Top ten economic events in 2014 as seen by MOLDPRES

Chisinau, 19 December /MOLDPRES/- The 2014 year was marked by more important events for Moldova, such as ratification of the Association Agreement with the EU and respectively, the Free Trade Agreement, opening of European market for Moldovan products. The economic growth was really surprising, by 4.7 per cent in the first nine months, after an 8.9-per cent record advance in 2013. Agriculture registered an increase that the most optimistic experts had not expected, after the 2013 leap. The Ungheni-Iasi gas pipeline was put into operation, and the feasibility study on Ungheni-Chisinau pipeline was discussed at the end of the year. On the other hand, 2014 was a troubled financial and economic year. Russia put an embargo on the import of more agricultural products, as a result, the exports on the Russian market have dramatically fallen. The Moldovan leu has significantly depreciated against the US dollar and euro, with the exchange rate reaching historical peaks by the end of the year. More scandals in the banking system reveal problems in the corporate management of financial institutions. Moldova remains one of the poorest countries of Europe, yet, the revenues increased and the unemployment rate dropped to one of the lowest levels.

1.       Ratification of Association Agreement between Moldova and the EU

The parliament ratified the Association Agreement with the EU, including the Free Trade Agreement on 2 July. A number of 59 MPs voted pro. The Communist opposition walked out of the meeting hall, before draft was put to vote. The Socialists voted against. “The political and economic association with the EU is the most important goal Moldova has been having over the last years”, President Nicolae Timofti said. “We will continue working. Only in this way, we shall leave stagnation backward, will get rid of corruption and will witness a growth we have not had in the past two decades”, Prime Minster Iurie Leanca said. He added that “getting full membership of the EU is the final point of Moldova’s European integration”. “The European project does not belong to a certain party or politician. It belongs to the Moldovans, including those who vote for opposition parties”, Parliament Speaker Igor Corman said. The agreement has been already ratified by 11 countries, including the European Parliament.

The Deep and Comprehensive Free Trade Agreement between Moldova and European Union entered into force temporarily on 1 September. Moldovan producers can deliver 80,000 tons of apples and 20,000 tons of plums and grapes on the EU market, without the customs price.

2.       Embargo imposed by Russia.

Shortly after the initialing of the Association Agreement with the EU, Moldova had to cope more pressures, both external and domestic. The first major difficulty has been related to pressure on behalf of Russia. Moscow banned, starting from 21 July, the import of fruits, vegetables and canned products from Moldova. If all production is prohibited, the losses incurred by Moldovan producers will increase to 150 million dollars, Agriculture and Food Minister Vasile Bumacov said.

A decree on levying customs duties on import of more Moldovan products, by Russian Prime Minister Dmitry Medvedev, entered into force on 1 September, in response to the initialing by the parliament of the Association Agreement with the EU. It is about 19 categories of goods, including meat, wine, cereals, sugar, fruits and furniture. Against the background of these strained economic relations, taking into account the ban on wine import in September 2013, the Moldovan exports on the Russian market decreased by about 30 per cent in the first ten months of 2014. Russia gave up the first position to Romania in the top of Moldova’s trade partners, after holding it more than 20 years. Yet, experts believe that the situation should not be dramatized, taking into account that “Moldova’s exposure to export to Russia is overrated”.

3.       Official exchange rates reach historical peaks

On 18 November, Moldovan leu went through a new psychological threshold, 15 lei per one U.S. dollar. The financial experts do not exclude that, by late 2014, the exchange rate could reach 16.0 lei for one U.S. dollar. The depreciation of the Moldovan leu is triggered by more external and internal factors, according to the National Bank of Moldova. It is about, first of all, appreciation of the U.S. dollar against euro on the international financial markets, seasonal factor related to a higher consumption of hydrocarbons, which, as a rule, leads to an increased demand of currency from the economic agents. At the same time, the degree of of coverage of the demand in currency coming from legal entities by the net supply of foreign currency from private people is much lower against the previous periods. Any shock on the foreign market, mainly, coming from the principal trade partners, Ukraine and Russia, immediately influence the internal currency market. The drop in rouble and Ukrainian hrivnya has directly affected the currency market. “We have a significant depreciation of the Moldovan leu against the U.S. dollar since the beginning of the year. This represents a macroeconomic adjustment of the economy to the regional situation,” BNM governor Dorin Dragutanu said. Psychological effect created by the geopolitical situation in the region has a great role.

Although, the Moldovan leu continues to depreciate, in mid-December, the BNM claims that the situation on the currency market is normal and that it intervenes by selling currency to licenced banks to provide them with liquidity.  In early December alone, BNM sold 115 million dollars to licensed banks. The currency reserves “are sufficient to absorb external shocks”. Some experts believe that the market had become more agitated after the BNM governor said that there were no reasons to maintain the exchange rate of Moldovan leu and he would not intervene to appease what is happening in Russia or Ukraine.

4.       Economic growth exceeding expectations

The economic growth for the entire 2014 year amounted to 4.7 per cent in the first nine months, after a surprising rise in GDP in the third quarter, especially supported by agriculture and services. In these conditions, the economic growth could reach 3.5-4.0 per cent level. Economy increased by 5.9 per cent in the third quarter against the similar period of 2013, according to data put out by the National Statistics Bureau (BNS), - a rise exceeding the most optimistic estimations by analysts and authorities. Most analysts expected a two-per cent annual increase , and the Economics Ministry maintained the forecast at 3.5 per cent.

The Gross Domestic Product increased by 81.7 billion lei in the first nine months. The gross added value in agriculture stood at 8.2 per cent, exceeding the level of the similar period of 2013 and influenced the GDP growth by 5.6 per cent. According to BNS, the gross added value in the services sector increased by 4.8 per cent, in construction – by 11.4 per cent, followed by wholesale and retail trades – 6.2 per cent, transport and communication by 4.5 per cent.

5. Iasi-Ungheni gas pipeline was officially launched on 27 August, on Moldova's Independence Day

It was announced back then that, starting from 1 September, the Romanian gas will cross the Prut, initially in a quantity able to ensure an alternative source, but the gas supply have not begun as yet. The officials explained that other technical works and testing were to be done. The project’s total cost is of 26 million euros, of which 7 million is a grant provided by the European Union. The 43.2-kilometer-long gas pipeline has a capacity of 1.5 billion cubic meters, of which a quantity of up to 50 million cubic meters per year will be initially supplied from Romania. The pre-feasibility study of the Ungheni-Iasi gas pipeline was discussed at a meeting of the National Agency for Energy Regulation in early December. The construction of the Ungheni-Iasi gas pipeline is estimated at 70 million euros. The European Bank for Reconstruction and Development will finance the working out of the feasibility study and a German company Fichtener will provide consultancy services.

6. The contract on prolongation of gas supply was signed, for the first time over the past years, in early November  

but not in the last days of 2014. The contract was extended till 31 December 2015. Starting from 2015, Moldova will pay for the Russian gas by almost 42 dollars less per 1,000 cubic meters, about 332 dollars per 1,000 cubic meters of gas. Moldovagaz specified that, under the agreement’s conditions, a European formula to calculate the price for gas shall be applied for Moldovan consumers beginning with 2015. The average price for gas supplied by Gazprom to the western European states and stock exchange prices for petroleum products – gasoil and black oil, which are decreasing, will be taken into account.   

7. Raider corporate attacks, lack of transparency among shareholders, worsening of situation at some banks

have developed the vulnerabilities of the Moldovan banking sector. The State taking over the control over the Banca de Economii (State Savings Bank (BEM)), following a decision by the Supreme Court of Justice, and introduction of the direct management by the National Bank of Moldova (BNM) at the above-mentioned bank and Banca Sociala (Social Bank), just before the parliamentary elections, left more questions. The state got again into possession of the controlling stake of 56.13 per cent, but the way this was done, in experts’ opinion, with huge delay, triggered controversial discussions. They do not exclude the fact that the Russian shareholders might claim damages of millions from Moldova. A report published by the International Monetary Fund in mid December, states that BNM has provided a 3.3-million-lei loan to the above-mentioned two banks, which, at present, are under the central bank’s management. BNM was obliged to give explanations in a press release, in which it specified that, after the special administration had been introduced at these banks, BNM ruled to provide an emergency credit „as this way ensures the fastest the stability of banks, avoidance of additional risks and safety of deposits by private persons and legal entities”. „The serious problems of the corporate management in the banking system  continue to represent a risk for the financial stability,” IMF executive directors have said. They put emphasis on „the emergency to diminish the vulnerability in the banking sector” and recommended to improve the quality of the corporate management in the banking sector, “including by improving the transparency of banks’ ultimate beneficial owners.”

8. Moldova went up seven positions in the world competitiveness top, 

issued by the World Economic Forum, up to the 82nd place out of 144 economies, according to the 2014-2015 Global Competitiveness Report, launched on past 2 September. It is for the first time over the past four years, that Moldova improves its score up to 4 points out of 7, after the score has been standing at 3.9 three years in a row.

Moldova got the weakest score of 2.94 points and the worst position, the 129^th, in   „innovations”, though the country has improved its performances against 2013, when it ranked 138th. The development of the financial market, institutions and efficiency of goods market are other two areas for which Moldova got some points. The best scores Moldova achieved in technological preparedness (51st position) and macroeconomic environment (56th), areas where, according to the report’s authors, the things developed for the better. Just as in the past years, the biggest problems faced by investors and entrepreneurs are corruption, political instability  and bureaucracy, the report shows.

9. Official assets diminished for the first time in 2014 after the global crisis,

putting an end to a five-year period of continuous increase, when the reserves have doubled and got to historic peaks. Over the last two months of 2014, when against a background of a significant fall of the Russian rouble and Ukrainian hrivnya, regional crisis and economic slowdown, the Moldovan leu started to depreciate, BNM intervened on the market with foreign currency sales and swap operations, the official reserve assets have started to drop more quickly. In past November, they diminished by 284 million dollars, and BNM sold 115 million dollars to licensed banks in the first 17 days of December. Thus, the mentioned assets have decreased by over 650 million dollars since the beginning of 2014, - a figure that exceeds the annual maximal rise of 550 million dollars recorded in 2012 de 550. Yet, BNM informed that „the foreign-exchange reserves are sufficient, in order to absorb foreign shocks”.

10. reorientation and development of exports to European Union's markets

The Moldovan exports to the Commonwealth of Independent States’ (CIS) market continue to decrease. In the first 10 months of 2014, the Moldovan goods’ supplies decreased by almost 17 per cent following the restrictions imposed by Russia. The embargoes put on some Moldovan goods led to significant diminution of supplies to the market of Russia, which is the only of the TOP5 trade partners to record a negative evolution in 2014. The quota of CIS states in terms of exports decreased to one third. After the exporters lost the Russian market, they try to re-orient to other destinations, first of all to the European Union, the quota of which rose to over 52 per cent. The exporters take advantage of the temporary entrance into force, starting from 1 September, of the Moldova-European Union Deep and Comprehensive Free Trade Agreement, as well as other facilities provided by EU. The European Parliament adopted a draft resolution on facilitation of Moldovan exports on 17 December. The Moldovan farmers will be able to export without taxes 40,000 tons of apples and by 10,000 tons of grapes and plums to the European Union. Against this background, Romania became the main trade partner of Moldova, with a record figure of the foreign trade worth over 1.2 billion dollars.

„Even if the Association Agreement implies medium- and even long-term benefits  (5-7 or even 10 years), in the first two months of implementation, it has already brought certain tangible effects. In reality, we ascertain an impressing increase, in September-October 2014, of exports of wine (+26 per cent), apples (2.7-fold), plums (8.1-fold), table grapes (5.8-fold), frozen sweet corn (over 3-fold) and cereals (+77 per cent),” the Expert-Grup Independent Analytical Group said. Yet, the quality and competitiveness of Moldovan products on the EU market, adjusting to the European standards still remain a problem.