VZCZCXYZ0000
RR RUEHWEB

DE RUEHCH #0113/01 0371414
ZNR UUUUU ZZH
R 061414Z FEB 08
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 6231
INFO RUEHBM/AMEMBASSY BUCHAREST 4273
RUEHKV/AMEMBASSY KYIV 0585
RUEHMO/AMEMBASSY MOSCOW 3260

UNCLAS CHISINAU 000113 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/UMB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV MD
SUBJECT: MOLDOVA'S ECONOMY RESILIENT IN 2007 
 
 
¶1. (SBU) SUMMARY: Moldova's economy remained resilient in 2007, 
overcoming the negative impacts of Russian trade bans, higher 
tariffs for natural gas and a devastating drought.  Although GDP 
growth was less than forecast (below 4 percent) and inflation was 
higher than projected (13.1 percent), foreign direct investment 
(FDI) increased dramatically, reaching USD 450 million.  The trade 
deficit widened as higher priced imports out-paced exports; however, 
export performance was encouraging with a shift towards the EU.  The 
declining USD, strong remittances and record FDI pushed the Moldovan 
lei upward, requiring the active intervention of the National Bank. 
Government finances remained healthy (under the watchful eye of the 
IMF), and positive signs indicate that the pattern of growth is 
shifting from consumption-based to investment-driven.  END SUMMARY. 
 
MOLDOVA'S ECONOMIC PERFORMANCE 
------------------------------ 
 
¶2. (SBU) According to preliminary calculations, Moldova's GDP growth 
is expected to be less than four percent for 2007.  Although growth 
in the first half of the year was eight percent, a record drought, 
which had a negative impact on the agricultural sector, slowed 
growth in the second half.  Agricultural production (Jan-Sep) 
declined 21 percent compared with 2006.  Industrial production fell 
2.7 percent, totaling MDL 26.18 billion (about USD 2.32 billion). 
Production declined for sugar processing (-50.4 percent), wine 
(-29.5 percent), alcoholic beverages (-22 percent) and tobacco 
products (-7.4 percent).  However, production of some food and 
non-food items (canned meat and vegetables, medical equipment and 
cement) increased. 
 
HIGH INFLATION REMAINS A CONCERN 
-------------------------------- 
 
¶3. (U) According to the National Bureau of Statistics (NBS), 
inflation (consumer price index) was 13.1 percent in 2007, down from 
14.1 percent in 2006.  Prices for foodstuffs rose 15.4 percent; 
non-food prices increased 11.6 percent; and tariffs on services 
climbed 13 percent.  The CPI increase exceeded the IMF and Moldova 
government's (GOM) projections of 10 percent for 2007. 
 
REMITTANCES AND CURRENCY APPRECIATION 
------------------------------------- 
 
¶4. (U) According to the National Bank of Moldova (NBM), Moldova's 
foreign reserves grew 72 percent in 2007, reaching a record level of 
USD 1.33 billion.  This growth resulted from the NBM's fight against 
excess liquidity on the market caused by large inflows of 
remittances and investments.  These inflows coupled with the 
declining USD put upward pressure on the Moldovan lei (MDL), which 
appreciated 12.3 percent against the USD in 2007.  (NOTE: On January 
1, 2007, one USD equaled MDL 12.90.  By December 31, it had fallen 
to MDL 11.31.  END NOTE.)  Remittances (Jan-Sep) were estimated at 
almost USD 1.1 billion and FDI (Jan-Sep) was estimated at USD 450 
million. 
 
GOVERNMENT FINANCES REMAIN STRONG 
--------------------------------- 
 
¶5. (U) According to the Ministry of Finance, Moldova's budget 
revenues totaled USD 1.235 billion in 2007, increasing by USD 251 
million or 25.5 percent from the previous year.  Revenues were 
driven by VAT and excises on imports, with the Moldovan Customs 
Service reporting a 22 percent increase in revenue.  Moldova 
recorded a budget surplus the past four years because of strong 
revenues from VAT and excises on imports and controlled government 
expenditures.  Budget spending increased 28.3 percent compared with 
2006, reaching USD 1.251 billion. 
 
TRADE INCREASES, BUT DEFICT WIDENS 
----------------------------------- 
 
¶6. (SBU) Moldova's trade deficit grew 44 percent in the first 11 
months of 2007, reaching USD 2.06 billion, as imports grew faster 
than exports, according to the NBS.  Exports through November rose 
30.5 percent (compared with 2006) to USD 1.2 billion; however, 
imports were 38.5 percent higher, totaling USD 3.3 billion.  Over 
half of Moldova's exports went to the EU, including Romania (16 
percent) and Italy (12 percent).  The Ministry of Economy commented 
positively that this shift indicated that Moldovan-made goods were 
becoming increasingly more competitive and that EU trade preferences 
offered Moldovan producers new opportunities.  Trade with Russia 
totaled over USD 1 billion, a 40 percent increase over 2006 (mostly 
a result of higher prices for Russian natural gas).  After a 
two-year absence, Moldovan agricultural products and wine enjoyed a 
limited returned to the Russian market throughout 2007. 
 
IMF: MOLDOVA'S MACROECONOMIC POLICIES ARE SOUND 
--------------------------------------------- -- 
 
¶7. (SBU) An IMF assessment mission at the end of 2007 concluded that 
Moldova's economy was doing well, having overcome external shocks 
with strong prospects for economic growth.  The IMF concluded that 
Moldova's 2008 budget was prudent - given economic and political 
conditions - and that the NBM had moved quickly to control inflation 
following the drought.  The IMF noted that Moldova's pattern of 
growth was changing, with encouraging signs that growth was shifting 
from consumption-driven to investment-driven.  The IMF also noted a 
shift of production and employment into manufacturing (textiles), 
where Moldova's low labor costs provide a comparative advantage. 
Despite the positive assessment, the IMF reaffirmed the need for 
continued structural reforms, particularly regulatory reform, 
judicial reforms, improved business legislation, simplified 
licensing procedures and modernized tax administration. 
 
COMMENT 
------- 
 
¶8. (SBU) Moldova's economy performed well in 2007 despite a record 
drought which cut agricultural production.  Increases in FDI were 
impressive and remittances are flowing into investments, which are 
driving growth.  However, much remains to be done to improve 
Moldova's business environment and competitiveness.  As the IMF 
noted, the structural reform agenda remains long.  Regardless of the 
current business environment, Moldova seems to be enjoying the much 
talked about "spill-over" effect from Romania's accession to the EU. 
 This, coupled with new EU trade preferences, will continue to 
attract FDI to Moldova and drive economic growth.  END COMMENT. 
 
KEIDERLING