VZCZCXYZ0001
RR RUEHWEB

DE RUEHCH #0330/01 1141443
ZNR UUUUU ZZH
R 241443Z APR 09
FM AMEMBASSY CHISINAU
TO SECSTATE WASHDC 7920

UNCLAS CHISINAU 000330 
 
STATE FOR EUR/UMB, EUR/ACE, EEB/OMA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT:  MOLDOVAN 2008 MACROECONOMIC OVERVIEW 
 
REF: CHISINAU 08 0227 
 
¶1.  (SBU) SUMMARY:  Economic growth continued to 
be strong in Moldova in 2008, according to 
recently released official statistics, with GDP 
growing 7.2 percent.  However, economic trends 
were not uniform during the year and fourth 
quarter data reflected the increasing impact of 
the world economic crisis on Moldova.  GDP growth 
was driven largely by soaring remittances while 
industrial output grew a disappointingly 0.7 
percent.  The 2008 Consumer Price Index (CPI) 
remained below double digits for the first time in 
six years at 7.3 percent.  The local currency, the 
Moldovan Leu (MDL), remained stable and even 
appreciated over the year.  The total external 
trade grew with a sharp increase in imports. 
Moldova continued to increase exports to the EU 
with the share growing to 51.6 percent.  The 
National Bank of Moldova (NBM) intervened in the 
foreign exchange market buying foreign currency 
and in the last four months of the year also 
selling foreign currency to support the MDL.  By 
the end of 2008, it became obvious that MoldovaQs 
modest macroeconomic success in the first eight 
months of 2008 was being affected by the impact of 
the global economic crisis, and that the negative 
trends would persist into 2009.  END SUMMARY. 
 
GDP GROWTH SLOWED IN THE LAST QUAURTER OF 2008 
--------------------------------------------- - 
 
¶2.  (U) Moldova's GDP was (MDL) 62.840 billion 
(around USD 6 billion) in 2008.  This amount 
represented an increase of 7.2 percent compared to 
2007 according to Moldova's National Statistics 
Bureau (NSB).  This growth exceeded the 6 percent 
forecast by the Government of Moldova (GOM) for 
the year.  GDP growth more than doubled from 3 
percent in 2007, when Moldova suffered a severe 
drought decimating the agricultural sector. 
Although GDP was strong for the year, economic 
growth was very uneven.  GDP grew by 4.3 percent 
in the first quarter, 6.2 percent in the second 
quarter, 10.8 percent in the third quarter and 
slowed in the fourth quarter.  The NSB has not 
provided the figure for the final quarter. 
 
¶3.  (U) According to official statistics, GDP 
growth was driven largely by good performances in 
goods and services, including transportation, 
retail and construction.   Large remittances 
equaling 27 percent of GDP from Moldovans working 
abroad continued to drive the increase in the 
populationQs purchasing power.  According to the 
NBM, remittances for yet another year grew 
substantially from USD 1.2 billion in 2007 to over 
USD 1.6 billion in 2008. 
 
INDUSTRIAL OUTPUT INCREASED A MODEST 0.7 PERCENT 
--------------------------------------------- --- 
 
¶4.  (U) According to NSB preliminary data, the 
overall industrial output in 2008 was MDL 29.66 
billion (USD 2.85 billion) in current prices which 
was, adjusted for inflation, a very modest 0.7 
percent more than in 2007.  The monthly industrial 
production index based on 2007 numbers was up and 
down during the year.  (Note:  In 2006 industrial 
output fell by 4.8 percent and in 2007 by 1.3 
percent.  The economy was hit hard in 2006-2007 by 
RussiaQs ban on Moldovan wine imports and by an 
increase in natural gas prices effective April 
¶2006.  End Note).  Despite the efforts of the GOM 
to project confidence that Moldova had dodged the 
global economic crisis in advance of general 
elections in April 2009, it was obvious that the 
downturn began affecting Moldova in late 2008. 
For the last three months of 2008, the industrial 
production index dropped below 100 to 97 percent 
in October, 94.9 percent in November, and 95.5 
percent in December. 
 
¶5.  (U) In 2008, the food processing and beverages 
subsector, which represents some 43 percent of the 
industrial sector, grew by 10 percent. 
Improvement in this sector was substantial due to 
the poor harvest in 2007 because of the severe 
drought and the Russian embargo on wines and 
agricultural products in 2006 and 2007.  In 2005 
this subsector was around 50 percent of Moldovan 
industrial production.  Some of the best 
performing areas registering increased production 
were sugar by 82 percent, wine by 26 percent, 
bread by 7.1 percent, distilled alcoholic drinks 
by 6.2 percent, dairy products by 6 percent, and 
processed and canned meat by 3.8 percent.  Strong 
performance in this subsector contributed to a 4.1 
percent increase in overall industrial production. 
The economy also increased output in metal 
production by 30.5 percent, chemical production by 
15.4 percent, wood processing and manufacture of 
wood articles by 13.4 percent, furniture by 8 
percent, and apparatus and precision medical 
equipment by 4.2 percent.  However, the share of 
each of these subsectors in total industrial 
production was minimal varying between 1.5 and 0.2 
percent.  Some of the subsectors that showed a 
significant decline in production included 
textiles by 8.8 percent, articles from textiles by 
15 percent, footwear by 2.3 percent, paper and 
cardboard production by 29 percent, machine 
production by 13 percent, cement and gypsum 
production by 12.5 percent, and glass and glass 
items by 2.6 percent.  The decline in these 
subsectors resulted in a large negative impact on 
overall industrial production. 
 
AGRICULTURAL PRODUCTION JUMPED 31.9 PERCENT 
------------------------------------------- 
 
¶6.  (U) Annual agricultural production in current 
prices was MDL 16.41 billion (USD 1.58 billion) 
for 2008, an increase of 28 percent over the 
previous year.  In constant prices, i.e. prices 
adjusted for inflation, agricultural output was 
31.9 percent greater than in 2007 when the country 
suffered a severe drought.  As a result of a good 
harvest in 2008, growth in agricultural production 
was 69 percent in the crop-growing sector. 
Unfortunately for farmers, the bumper harvest in 
the region led to lower prices for agricultural 
products.  Meanwhile, animal production decreased 
by some 20 percent as a result of many farmers 
having slaughtered their livestock during the 
drought the previous year.  The 2008 agricultural 
performance appears more impressive compared to 
2007 when agricultural production dropped by 23 
percent from the previous year because of the 
drought. 
 
SINGLE -DIGIT INFLATION 
----------------------- 
 
¶7.  (U) The CPI rose by 7.3 percent for 2008. 
This increase compares favorably to 2007 when CPI 
rose by 13.1 percent.  Food prices grew by 6.5 
percent, non-food items by 2.1 percent, and 
services by 17.5 percent.  The greatest price 
increase in the services was due to more expensive 
energy resources.  Moldovans saw the tariff for 
utilities increase 29.2 percent.  The greatest 
increase in utilities was in central heating which 
grew by 75.9 percent.  Interestingly, the city 
government in the capital of Chisinau continued to 
charge the lowest tariffs for central heating in 
the country.  The municipality subsidized tariffs 
and ran up huge debts with the heating company. 
The consumer costs for public transportation 
increased by 20.1 percent. 
 
¶8.  (SBU) The GOM and NBM both took credit for the 
first year of single digit inflation since 2002. 
For the past five years, Moldova experienced 
double-digit inflation rates, ranging from 15.7 
percent in 2003 to 10 percent in 2005.  Since 
2006, the primary objective of the BNM has been to 
maintain price stability and a stable market-based 
financial system.  Prior to 2005, the BNM's main 
objective had been to maintain local currency 
stability.  Much of the credit for the GOM's 
performance in controlling inflation goes to the 
IMF which had pushed the government to enact tight 
fiscal policies by running small to zero budget 
deficits. 
 
NATIONAL CURRENCY APPRECIATED OVER 2008 
--------------------------------------- 
 
¶9.  (U) For the year, the official nominal 
exchange rate of the national currency, the 
Moldovan Leu, appreciated against the USD by 8.12 
percent, from MDL 11.3192 per USD as of December 
31, 2007 to MDL 10.4002 at the end of 2008. 
During the year, the exchange rate was influenced 
by the significant interference of the NBM in 
buying and selling dollars at various times of the 
year.  From January to May, the BNM bought USD 61 
million, and in the following three months, July 
to August, another USD 222 million.  Beginning in 
September, the BNM intervened by both buying and 
for the first time in 2008 selling USD.  The BNM 
purchased USD 118.5 million and sold USD 163 
million in the last four months of the year. 
 
EXTERNAL TRADE WAS UP AND THEN DOWN 
----------------------------------- 
 
¶10.  (U) The total trade figure for 2008 was 29 
percent greater than in 2007.  According to the 
NSB preliminary data, annual external trade was 
USD 6.496 billion for 2008.  The trade consisted 
of USD 1,597 billion in exports and USD 4.899 
million in imports representing a 19 percent 
increase in exports and a 32.8 percent increase in 
imports.  The stronger growth in imports led to a 
sharp increase in the trade deficit, which 
exceeded USD 3.3 billion.  Moldovan exports 
remained concentrated in the EU market, with the 
share slightly increasing to 51.4 percent in 2008 
compared with 50.6 percent in 2007.  At the same 
time, the share of exports to CIS countries 
decreased to 39.3 percent from 41 percent in 2007. 
Imports from the EU comprised 43 percent, compared 
with 45.6 percent in 2007.  Imports from CIS 
countries also decreased, dropping to 35.5 percent 
from 36.1 percent in 2007.  Imports from countries 
other than the EU or CIS increased to 21.5 percent 
from 18.3 percent in 2007. 
 
¶11.  (U) As in previous years, Russia, Ukraine and 
Romania remained Moldova's largest trading 
partners.  Moldovan-Russian trade totaled USD 985 
million, or 15 percent of total trade.  Moldovan- 
Ukrainian trade was almost the same at USD 982 
million (15 percent).  Moldovan-Romanian trade was 
USD 927 million (14 percent).  Moldova's other 
important trade partners were Italy with USD 473 
million (7.3 percent), Germany with USD 428 
million (6.6 percent), China with USD 325.5 (5 
percent), Belarus with USD 292 million (4.5 
percent), and Turkey with USD 265 million (4 
percent). 
 
CHANGES IN MOLDOVA'S IMPORT AND EXPORT MARKETS 
--------------------------------------------- - 
 
¶12.  (U) In 2008, for the first time, Romania 
became the leading export nation for Moldovan 
goods with USD 336 million of imports, 21 percent 
of all Moldovan exports.  Russia was the second 
largest market for Moldovan exports with USD 318 
million or 19.9 percent of Moldova's total 
exports.  The following export markets by country 
were Italy (10.5 percent), Ukraine (9 percent), 
Belarus (5.8 percent), and Germany (4 percent). 
(Note:  In 2006, the Russian ban on imports of 
Moldovan wine and agricultural products led to a 
47.6 percent drop in Moldova's exports to Russia 
and an increase in exports to Romania, Ukraine, 
Belarus, some partners from the EU, and several 
other countries.  The share of Moldovan exports to 
Russia declined considerably from 31.8 percent of 
total exports in 2005 to 17 percent in 2006-2007. 
Nevertheless, Russia remained the leading market 
for Moldovan exports until 2008.  End Note) 
 
¶13.  Ukraine has been Moldova's main supplier of 
imports since 2001.  In 2008, imports from Ukraine 
were USD 839 million (17 percent of total 
imports).  Imports from Russia were USD 666 
million (13.6 percent), followed by Romania with 
USD 591 million (12 percent), Germany with USD 365 
million (7.5 percent), China with USD 325 million 
(6.6 percent), and Italy with USD 306 million (6.3 
percent).   Imports from all the major importers 
increased considerably compared to the previous 
year. The increases were 22 percent from Ukraine, 
33.6 percent from Russia, 32 percent from Romania, 
14 percent from Germany, 60 percent from China, 
and 14 percent from Italy. 
 
¶14.  (U) Moldova's major exports were textile and 
articles from textile (USD 314 million or 20.6 
percent of total export), food stuffs (processed 
animal and vegetable products) and wines (USD 312 
million, or 20.6 percent), and products of 
vegetable origin (fresh, dried or frozen fruits 
and vegetables) (USD 210.1 million or 12 percent). 
Major imports were mineral products (USD 1,126 
million or 23 percent of total imports), 
machinery, apparatus and equipment (USD 765.5 
million or 15.6 percent), chemical products (USD 
416.8 million or 8.5 percent), and transport means 
(USD 391 million or 8 percent).   Both exports and 
imports declined in the last quarter of the year. 
 
COMMENT 
------- 
 
¶15.  (SBU) Although the end-of-year numbers for 
the Moldovan economy were still positive, the last 
quarter of 2008 indicated that the economic crisis 
had already begun to affect Moldova significantly. 
The GOM continued to display confidence in the 
economy through the first three months of 2009 
leading up to the general elections on April 5. 
However, we expect the numbers for the first 
quarter of 2009 to tell a different story.  IMF 
informed us that remittances have dropped 
significantly in the first quarter of 2009.  The 
GOM derives approximately 70 percent of its 
revenue from taxes and duties on imports which 
will decline as remittances drop and imports 
decrease.  There are reports that the government 
has not paid Moldovan embassy staff overseas for 
two months.  According to EU sources the GOM 
diverted the most recent tranche of 12 million 
Euros that was meant for budget support to pay 
foreign debt.  These actions might be consequences 
of the GOM's aggressive intervention in the 
financial market to prop up the Leu in the months 
leading up to the elections.  The new government 
will have to focus on the economy and face up to 
IFIs recommendations including reducing government 
payrolls and procurement.  Since the April 5 
elections, Moldova has been bogged down in a 
political crisis and it will still take some time 
before a new government is named. 
 
CHAUDHRY