February 24 (SeeNews) - A sustained post-pandemic recovery of Moldovan economy is highly dependent on the country's ability to reduce political uncertainty, Scope Ratings analysts told SeeNews on Wednesday.
Moldova’s economy will grow by around 3.5% this year, with the gradual recovery rooted in an upturn in private consumption and investment, Levon Kameryan, analyst at sovereign and public sector ratings at Scope Ratings, and Dennis Shen, director at the ratings agency, commented. In their view, a recovery in remittance receipts since the second quarter of 2020 will boost private consumption.
"Output will return to pre-pandemic levels only by 2022," Kameryan said. "The growth outlook remains uncertain: much depends on how the pandemic itself evolves and affects the economy and labour market, while politics might also determine how the economy performs."
Scope estimates that the economy contracted by around 7% in 2020, in line with the 6% decline during the global financial crisis in 2009. The Covid-19 crisis contributed to a significant drop in private consumption as did the impact of a severe drought on agriculture.
"Enhancing prospects for medium-term growth depends on the capacity of the government to implement structural and institutional reform," Kameryan said. "To that end, forming a stable government after recent presidential elections is crucial."
Moldova's parliament voted against former finance minister Natalia Gavrilita as new prime minister, paving the way for snap elections if deputies rejected Gavrilita in a second ballot. However, a ruling of the Constitutional Court against the second nomination of Gavrilita has complicated the president’s attempts to force early parliamentary elections.
Stable governance is important for ensuring continued access to funding from international financial institutions, such as funds from the International Monetary Fund, to finance significant fiscal and external-sector deficits, they stressed.
The IMF and Moldova reached staff-level agreement on a three-year programme, but final approval hinges on the authorities’ commitment to central-bank independence, improving financial-sector supervision and maintaining fiscal discipline.
The government’s budget deficit widened to an estimated 5% of GDP last year – less wide than originally expected – from 1.4% in 2019. Scope expects the deficit to narrow to around 3% of GDP in 2021 as pandemic-related fiscal support winds down. Deficits this year and next will push government debt higher to 37% of GDP in 2021 from around 35% last year and 28% in 2019 before stabilising, according to the ratings agency.
Moldova’s debt-to-GDP remains below that of peer economies of the region, with, moreover, much of outstanding debt in the form of concessional loans, which supports debt sustainability.
"Tightened regulations and supervision and strengthened central-bank independence, underpinned by the previous IMF programme, support financial stability," Shen said. "The central bank has used leeway in monetary policy to support the economy since the Covid-19 crisis. It has cut the base rate to a low of 2.65% and reduced the required reserve ratio for banks in local currency to 32%. This has eased financial conditions with inflation set to remain below a 5% target in 2021."
(1 euro=21.3046 lei)