Is Moldova exposed to a monetary crisis? Economic analysis by Info-Prim Neo

A report by the United Nations Conference on Trade and Development (UNCTAD) sends a warning signal to the Eastern European countries: the powerful appreciation of the currencies and the considerable rise in the current account deficit could lead to a collapse of the national currencies. Most of the currencies in the zone have significantly appreciated as a result of the speculations in currency and now the Eastern European countries risk entering a classical current account crisis. This is a future danger generated by a situation experienced until present by countries from Asia and Latin America, warned Heiner Flassbeck, senior economist of UNCTAD. Argentina faced a similar problem in 2001, when the national currency collapsed and the population that lost a large part of the savings staged protests. In its annual report, UNCTAD highlighted that the ingredients necessary for such a crisis appeared in Eastern Europe and Central Asia, the countries of the region accumulating a substantial foreign debt and facing simultaneously significant current account deficits following the over-appreciation of the national currencies. Is the Republic of Moldova exposed to a monetary crisis? All the signs of which the UNCTAD experts speak exist. This is a first conclusion. The National Bank and independent experts admit to speculations in foreign currency, but the estimations differ from “insignificant sums”, in the opinion of the central bank, to 20-30% of the remittances from abroad, which are though to come only from the Moldovans working abroad. Under the pressure of the currency surplus, the leu continues to appreciate the third year in a row. From an average of 13.1319 lei per dollar in 2006, the national currency’s exchange rate reached less than 10 lei a dollar in September 2008 and the authorities expect a rate of 9.12 lei per dollar in 2009 and of 8.0 lei per dollar in 2011. The exchange rate of 9.12 lei per dollar was used to assess the budget for 2009. The high inflation makes the commercial banks raise the interest rates on deposits, which attract in turn speculative capital. Experts do not rule out that the high interest rates in Moldova, as in the other countries of Eastern Europe, stimulate speculations in regional currencies through carry-trade operations by which the speculators borrow money in currency with a low rate in order to reinvest it in these markets. On the other hand, the current account deficit in 2007 rose to 15.8% of the Gross Domestic Product, almost sevenfold higher compared with 2004 and twofold higher on 2005. In 2006, the balance of payment deficit increased by 70.9%, while in 2007 – by 79.5%. In the medium-term expenditure estimate for 2009-2011, the Ministry of Finance says that the balance of payment deficit will rise to 55% in 2011. Another thing arouses concern in such a situation – Moldova’s indebtedness level is increasing. In 2005, the foreign debt made up 69.6% of the GDP, while in 2007 – 75.1% During the financial crisis of 1998, which had a serious impact on the Moldovan economy that could not avoid a new fall, the National Bank of Moldova managed the crisis best of all in the region and prevented a further depreciation of the leu. During the last 12 months (starting with August 2007), when a powerful inflationist pressure began to be felt and an enormous currency surplus appeared on the market, the central bank has toughened up its money policy, employing the instruments it possesses. On the one hand, the central bank raised the base rate from 13.5% to 18.5%, after only nine months, in a move to diminish the inflationist pressure. The norm of obligatory reserves from the means attracted in MDL and convertible currencies was doubled, from 10% to 22%. On the other hand, in an attempt to immobilize the currency surplus, in 2007 the central bank purchased the equivalent of 367.3 million US dollars on the currency market. The 2008 interventions are also essential: the purchases exceeded 100 million US dollars in the past few months. The foreign currency reserves this year have increased by about 400 million US dollars. The central bank bough currency even if it is not in its interests to purchase large sums of money. The greater the preoccupations, the more the National Bank loses and its decapitalization becomes more evident During only half a year, the central bank sustained losses of about 1 billion lei, because the reserves are kept in dollars and other currencies, while the bank’s balance is in lei. Consequently, the appreciation of the leu leads to the diminution of the balance records. While on a mission to Chisinau, Graeme Justice, the head of the IMF European Department, said that the National Bank successfully reduced the pressure on the demand, the budget performance is good, while the basic inflation is decreasing, and not only due to the fall in food prices. The effects of the steps taken by the central bank could have been much better if the economy had been restructured and the Government supported the central banks through the instruments it owns. But, even if the Ministry of Economy and Trade expressed its concern about the created situation and said it would try to launch measures so as to change the tendencies witnessed during the past few weeks, including a new instrument for intervening on the currency market, it did not announce the launch of such an instrument or at least its devising. Meanwhile, the national currency continues to appreciate, while the current account deficit is increasing. The UNCTAD report says that an adjustment of the value of the currencies of the Eastern European countries is inevitable, this being the only solution to the existent disequilibrium.