Overview

• New President Maia Sandu took office on 24 Dec 2020; after the resignation of PM Ion Chicu, Aureliu Ciocoi was appointed acting PM; parliamentary elections expected in spring 2021
• In 2020, Moldova’s economy suffered twin shocks with COVID-19 and a severe drought in the agricultural sector; we forecast GDP to decline by 6.7%
• Recovery in 2021: GDP forecast to grow by 4.5%
• Inflation remained within the National Bank’s target corridor in 2020; however, it is expected to decline to 2.5% in 2021
• Budget deficit is expected to reach 5.4% of GDP in 2020, due to decreased revenues and increased expenditures; available sources of external financing (IMF, EU) only partially used

Overview

• We forecast GDP to decline by 6.3% in 2020 due to Corona crisis fall-out – deeper recession than after global financial crisis
• Consumption, investments and exports all expected to decline; lower imports and higher government spending mitigate the negative effect on GDP
• Economy to recover strongly by 5.5% in 2021
• Inflation to decline to 1.3% in 2020 (after 4.8% in 2019) as economy runs below capacity
• As such, monetary policy rate expected to decline further and to remain low for the foreseeable future
• Exchange rate holding up so far amidst support by National Bank, but moderate depreciation possible in 2020 as economy opens up again
• Increasing public expenditures and falling revenues results in a budget deficit of 5.4% this year – assuming the government can access external assistance

Topics:

• New government. Socialist minority government still has to prove its commitment to reforms
• Improving the business climate. Proposals in cooperation with the European Business Association
• Reform concept for the Investment Promotion Agency. To make the Investment Promotion Agency more efficient, a target group-oriented approach should be followed
• Intercity bus market in Moldova. A strategic planning process is required, which should include an integrated mobility master plan

Topics:

• The new government. Big challenges ahead for the unusual coalition of pro-Russian Socialists and pro-EU block ACUM
• Economic effects of the DCFTA. After 5 years of implementation we see a strong positive effect on exports to EU
• Reorientation of Moldovan Investment Promotion Agency. The reorganization also requires an adaptation of tasks and processes

Topics:

• Monetary policy normalisation in leading economies. So far no impact on Moldova, due to low foreign debt and prudent policy in recent years; nevertheless need to be cautious
• Perspectives of agricultural insurance. Current system had only limited success, we recommend a simple alternative or a gradual reform
• Household over-indebtedness. Some microfinance institutions contribute to increasing household over-indebtedness through irresponsible lending
• Effect of the DCFTA. Strong exports growth to the EU, higher FDI from EU

Topics:

• Exports development. EU market remains the key driver for Moldovan exports. EU direct investment boosts exports from the automotive sector (esp. wiring harness)
• EU tariff rate quotas. Recommendation to increase quotas for grapes and plums
• Transparency of consumer loans. Intransparent use of the annual percentage rate of charge for consumer loans. Legal framework and supervision should be strengthened

Topics:

• Banking sector. Stabilisation reached after banking fraud, crediting of the private sector still decreasing
• Foreign direct investment. Role of FDI for the economy so far underestimated, as a study of GET Moldova has shown
• Economic reforms. Comprehensive reforms to be assessed positively; too early for final assessment
• Increasing tax revenues. Increase in tax revenues can at least partly be attributed to reforms; positive example for structural reforms

Topics

• Cluster development. The creation of clusters can contribute to industrial development and FDI attraction
• External trade. Extension of trade with CIS is desirable, but should not happen at the expense of trade with the EU; criticism of the DCFTA is unfounded
• Banking sector. Recommendations how to absorb excess liquidity in the banking sector