UPDATE 1 –Moldova's H1 GDP Shrinks by Real 7.8% Y/Y on Falling Industrial Output, Construction and Services

In the second quarter alone, the GDP shrunk by 8.6% after rising 6.2% a year ago, the statistics office said in a statement.

Calculated in current prices, the country's gross domestic product (GDP) totalled 27.869 billion lei ($2.5 billion/1.7 billion euro) in the first half, the office said.

“Moldova has no functional market economy. It’s too late to make something for our economy now. We have to change the whole structure of economy,” Marcel Chistruga, economic analyst at Chisinau-based non-governmental institute for development and social initiatives, IDIS Viitorul, told SeeNews, commenting on development of the Moldovan economy in the first half of the year.

He forecasts an economic contraction of 9.0% in 2009, in the best-case scenario and 13% contraction under the most pessimistic forecast.

The gross value added fell by 7.0% in the first six months compared to a 5.0% rise in the same period a year earlier.

Final consumption fell by 8.2% on the year in January to June, as household consumption decreased faster, by 10.4%. Gross capital formation was 59% down on the year in the first half.

“The situation in the real sector is largely the same as in early 2009,”Valeriu Prohnitchi, executive director of Moldovan independent think-tank Expert Grup, told SeeNews. “My expectation for the first half was 6.5%-7.0% decline and in second quarter by similar rate. My estimates were based on negative evolution of industrial production, figures for foreign and domestic trade,” he added.

Among macroeconomic indicators, which had a negative impact on the first-half GDP, are a 24.9% annual fall in industrial production, a 31.9% decrease in the construction sector and a 55.7% drop in freight traffic, the office said. Retail sales were down by 4.5% on the year.

Exports and imports, calculated in U.S. dollars, fell by 20.7% and 35.8% on the year in the first half, respectively, the office said.

Besides economic crisis, Moldova has been in political stalemate since the April 5 parliamentary elections, in which the Communist Party won 49.48% of the vote - not enough to elect the president on its own. The country held new parliamentary elections on July 29 after the new legislature failed to elect a new head of state in two attempts.

Moldovan newly elected parliament is expected to elect president, who then will from the government.

“New government should focus now on how it can change the situation in the economy. It could be done through budget sources, through external financing. In the long-term, the foreign direct investments could help to revive the economy, but we should fight corruption and bureaucracy first,” Chistruga said.

“My main concern is the very poor situation in the budgetary sphere where a 10% budget deficit is looming ahead,” Prohnitchi added.

In June, the International Monetary Fund (IMF) urged Moldova to make an urgent budget rectification to bring about a better balance between government consumption and the available resources. Unless a budget rectification and legislative changes are implemented, the prospects for a deep and prolonged recession will continue to grow, the IMF warned.

Moldova’s budget deficit reached 1.841 billion lei in the first eight months this year, the latest data showed.

The European Bank for Reconstruction and Development expects Moldova's economy to contract by 6.0% in 2009, under its latest forecast. The International Monetary Fund has forecast a 9.0% contraction in Moldova’s 2009 GDP in real terms.

(1 euro=16.4125 Moldovan lei)