Economic rebound despite political uncertainty
After a deep contraction of GDP amounting to 7.0% in 2020 due to the twin shocks of COVID-19 and the drought, the Moldovan economy is expected to rebound in 2021. Based on our macroeconomic model, we predict a growth rate of 4.8% for the year. Growth is driven mainly by a recovery of private consumption as well as exports.
Inflation remained stable throughout the crisis in Moldova and decreased to 0.4% at the end of 2020. It is expected to pick up only moderately in 2021 with the economic recovery, with an expected average annual inflation rate of 2.5%. Similarly, the exchange rate as well as foreign exchange reserves continue to be stable, supported by both resilient remittances as well as donor lending.
The budget deficit is forecast to shrink to 4.0% of GDP from 5.1% in 2020. However, while the EU just announced a large recovery package of EUR 600 m, uncertainty regarding external financial assistance remains due to conditionalities on structural reforms. Therefore, it is possible that the actual budget deficit may be lower due to a lack of external financing.
Thus, the economic outlook for Moldova in 2021 is solid while uncertainty remains around the political future of the country ahead of the snap parliamentary elections in July.