eastern Europe and Central Asia.

Here is what Andrei Timush told SeeNews:

Q: Has the political crisis affected the FDI inflow to Moldova since the April 5 vote?

A: The crisis has adversely influenced the image of our country. Of course, political stability is very important to any foreign investor.

Q: To what extent has the global economic downturn affected the activity of foreign investors already operating in Moldova?

A: Despite the crisis foreign investors continue to invest in the country but at a much slower pace than before. Some have switched from initially-planned large-scale investment projects to less ambitious small- and medium-sized ones. Most important, however, is that as far as we know the majority of foreign investors already operating in Moldova do not intend to retreat on their economic and financial commitments in the medium to long term.

Our initial projection was that FDI would not fall below last year’s level but preliminary figures show us that FDI fell by around 50% on the year to 614.4 million lei ($54.8 million/38.2 million euro) in the first half of 2009. It is obvious that the financial crisis will impact our economy, but not to the same extent as in other European countries.

Moldova, for instance, has no sophisticated mortgage lending system, which created many of the problems now faced by the United States and Europe. Historically, the FDI inflow in Moldova was channeled primarily into the sectors of trade, financial services and industry rather than in real estate.

Q: What investment incentives does the Moldovan government offer?

A: The incentives for foreign investors are many and include, amongst others, zero income tax for companies that reinvest their profits. The government has also invited Moldovan businesses to declare their hidden assets, aiming to improve the creditworthiness of these companies. As we all know, hidden assets impair the ability of a company to take out bank loans and make this company less attractive to both investors and foreign partners.

Moldovan investment incentives also include cuts in corporate income tax all the way to zero and facilitation for starting up a business in the free economic zones in Moldova. Such free economic zones (FEZs) operate at the Giurgiulesti International Free Port, the Marculeti International Free Airport and in six other locations.

The most important tax benefits for a FEZ resident include exemption from Value Added Tax, exemption from customs duties on goods imported into the FEZ to further export, exemption from excise duties on products imported in the FEZ for a subsequent re-export.

Q: What are the main sectors of the Moldovan economy foreign investors prefer to invest in?

A: The sectors, which currently attract most investments, are fruit and vegetables processing, textile industry, construction and transport.

Retail trade and hotel business also are popular investment target areas. The largest foreign investor in Moldova in 2008 was the Netherlands with a 22% share of total FDI inflow. Russia, Cyprus and Spain followed with 12%, 8.5% and 8.4%, respectively.

Some major foreign investors that have already made sizeable investments in Moldova include France Telecom, Lafarge and Societe Generale from France, Germany's Draxlmaier, Metro Group and Suedzucker, Italy's Veneto Banca, Spain's Union Fenosa, Dutch-based Danube Logistics and also Austria's Raiffeisen bank, Vienna Insurance Groupe, Western NIS Entreprise Fund, ProCredit Holding and others.

(1 euro=16.0777 Moldovan lei)