Moderate economic outlook with downside risks
After a significant decline of GDP in 2022, Moldova’s economy continues to struggle. In the first half of 2023, GDP decreased by 2.3 % yoy; private consumption remains weak and is a key driver of this downturn. On the other hand, inflation continues to decline steadily and is expected to be as low as 5.5% by the end of the year.
As such, more positive impulses for consumption are expected for the rest of the year. Together with a positive outlook for agriculture, the overall estimate for the year is moderate with an expected GDP growth rate of 2%. In terms of public finances, an increase in the deficit to 6% of GDP is planned. Whether or not this deficit will be realised also depends on the extent to which the government will be able to improve its implementation capacities especially for public investment.
Moderate economic outlook
After a significant economic decline of 5.9% of GDP in 2022, the Moldovan GDP decreased further in the first half of 2023 by 2.3% yoy.
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The key driver of this economic decline was weak private consumption. On the other hand, net exports had a positive contribution to GDP, as imports declined more strongly than exports in real terms. In addition, investment has started to recover somewhat and contributed to GDP growth.
Sectoral dynamics continued to show a mixed picture in 6M2023 with negative developments across a majority of sectors. Manufacturing and construction both decreased relative to the first half of 2022 by 11.8% and 15.3% respectively, reflecting the impacts of weak investment activity in the past year. Similarly, retail trade declined by 7.4% in line with lower private consumption. On the other hand, the agriculture sector grew by 6.2% yoy reflecting more favourable weather conditions.
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The outlook for 2023 as a whole is moderately positive with IMF forecasting a GDP growth rate of 2%. Key reasons for this are a more positive outlook for the agriculture sector and expectations of a recovery in consumption and investment.
Inflation on downward trend
Moderately positive impulses are expected from declining inflation. After a record increase in the inflation rate to above 30% in 2022, inflation has been steadily declining since November 2022. At the end of August 2023, the inflation rate was down to 9.7% yoy. The National Bank of Moldova (NBM) expects this downward trend to continue and forecasts inflation to be 5.5% by year’s end and thus very close to its target rate of 5%.
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This decline in inflation is expected to contribute to a more positive dynamic for private consumption. In addition, the NBM has been easing its monetary policy as a response to declining inflation. The policy rate is now 6% p.a., down from a record 21.5% p.a. between August and November 2022. As interest rates in the banking market adjust to these rates, positive implications for investment activity can be expected.
External trade significantly weaker in 2023
After a very strong increase in both exports and imports in 2022, external trade has been developing much weaker in the first half of 2023.
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Exports decreased by 10.9% yoy in USD terms. However, when calculated in physical volumes, exports decreased by 4.3% yoy. The reason for the difference is a significant change in export prices between the first six months of 2022 and 2023. At the same time, the export of services increased considerably by 8.9% yoy driven mainly by tourism and IT services. The growth in tourism services is likely related to the economic impact of refugees staying in Moldova.
On the import side, there was a small increase of 0.5% yoy in the first half of 2023 recorded in USD terms. In physical volumes however, imports decreased by 3% yoy. Due to the much larger size of imports, this dynamic led to a positive contribution of net exports to GDP growth.
Higher budget deficit planned
In 2022, Moldova had planned a budget deficit of 6.2% of GDP. However, the actually realised deficit amounted to only 3.3% of GDP. The lower deficit was partly due to higher-than-expected revenues, but mainly to under-execution on public expenditures, reflecting limited implementation capacities of the Moldovan administration – a long-standing challenge for Moldova.
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For 2023, an expansion of the deficit to 6.0% of GDP is planned due to higher expenditures for social services, particularly for energy subsidies. In addition, the government has recognised the importance of improving capacities in the public sector, for which additional budgetary means are included. The financing of the deficit is again enabled by high levels of international financial support for Moldova. Public debt, mainly with international financial institutions, is expected to increase only slightly in 2023 to 34.7%, a level still moderate in international comparison.
Conclusions and outlook
The Moldovan economy continues to be negatively affected by the Russian war against Ukraine. Nevertheless, inflation is declining and expectations for this year’s harvest are optimistic. As a result, the overall economic outlook is moderately positive. As long as the war continues however, downside risks remain, which make it difficult to predict the economic development in the future.
This Newsletter is based on the 18th issue of our Economic Monitor Moldova
