Foreign direct investment: a high-stake competition

The flows of foreign direct investment (FDI) into the Moldovan economy have almost doubled in the first quarter of 2008, totaling 167.85 million USD. As a result, the FDI amounted to 1.966,27 billion USD. The social capital and reinvested profit accounted for 1.427,65 billion USD of this. The data of the National Bank of Moldova are more than conclusive. Moldova witnesses an investment boom, the head of state said, stressing that the FDI inflows have doubled compared with 2005. “More than 50% of the attracted foreign direct investment come from the EU states, with the Netherlands accounting for 20.7% of the total investments,” the Ministry of Economy and Trade said. [Investment boom – reality or illusion] Statistics place Moldova among the economies that see a significant rise in foreign investment. The net value of the FDI in 2007 exceeded the last year’s level by over 80%. Even if the growth was relatively smaller in the first quarter of 2008, it is above 50%. Even the most optimistic analysts couldn’t have forecasted such a development. The International Monetary Fund anticipated that the FDI would total 450 million USD in 2007, but the statistics exceeded the expectations. The conclusions included in a study carried out by the auditing and consulting company Ernst&Young (E&Y) seem to come true. The study said that during 2007-2020 Moldova will see the most significant rise in investments among the Southeastern European countries. It should be noted yet that the rise comes on the back of an over twofold reduction in the foreign direct investment during 2001-2003 and of a powerful depreciation of the US currency against other currencies. So, what is the inflation rate and what is the real growth? It is true that after 2003 the growth has been constant. But this does not mean that we started from a very low level and the rise should be spectacular so that we could catch up with the countries with which we are competing as quickly as possible. The foreign direct investment in the Moldovan economy grows at the same rate as in some of the countries when they were in a period of transition to the EU, the IMF Resident Representative in Chisinau Johan Mathisen said earlier. Bulgaria and Romanian reached the same level of investments five-eight years ago. More than 70% of the FDI are investments in subscribed capital and reinvested profit. This shows that Moldova is attractive as investment destination to a certain extent. But there are a lot of reserves as regards the improvement of the investors’ satisfaction with the investment in Moldova. Though the direct investment rose by over 50% in the first quarter of this year, the reinvested profit remained practically at the same level as a month before and compares to the figures for the first quarter of 2007. This shows that the quality of the investment remains low, experts say. The share of the net FDI flows in the GDP, which is nearly 40%, and the investment per capita cannot yet be regarded as accomplishments. [There are yet beneficial conditions for an investment boom] Accounting for 24.3% of the total, the food industry is among the main foreign investment destinations in Moldova, followed by the energy sector (22.6%), financial activities (18.9%), wholesale and retail trade (17.2%). The construction sector and agriculture account for less than 1% of the FDI each, according to the National Bank of Moldova. Even if the statistics show positive trends, as well as handicaps, there are yet beneficial conditions for an investment boom: The zero tax on reinvested profit and a tax of 15% on non-distributed profit; the level of gas prices in the future is rather definite; the investment attraction strategy that stipulates rules appreciated by the investors began to be implemented in 2007; there will be created ten industrial parks; Moldova became more attractive after Romania joined the EU on January 1 and Moldova became an EU member; the Government has announced it will privatize large and attractive companies like MoldTelecom, Banca de Economii, Tobacco Factory in Chisinau. What makes the investors want to come to Moldova? the cheap workforce; the potential for increasing work productivity and the availability of locations for investment; the reform of the regulatory framework and adequate conditions for developing the business. [Moldova has a lot to recover] Is Moldova a heaven for investors? Not at all. The managers of multinational companies say that the infrastructure, especially of roads, is poor, the level of corruption is high, the purchase capacity and the quality of life remain low, the state can interfere in the economic activity, there appear new regulations (despite the efforts of the Guillotine), and, in certain cases, the opinion of the private sector is neglected. Later this June, the U.S. magazine Forbes placed Moldova the 90th out of 121 countries in a list of the best states for business. Corruption and the strong administrative influence continue to be the main challenges of the Moldovan economy that slow down the economic reforms, the study authors say. Despite talks about an investment boom, Moldova has a lot to recover given that the FDI per capita at the end of 2007 was only 550 USD. Three years earlier, this figure in Poland was 1,502 USD, in Hungary – 3,693 USD, in the Czech Republic – 4,080 USD, in Slovakia – 2,128 USD, in Romania - 747 USD, in Estonia – 2,995 USD, in Latvia – 1,686 USD, in Lithuania – 1,217 USD. The Ministry of Economy and Trade forecasts that the foreign direct investment over 2008-2010 will grow by at least 10% a year. The Ministry counts on a stable and long-term flow of investments into the export-oriented sectors of the economy with a higher competitiveness, on the implementation of the investment attraction and export promotion strategy for 2006-2015 and on the continuation of the dialogue with representatives of the investors and businesspeople. There are real preconditions for attracting large investment inflows. Moldova needs investments of billions, but it should develop at the same pace or even quicker than the countries of the region in order to become a special investment destination.