Is Moldova immune to the financial crisis? Economy analysis by Info-Prim Neo

The world financial crisis will not have a serious impact on Moldova, say Moldovan authorities and economists. At the same time, skeptics say the effects of the crisis will be felt. The Moldovan economy is very open and therefore seriously exposed to foreign factors. But one thing is for sure – the banking sector will not be affected. What the bankers and businessmen criticized vehemently – the rise in the base rate and in the norms of mandatory reserves – turned out to be a defensive move as the liquidity of the banks is high and experts say the National Bank managed the situation professionally. “After experiencing the regional crisis of 1998 and the wine crisis in 2006, which affected 10 national banks, we prepared for a possible recession and possess instruments for minimizing its effects,” the central bank’s governor Leonid Talmaci said recently. The default loans make up less than 4.5% of the total loans and cannot cause problems to the banks. The possible speculative operations by non-residents on the internal deposits market do not arouse concerns either as their deposits make up only 8%. After the norm of obligatory reserves attracted by banks was raised up to 22%, the banks started to offer much larger interest rates on deposits and collected sufficient liquidity to honor their obligations. On the other hand, they imposed tougher lending conditions and the growth rate of loans slowed down. It became very difficult to get a bank loan. The bankers say that though the banks provide higher rates, the population and economic entities became more alert. The volume of deposits in September fell by 380 million lei from August. Is it a simple coincidence or a nervous reaction of the population and companies to the bad news coming from world stock exchanges? An issue that should be addressed is the maximum sum for guaranteeing bank deposits, which is only 4,500 lei or a little more than 300 euros. This is tenfold less compared with the sum guaranteed by the countries of the region. It can happen that the rise in the ceiling, which has been discussed lately in other contexts as well, would be a negative signal for depositors. On the other hand, the lower number of loans could have serious consequences on companies and the economy in general. The banking sector feels safe, but other sectors such as the realty market are more exposed. During the past five-six years, the real estate prices went up, often exaggeratedly, under the pressure of increased demand, including from investors that purchased an apartment for selling it afterward, and from the Moldovans working abroad. An apartment in Chisinau costs like an apartment in European cities. The high prices could collapse someday. The first signal was in August, when the real estate prices decreased, but increased again the next month. Even if the prices continue to rise slightly in absolute terms, as realty agencies say, compared with the exchange rate they are on the decrease because the apartments are sold and bought in euros. After the euro depreciated by over 20% against the Moldovan leu, the buyers spend much less lei to purchase euros and sellers’ profits fall. Following the world financial crisis, the Moldovans working abroad would buy less real estate. A part of them, especially those working in the construction and service sectors, could lose their jobs and would have to return home. The tougher lending conditions and the high prices of real estate would practically clear the real estate market of speculators, who are concerned about the low number of dealings performed during the past year. The owners of land and buildings would realize that they would not be able to sell at the same high price and would have to offer lower prices. The same happened in other countries of the region, where land prices fell by 10 - 20%. Experts say that remittances from abroad, which fuel economic growth, would decrease. Evidently, a sudden decrease in the mount of money sent by the individuals working abroad would lead to lower consumption and, respectively, lower economic growth. But economists say that the money coming from abroad is not the classical remittance anymore as it hides small investments and important sums that are deposited in banks, which offer interest rates of 24-25%. When the rates are reduced, this more or less speculative inflow will also decrease. The slowdown in economic growth, which is forecasted to reach 7.5% this year, does not seem a problem either. The economic growth in 2009 is projected to be 6%. “With a growth of 6% or even 5%, we cannot say that Moldova is hit by the crisis,” economists say. It is rather improbable that the exports will not be hit when Moldova’s key trade partners (Ukraine, Russia, Romania and many other countries of the European Union) are directly affected. The companies do not seem worried. The problems that could appear in the balance sheets of companies, especially trading companies, could represent only a slowdown in growth. On the other hand, though it is said that the capital market would not be affected by the world crisis directly, given that it is not closely connected with the world financial markets, the number of transactions on the Moldova Stock Exchange fell. Experts say the investments made by foreigners into Moldovan companies could significantly decrease. “It would be exaggerated to say that Moldova is so isolated from the rest of the world that it would not be affected in a way or another,” said recently Ion Sturza, the former Prime Minister of Moldova, now deputy director and shareholder of Rompetrol Group. He managed the financial crisis that hit Moldova in 1998 as a result of the regional crisis. A lot depends on how the situation is managed and if a possible impact is anticipated. A high price was paid in 1998 (the collapse of the national currency and foreign trade) to normalize the situation. A commission created by the Government monitors the situation. It says that the situation is under control. The society does not seem concerned about the world financial crisis for the time being.