VZCZCXYZ0029
RR RUEHWEB

DE RUEHCH #0227/01 0841329
ZNR UUUUU ZZH (CCY ADX0046FF9F MSI7921)
R 251329Z MAR 09
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 7782
INFO RUEHMO/AMEMBASSY MOSCOW 3272
RUEHKV/AMEMBASSY KYIV 0639
RUEHBM/AMEMBASSY BUCHAREST 4327
RUEHSF/AMEMBASSY SOFIA 0690
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0748
RUCPCIM/CIM NTDB WASHINGTON DC

UNCLAS CHISINAU 000227 
 
C O R R E C T E D  C O P Y (ADDED CAPTION) 
 
STATE FOR EUR/UMB, EEB/IED, EEB/ESC, EEB/IFD/OMA, 
EEB/EPPD 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EINV EFIN ETRD PGOV KTDB MD
SUBJECT: MOLDOVA SUCCUMBS TO ECONOMIC CRISIS 
 
REF: CHISINAU 08 1273 
 
¶1. (SBU) Summary:  After the GOM's initial 
confidence that Moldova might ride out the global 
financial storm (backed by positive economic 
figures for 2008), more recent news about a 
slowdown in imports, exports and remittances 
forebodes gloom for 2009.  The International 
Monetary Fund now projects that the situation is 
far worse than was initially predicted.  The 
banking sector still seems sound, but there is 
much speculation about possible devaluation of the 
national currency after elections.  With an 
economy whose growth in recent years has been 
driven largely by remittances from migrant 
workers, Moldova may suffer severely as 
international markets slide deeper into recession, 
and some of these workers return home to join the 
ranks of the locally unemployed.  Lower 
remittances will cause a decrease in local 
consumption and a consequent decline in imports. 
And fewer imports will result in a substantial 
drop in customs duties from which the GOM derives 
70 percent of its revenues.  Separatist 
Transnistria has been even harder hit and is in 
desperate need of support from Russia.  The 
upcoming parliamentary elections on April 5 
complicate the situation, since the ruling Party 
of Communists of the Republic of Moldova (PCRM) is 
fully focused on the campaign and on keeping up 
the appearances of a sound economy.  Such an 
approach may prove deleterious after the 
elections.  In the post-electoral period, efforts 
to put together a ruling coalition may distract 
political leaders from the need to focus on 
economic policy as soon as possible.  End Summary. 
 
ECONOMIC GROWTH SLOWS AT END OF 2008 
------------------------------------ 
¶2. (U) In 2008 the Moldovan economy continued to 
grow as it has done each year since 2000.  During 
the first three quarters of 2008, the Moldovan 
economy outperformed the initial projections for 
the year.  The last quarter of 2008, however, saw 
a deceleration across the board as the global 
crisis started to bite.  Growth reached 10.8 
percent in the third quarter, the highest in 
Moldova's recent history.  GDP growth slowed in 
the fourth quarter, bringing the final annual rate 
nevertheless to an impressive 7.2 percent. 
Agriculture had a spectacular jump of 31.9 percent 
in growth thanks both to a good harvest and 
reflecting a recovery from the worst drought in 
years in 2007.  However, the bumper agricultural 
harvest of 2008 has not helped Moldovan farmers 
who have had to struggle with low regional 
commodity prices.  Many farmers have chosen to 
store their crops in warehouses, barns and silos 
rather than take a loss by accepting the current 
low prices on agricultural products.  Industrial 
output edged up a disappointing 0.7 percent, while 
retail soared 8.4 percent. 
 
¶3. (U) MoldovaQs product competitiveness suffered 
somewhat in 2008 as a result of the depreciation 
of the currencies of the countryQs main trade 
partners, in particular in Ukraine and Russia. 
Nonetheless, the country's export growth remained 
fairly strong in 2008 at 19 percent.  Imports shot 
up 32.8 percent, further contributing to an ever- 
widening trade deficit, which equaled 54.6 percent 
of GDP.  Construction was down 8.9 percent, 
confirming earlier media reports that the 
construction boom was turning into an outright 
bust. 
 
TIMES OF TROUBLES AHEAD 
----------------------- 
¶4. (SBU) Statistical data for the first two months 
of 2009 are beginning to show signs of trouble 
ahead for Moldova.  The picture will be clearer 
when first quarter 2009 statistics are released. 
The slowdown in the final months of 2008 now seems 
to have been the beginning of a more serious 
economic crisis, which will be picking up speed 
during 2009.  Industrial output plunged 25.1 
percent year-on-year in January 2009.  Imports 
were down 28.2 percent in the same month.  Private 
trucking companies are laying off personnel. 
Media have revealed copies of managersQ letters at 
the state-run railway enterprise, suggesting a cut 
in employeesQ working hours. 
 
¶5. (SBU) At the beginning of March, the IMF 
included Moldova in the list of 26 countries 
highly vulnerable to the global downturn but not 
requiring urgent assistance.  The IMF's Resident 
Representative, Johann Mathisen, told the Embassy 
that in the first two months of 2009 the IMF 
registered drops in remittances of 15 to 20 
percent over the same months in 2008.  Remittances 
serve as a financial lifeline for many cash- 
strapped Moldovans.  These remittance-dependent 
Moldovans may find themselves in need of 
assistance, if the remittances they receive 
decrease or cease.  The state news agency, 
Moldpress, attempted to put a positive spin on the 
developments by noting that Moldovans abroad still 
had jobs and managed to send USD 65 million home 
in January.  The next few months will reveal the 
true impact of the global downturn on Moldovan 
migrant workers.  Many Moldovans go abroad in 
spring and summer to work for up to six months 
before returning home.  Party representatives have 
informed Embassy staff that increasing numbers of 
migrant workers are returning home and are 
unemployed.  The IMF also noted that imports 
dropped 50 to 60 percent in February 2009.  A drop 
in imports seriously undermines state budget 
revenues, of which 70 percent are derived from 
customs duties.  Businesses are noting decreased 
sales as without remittances Moldovans have less 
cash to spend.  At this rate, the current GOM 
budget will be unrealistic because it will not 
receive the planned revenues from customs duties 
on imports. 
 
¶6. (SBU) The GOM added "election-related" expenses 
to the budget in the form of wage increases for 
some government employees, e.g., teachers, at the 
end of December 2008, an expense that the GOM had 
not originally planned.  The IMF noted that 
pension increases, anticipated by many citizens 
shortly before the elections, would be another 
unplanned expense for the government.  When the 
April 5 elections are over, the new government 
will face an immediate necessity to rectify the 
budget.  The new government will have to consider 
reducing government expenditures and will likely 
need international assistance. 
 
NATIONAL CURRENCY UNDER STRAIN 
------------------------------ 
¶7. (SBU) The GOM seems intent on depleting the 
National BankQs foreign exchange reserves in order 
to support the national currency.  Since the 
beginning of 2009 alone, the National Bank has 
lost 23.5 percent or USD 392.6 million from its 
foreign exchange reserves by intervening in the 
currency market to prop up the Moldovan leu. 
Despite the National Bank's interventions, the leu 
has lost four percent of its value against the 
U.S. dollar since the beginning of the year.  In 
the first two weeks of March, exchange offices 
were overwhelmed by Moldovans wishing to exchange 
Moldovan lei into foreign currency.  Authorities 
responded by blaming independent economic analysts 
for unfounded and unprofessional statements about 
the imminent devaluation of the leu in an effort 
to calm citizens.  Shortly thereafter, the U.S. 
dollar again dropped below the psychological level 
of 11 lei to the U.S dollar at exchange offices. 
Critics of the National Bank's policy have been 
calling for a gradual devaluation of the leu to 
boost exports and to make local products more 
competitive against imports.  If the GOM holds to 
 
its course of supporting the leu, imports may pick 
up.  Products from neighboring countries with 
falling currencies will become cheaper for 
Moldovans.  However, Moldovan exports will likely 
decrease, if the leu continues to hold steady. 
Neighboring countries will be unable to purchase 
increasingly more expensive Moldovan products as 
their currencies continue to lose value. 
 
RUSSIA HELPS BREAKAWAY TRANSNISTRIA DEAL WITH THE 
CRISIS 
--------------------------------------------- ----- 
------ 
¶8. (SBU) Crippled even more severely by the global 
economic crisis than right-bank Moldova, the more 
industrialized breakaway region of Transnistria 
has slid into a deeper slump.  Both industrial 
output and exports plunged dramatically to almost 
a half of last year's corresponding figures in the 
first two months of 2009.  The two largest 
contributors to the Transnistrian budget, the 
Rybnitsa Metal Plant and Rybnitsa Cement Plant, 
slashed their output by over 40 percent. 
 
¶9. (U) Authorities in the region have moved 
quickly to adopt measures to fight the effects of 
the crisis in the region.  The region's 
authorities were forced to postpone an earlier 
announced raise in salaries for state employees 
from March to September 2009.  At the same time, 
Transnistrian authorities froze any increases in 
prices for utilities (gas, electricity, heating, 
etc.) at least until September and allowed barter 
transactions between enterprises. 
 
¶10. (U) The Supreme Soviet, Transnistria's 
parliament, reported in February that, following 
earlier appeals by local authorities, Russia 
granted about USD 7 million to the region to pay 
pensions and bolster financing for social and 
medical facilities.  Few details are available 
about the terms and conditions of Russia's 
financial and economic support which is packaged 
as humanitarian aid.  This Russian assistance is 
key to preventing an economic and social collapse 
in the region.  It is Russia's support that helps 
maintain the Transnistrian ruble's exchange rate, 
according to Vladimir Yastrebchak, the region's 
"foreign affairs minister." 
 
COMMENT 
------- 
¶9. (SBU) The PCRM's focus on the campaign 
paralyzes the GOM's ability to address the economy 
in any other manner than to continually reassure 
citizens that Moldova is doing fine.  The ruling 
party's short-term interests in defeating the 
opposition parties in the upcoming April 5 
elections trump any serious efforts by the current 
government to alleviate the pending budget crisis. 
The PCRM has focused most of its electoral 
campaign on the country's stability and economic 
growth over the last eight years and chooses to 
ignore the fallout from the global economic 
crisis.  In an effort to project confidence in its 
handling of the economy, the GOM did not engage 
with a recent IMF mission to discuss a new IMF 
framework to replace the current memorandum that 
is due to expire in May.  The IMF does not expect 
the government to be in a position to discuss 
fiscal and monetary policy until after the 
elections.  Moldova could not have been caught at 
a worst possible moment for the global economic 
crisis to begin taking a toll on the Moldovan 
economy.  The IMF and other analysts expected 
Moldova to feel the crisis sharply in the next two 
or three months.  An effective response to the 
pending crisis in Moldova depends on the outcome 
of the elections and the expediency with which the 
new Parliament will be able to elect a President 
and approve a new cabinet to start dealing with 
budget shortfalls and the economic issues at hand. 
CHAUDHRY