VZCZCXYZ0000
RR RUEHWEB

DE RUEHCH #1273/01 3650822
ZNR UUUUU ZZH
R 300822Z DEC 08
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 7480
INFO RUEHMO/AMEMBASSY MOSCOW 3267
RUEHKV/AMEMBASSY KYIV 0627
RUEHBM/AMEMBASSY BUCHAREST 4313
RUEHSF/AMEMBASSY SOFIA 0685
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0743
RUCPCIM/CIM NTDB WASHINGTON DC

UNCLAS CHISINAU 001273 
 
STATE FOR EUR/UMB, EEB/IED, EEB/ESC, EEB/IFD/OMA 
STATE FOR EEB/EPPD 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EINV EFIN ETRD PGOV KTDB MD
 
SUBJECT: GLOBAL ECONOMIC CRISIS IN MOLDOVA 
 
¶1. Summary:  Moldova's underdeveloped banking 
sector and stock market and the absence of 
speculative capital have enabled the country to 
avoid any initial shock from the global economic 
crisis.  Quite the opposite, the country is set to 
finish 2008 with seven percent GDP growth and 
record high levels of foreign direct investment. 
However, the prospects for 2009 look less 
promising for Moldova.  As the economy is driven 
largely by remittances from migrant workers and 
foreign investments, inflows may decline as 
migrants lose jobs and return home and foreign 
investment slows.  Domestically this could 
translate into lower consumption and reduce GDP 
growth.  As a result, returning migrant workers 
with declining employment opportunities abroad 
might express their dissatisfaction with the 
ruling Party of Communists (PCRM) and support 
opposition parties in the upcoming elections.  A 
more serious economic downturn is developing in 
the more-industrialized separatist region of 
Transnistria, where industrial production and the 
level of exports have dropped significantly.  End 
Summary. 
 
THERE IS A FINANCIAL CRISIS WHERE THERE IS A 
FINANCIAL SECTOR 
--------------------------------------------- ----- 
----------- 
 
¶2. In a news conference held a few weeks ago the 
National Bank governor Leonid Talmaci said that 
the banking sector was sound and ready to weather 
financial turmoil.  According to Talmaci the 
country's financial system has a resilience 
learned from the financial crisis during the 1998 
Russian ruble collapse and an economic crisis with 
the 2006 Russian wine embargo of Moldovan 
products.  Johan Mathisen, IMF Resident 
Representative in Moldova, agrees that local 
commercial banks are well capitalized.  They have 
the highest liquidity levels in Eastern Europe at 
31.4 percent although the minimum required is 20 
percent.  The National Bank has done a good job of 
raising foreign exchange reserves to unprecedented 
levels, adequate to keep at bay any immediate 
pressure on the exchange rate of the national 
currency, the leu. 
 
¶3. The underdeveloped credit market has enabled 
Moldova to avoid a financial crisis.  Moldova's 
banking sector plays a relatively minor role in 
financing economic activity unlike western 
economies and the size of the country's stock 
market is insignificant.  The non-resident share 
of total deposits is low at around 8 percent and 
does not arouse concerns of capital flight. 
Mortgage financing is only at its nascent stage. 
In a remark at a recent news conference Valeriu 
Lazar, a former Minister of Economy and Trade, 
noted that there is a financial crisis where there 
is a financial sector and there is economic crisis 
where there is an economic sector.  Lazar's 
conclusion was that Moldova has little of either. 
 
¶4. While the financial sector is underdeveloped 
both it and the economy continue to grow.  The GOM 
expects to finish off the year with seven percent 
GDP growth, record high FDI inflows of up to USD 
650 million, an inflation rate of less than 9 
percent, a 20 percent increase in exports and a 30 
percent increase in imports.  The GOM's outlook 
for next year's state budget is optimistic 
assuming six percent GDP growth. 
 
MOLDOVANS STILL WARY OF BANKING SECTOR 
-------------------------------------- 
 
¶5. Many Moldovans remember the skyrocketing 
inflation of the early 1990s that wiped out 
lifelong savings and the subsequent 1998 Russian 
financial crisis that caused the national 
currencyQs devaluation almost overnight. 
Officials have made numerous statements to 
reassure everyone that the banking sector is safe. 
In early November the newspaper Moldavskie 
Vedomosti published an article stating that 
President Vladimir Voronin told the National Bank 
Governor to freeze early withdrawals of deposits 
from banks and suspend licenses of several banks. 
The National Bank was quick to deny and dismiss 
the information as "intentional misleading of 
public opinion with the aim of destabilization of 
the situation." 
 
¶6. Rumors and uncertainty on financial markets 
abroad seem to have alarmed some Moldovans and in 
October bank deposits decreased 4.6 percent. 
Today there seems to be general confidence in the 
banking system.  The initial tension in the 
banking sector has abated, yet the situation can 
change on unfavorable news about the struggling 
financial sector of Russia and Ukraine.  The GOM 
offers deposit insurance of up to $450 for an 
account in a bank.  Moldovans having more than 
$450 in savings are aware of the deposit insurance 
and have accounts in more than one of the 16 banks 
in the country since the IMF reports that up to 90 
percent of all deposits are covered. 
 
MIGRANT WORKERS, REMITTANCES AND POLITICS 
----------------------------------------- 
 
¶7. Moldova's economic growth over the recent years 
has been spurred by large remittances from the 
countryQs migrant workers.  Estimates of the 
number of Moldovans working abroad range from 
350,000 as reported by the International 
Organization for Migration to estimates of even 1 
or 1.1 million.  Moldova ranks second in the World 
Bank global 2007 rankings on the reliance of 
economic growth on remittances at 38.5 percent of 
GDP.  Last year remittances were around USD 1.3 
billion and by the end of this year are projected 
to reach USD 1.7-1.8 billion.  High consumption 
fueled by growing remittances has stimulated 
imports into Moldova.  The IMF Representative 
warned recently that the recession on the world 
markets may lead to a drop in exports and lower 
demand for Moldovan labor abroad.  The latter may 
lead to fewer remittances from Moldovans abroad 
and thus lower consumption and reduced imports. 
These developments could lead to a decline in VAT 
and customs taxes which represent the main sources 
of income for the state budget. 
 
¶8. Moldovans working in construction in the CIS, 
primarily in Russia, will likely be the first 
migrants to return home.  Authorities estimate 
that up to three quarters of the over 120,000 
Moldovans in Russia are working in construction, 
where the sector has ground to a halt.  Igor 
Dodon, Deputy Prime Minister and Minister of 
Economy and Trade, recognizes this as a concern. 
He says his Russian counterparts have assured him 
that many Moldovan workers will continue to be 
employed in large infrastructure projects such as 
the Sochi Winter Olympics site.  Dodon speculates 
that some 25,000 migrants may be forced to come 
back in the first quarter of 2009 but asserts that 
the Moldovan economy will be able to employ them 
in domestic infrastructure projects.  The GOM 
reports 310,000 Moldovan migrant workers are 
employed in the European Union.  They work 
predominantly in the service sector in Italy which 
will not experience an immediate economic 
recession.  Some migrants may lose their jobs but 
given the dire economic situation in Moldova many 
would prefer to stay unemployed in the EU. 
Returning migrants are a source of concern for the 
ruling PCRM because they could possibly express 
dissatisfaction with the government in upcoming 
elections. 
REAL ESTATE SLOWDOWN IN MOLDOVA ACCELERATES 
------------------------------------------- 
 
¶9. There are signs that the crisis has taken a 
toll on the real estate market.  The construction 
boom that fueled higher real estate prices and 
strong annual growth rates of over 20 percent in 
recent years is now slowing.  Data from official 
statistics show that construction work was down 
8.8 percent in the first nine months of 2008. 
Local analysts now say the current situation 
reflects what a local newspaper called "a price 
stabilization with a tinge of stagnation."  The 
local Russian-language newspaper Ekonomicheskoye 
Obozrenie conducted a survey of realtors to assess 
the impact of the global financial crisis on the 
real estate market.  Some realtors indicated that 
Moldovans are no longer rushing to invest in new 
apartments.  The frenzy of 2005 when it took three 
weeks to find a buyer for an apartment is over. 
Nowadays it takes at least five and a half months 
to find a buyer.  Moldovans are waiting and 
expecting realtors to cut prices or are making 
other choices with their money.  According to one 
realtor, sellers of commercial and industrial 
space are ready to cut asking prices by up to a 
half. 
 
EVIDENCE OF AN ECONOMIC SLOWDOWN 
-------------------------------- 
 
¶10. Deputy Prime Minister Dodon says that exports 
of food products to CIS may suffer and has called 
on exporters to be careful with payments on 
eastward deliveries reminding them of the 1998 
Russian ruble crisis.  Moldovan media also 
reported that importers were asking advance 
payment for deliveries from retailers.  Lower 
imports have also affected the transportation 
sector.  Moldovan state-owned railways and 
trucking companies complained to reporters that as 
consumers tighten their belts they have fewer 
goods to transport. 
 
¶11. There is anecdotal evidence that a few 
Moldovan private TV stations are finding it 
difficult to renew advertising contracts for 2009 
because many major businesses are not rushing to 
make budget commitments given the uncertainty on 
the global markets.  Some of these companies 
representing world brands operate out of 
neighboring Romania and Ukraine where the effects 
of the global crisis have had a more immediate and 
significant impact on the national economies. 
 
¶12. In a meeting with the World Bank Regional 
Director Martin Raiser to discuss the World Bank 
Moldova Cooperation Strategy, Prime Minister 
Zinaida Greceanii mentioned the GOM's 
precautionary measures for 2009.  She said the GOM 
is closely watching the global financial crisis 
which has not affected Moldova so far but the 
country has to undertake precautionary measures to 
avert a crisis next year.  The two major 
challenges are exports and payment capacities on 
export markets as well as a possible return of 
Moldovan citizens working abroad.  Greceanii sees 
the return of Moldovan citizens as beneficial 
given the stringent need for labor in all sectors 
of the economy. 
 
THE GOM IS PLANNING 
------------------- 
 
¶13. It took officials some time to come out 
publicly with statements about the impact of the 
global crisis on remittance-driven Moldovan 
economic growth.  After the initial reaction of 
talking up the mood of the public, officials are 
now half-heartedly admitting to some impending 
fallout from the international markets.  The GOM 
is looking at measures that will focus on four 
priority areas but has not presented any specifics 
on actions it will take to support these areas. 
First the government would like to ensure 
sufficient liquidity for the banking sector and 
avoid volatility in the leu's exchange rate. 
Secondly, the GOM would like to prepare programs 
to accommodate migrant workers returning home as a 
result of downsizing in such sectors as 
construction and transportation in Russia and the 
EU.  Such programs will offer consultancy and 
financial assistance to those willing to set up 
and run their own businesses.  Thirdly, the GOM 
would like to begin large construction projects 
such as roads, gas pipelines and water supply.  In 
particular, the GOM plans to initiate 
infrastructure development projects estimated at 
USD 300-400 million in the first half of 2009 when 
the impact of the crisis will be felt.  The GOM 
will allot 550 million lei (USD 53 million) from 
the 2009 state budget and expects 116.5 million 
euros and USD 73 million from the international 
donor community.  Fourthly, the GOM will focus on 
helping local manufacturers finance their 
activities through partial coverage of interest 
payments to banks or through direct government 
lending to businesses.  The GOM plans to use 
proceeds from privatizations to finance this 
program.  (Note: The GOM has recently announced 
the pending sale of state shares in 80 enterprises 
estimated at 4.1 billion lei (USD 395 million) 
before the end of the year.  Opposition and 
independent media criticize the timing of the 
privatizations during a global economic crisis. 
Deputy Prime Minister Dodon commented that these 
privatizations may help prevent a drop in foreign 
direct investment.) 
 
TRANSNISTRIA'S INDUSTRIAL BLESSING TURNS INTO A 
CURSE 
--------------------------------------------- ----- 
--- 
 
¶14. Transnistria's industry-based economy has 
always been a source of pride for the break-away 
region's authorities.  However, this concentration 
has also made it more susceptible to the economic 
crisis.  Tiraspol has been vocal about the effects 
of the global crisis on its export-oriented, 
heavy-industry enterprises.  Production in the 
region has been in continuous decline since 
September.  In November the region's industrial 
output was down 19 percent.  Average monthly 
exports were cut 40-60 percent.  The downturn in 
export markets triggered production cuts and 
temporary layoffs in the export-oriented Ribnita 
Metal Plant and Ribnita Cement Plant.  Other 
industrial manufacturers located in the region 
have also been suffering.  Prices on metal 
products and cement were halved reducing sales 
further.  With the Ribnita Metal Plant accounting 
for two-thirds of the region's exports and 
contributing at least one-third of the 
Transnistrian budget, the "government" in Tiraspol 
is grappling with difficulties in payment of 
pensions which in some instances are as much as 
two weeks late.  The region already estimates a 30 
percent drop in budget revenues.  Authorities of 
some towns in the region have come up with 
proposals for hiring those laid off to clean town 
parks and streets.  Transnistria's parliament, the 
Supreme Soviet, intends to address the Russian 
Duma to request material and financial aid for the 
beleaguered region. 
 
COMMENT 
------- 
 
¶15. The ruling PCRM of Moldova is striving to 
maintain a stable macroeconomic situation in the 
months before the parliamentary elections in 
spring 2009.  Coming up with the proposed measures 
 
to fight off the recession, the GOM has few 
financial resources of its own to fund such 
projects and will have to rely on the 
international community for assistance.  A tough 
IMF fiscal framework has enabled Moldova to 
weather the initial financial shock of the crisis 
safely.  The banks have high rates of liquidity 
and the NBM has supported a stable currency.  The 
IMF continues to emphasize that the GOM will have 
to do more to improve its investment climate, step 
up regulatory reform and fight corruption to 
simplify the operation of businesses and attract 
investments.  There has been no major decline in 
remittances but the export markets for 
agricultural goods may suffer since two major 
markets, Russia and Ukraine, are experiencing far 
greater economic downturns than Moldova. 
 
CHAUDHRY