Moldova’s rising external debt: reason for concern? Info-Prim Neo economic analysis

Moldova has an external debt of over 3.5 billion USD and it is acceptable even if it has increased by over 80% during the past five years, say some economists, while others consider that the relatively low public debt point to the country’s low incapacity to attract larger investments and loans at a time when the economy needs investments of billions of dollars. “Compared with the Cross Domestic Product and taking into account the share of the expenses for servicing the external debt in the total budget expenditure, the foreign debt is acceptable, even if compared with other poor and highly indebted countries,” experts consider. A week ago, the former World Bank Regional Director for Moldova, Ukraine and Belarus Paul Birmingham said that four years ago, when he came to out country, Moldova was on the brink of default, but now there is no such risk as the level of debts and arrears has decreased. According to the National Bank of Moldova, the share of the public and government guaranteed external debt in the Gross Domestic Product has decreased from 51.5% in 2003 to 25% in 2007, while the Economic Policy Center of the Institute for Development and Social Initiative "Viitorul" forecasts an external debt of 23% of the GDP. The authorities do not agree with the analysts that see in the external debt a rather high risk for Moldova, which, as the authorities say, copes with the foreign debt. [Loans taken out by private sector bring the debt to over 3.5 billion USD] The external debt in the first quarter of 2008 rose by 234.89 million USD, reaching a new record of 3.535,14 billion USD, the National Bank of Moldova said. The private sector was the one that fueled the rise in the debt. The public sector took out fewer loans. The companies in the first three months of this year attracted 160.81 million, while the public sector only 47.65 million. During 2003-2007, the external debt rose due to the private sector, while the public sector decreased the foreign debt to 773.75 million USD between 2003 and 2005. Afterward, the debt rose to 986.27 million USD. The direct investment grew significantly (2.54 times) owing to the credits between affiliated companies, which rose from 213.99 million USD in 2003 to 597.16 million USD in 2007. The central bank has not published information about how the debt is serviced or how it is covered by exports in months or by the foreign currency reserves. Anyway, the external debt is growing slowly and it is not a reason for concern even if it rose by over 1.6 billion USD after 2003. The public and publicly guaranteed external debt at the end of the first quarter of 2008 totaled 986.27 million USD, while the non-guaranteed private debt – 2.548,87 billion USD, rising by 5.1% and, respectively, 7.9%. The non-guaranteed private debt made up 72.1% of the total debt, the central bank said. Monetary authorities’ liabilities increased to 175.10 million USD after using a new tranche of the loan granted by the IMF (18.88 million USD). The National Bank of Moldova in this period repaid 9.51 million USD. The direct government debt rose by 31.31 million, especially owing to the fluctuation of the exchange rate (26.68 million USD). A reason for concern should be the variation of the exchange rate of the US dollar against other currencies, which could lead to the rise in the external debt. In the first quarter of 2008, the debt has increased as a result of the continuous depreciation of the US currency by 58.81 million USD. The commercial banks continue to lend money. Their debts have increased considerably in the past years. Late in March, the national banks owed 399.65 million USD to foreign organizations, or 11.3% of the total debt, as against 57.59 million USD in 2003. The bankers fueled thus the rapid growth in the number of loans given that the demand for loans was increasing. Another category mentioned by the central bank are other sectors (practically companies), which owe 1.561,13 billion USD. Their debts have doubled over the past five years. The loans make up 49.0% of the total external debt, the currency and deposits – 5.6%, the commercial credits – 15.5%, the arrears related to the direct investments made by non-residents – 16.9%. [The World Bank is the largest creditor] The external obligations in the form of loans and securities, including the amounts overdue on them, amount to 2.453,33 billion USD. The debt to the World Bank makes up 18.4% of this sum. The International Bank for Reconstruction and Development and the International Development Association, which form part of the World Bank, are the largest creditors of the Government of Moldova. Moldova owes 138.90 million USD to Russia, 56.74 million USD to the United States and 25.63 million USD to Japan. The companies and banks borrow money from the European Bank for Reconstruction and Development, the International Finance Corporation and other creditors. The central bank says that the loans taken by the private sector from “other creditors” add up to 1.359,86 billion USD. [Moldova has a low capacity for attracting loans] The relatively low level of the debts, especially in the public sector, indicates a reduced capacity for attracting larger loans and investments at a time when the investments needed amount to billions of dollars. The agricultural sector alone needs investments of over 2 billion dollars to develop normally. “The Republic of Moldova can get money only from donors, international financial institutions or some governments, but practically cannot borrow directly from the international financial markets. In fact, we cannot assimilate the large sums of money offers by the IMF, WB and EBRD – it is even too much for the stability of the internal market and a part of this money is wasted,” says economist Veacselav Negruta. There are many institutions that could grant loans to Moldova, but we do not apply to them because we cannot assimilate this money, says Veaceslav Ionita, program coordinator at the Economic Policy Center of the Institute for Development and Social Initiative "Viitorul". Who remembers of the donors and creditors’ intention to offer Moldova 1.2 billion dollars?, asks the economist Ionita. He considers yet that Moldova wouldn’t have been capable of correctly and efficiently using this money. This is the real problem, not the rising debt that is acceptable. The Independent Analytical Center “Expert Grup” also speaks about the reduced capacity for assimilating investments in an analysis of the economic growth in the first quarter. “Should we be concerned about the fact that the investments in fixed capital over January-March 2008 grew at a lower rate than in 2007 (23.4% as opposed to 39.2%)? Yes, to a certain extent, if the reduction is determined by companies’ reduced capacities for assimilating investments and not by conjuncture-related factors. But the influence of these factors cannot yet be assessed according to rather summary statistical data. The Government should not be concerned about the relatively small growth of the GDP in the first quarter, but continue to make efforts to improve the capacities for assimilating national and foreign direct investment,” Expert Grup considers. According to analysts, one thing is for sure – the Moldovan economy needs much more investments, but nor speculative money or much but poorly managed money. It is as clear that besides the continuation of the institutional reforms, there are needed investments in the physical infrastructure without which the investments in production cannot grow and there can be attracted no loans to develop the economy.