Profitразделитель ссылочного текста №_6_2020 (279), iunie 2020

Moldovan economy and coronavirus: impact and recovery

By Ana Kresic and Radu Cracan, EBRD economists | Experts & Analysis

In 2019, the Moldovan economy grew by 3.6%, with strong investments benefiting from heightened construction activity, private consumption and robust export growth being the main drivers of gross domestic product (GDP) growth. But that was before the coronavirus pandemic left Moldova, along with the rest of the world, grappling with uncertainty. Currently, the EBRD expects GDP to decline by 4.0% in 2020, followed by a swift recovery of 5.0% in 2021, as laid out in its newest Regional Economic Prospects.

The impact

Covid-19 will affect the Moldovan economy in four key ways: it will lower private consumption, there will be a drop in remittances, there will be a weaker demand for exports and investment will be delayed.

The containment measures will affect private consumption, meaning smaller firms will feel the impact first. Consumer-focused sectors such as retail, hospitality and recreation will suffer an immediate blow. These sectors account for around a quarter of the GDP, employ approximately the same share of the workforce and are mainly composed of small and medium-sized enterprises (SMEs), which contribute to 70% of overall value added and employment in the Moldovan economy. Due to low levels of liquidity, SMEs tend to have more difficulty accessing financing and are likely to face financial difficulties sooner than larger enterprises. High levels of informality in the economy, which further constrains the ability to obtain bank financing, among other consequences, will amplify the supply shock and lead to further disruption of demand.

A likely drop in remittances will weigh on disposable incomes and exacerbate the drop in consumption and investments. Remittances accounted for about 15% of GDP in 2019, making Moldova one of the most dependent economies in the EBRD regions. Up to one-third of all households receive remittances from family members abroad, and these transfers contribute to more than half of the disposable income of such dependent households on average. The inflow of remittances is expected to shrink this year since the EU and Russia, hosting the large majority of Moldovan emigrants, are facing recession as well. Given that temporary workers account for around 30% of total migrants, the International Organisation for Migration estimates that up to one-fifth of migrants were planning to return to Moldova in April. This will exacerbate the drop in consumption as well as investments, particularly in the construction sector.

Weaker demand from trade partners, including from the free trade zone, which is well-integrated into the global supply chains, will lower Moldovan exports. The automotive industry has been severely hit around the world due to supply chain disruptions and plummeting demand. Based primarily in the free trade zones and catering to the EU market, Moldova’s automotive sector was one of the main drivers of export growth in previous years. It currently accounts for 20% of total goods exports. According to some estimates, foreign direct investment (FDI) in free trade zones accounted for half of all FDI inflows pre-crisis, meaning a delay in investments is likely as well. On the other hand, the country’s low reliance on tourism will cushion the economy against the shock of the collapse of international travel.

Uncertainty, compounded by turmoil in the financial markets, and adverse economic conditions will postpone private-sector investment decisions. The construction sector, which has been growing at double-digit rates in recent years, is expected to slow, given the uncertainty regarding the economic outlook, driving down capital investments. While the sector was expected to slow down in 2020, even before the outbreak, the increase in state subsidy for the First House programme may partly support demand for residential buildings. Other investment decisions will likely be postponed by the private sector in the face of uncertainty, in line with dynamics in other countries.

 

 

 

 

The response

The Moldovan economy is entering the crisis on a good macroeconomic footing. The economy has been expanding in recent years at decent rates, with a significant contribution of capital investments and exports. At nearly US$3 billion and covering around six months of imports, international reserves held by the National Bank of Moldova (NBM) are at comfortable levels. While inflation was slightly elevated at the end of 2019, monetary policy decision-making is credible. Public debt is estimated at around 28% of GDP in 2019, leaving ample fiscal space for policy response. Multi-year efforts to clean up the financial system succeeded in putting it on significantly better footing, with tightened regulatory and governance frameworks and stronger regulator and foreign strategic investors in the banking sector. The successful completion of the last IMF programme shows the authorities’ commitment to maintaining macro-financial stability.

The emergency policy response worth around 2% of GDP is focused on tax deferrals, a temporary increase in social benefits, monetary policy easing and liquidity provision. Guaranteed minimum income has been raised from MDL 1107 to MDL 1300, while the unemployment benefit was set at MDL 2775 per month. The government also announced faster VAT reimbursement and will provide subsidised lending to SMEs. Moreover, the VAT rate for the hospitality sector was reduced from 20% to 15%. Firms that ceased operations during the state of emergency will have their payrolls (PIT and social contributions) fully compensated by the state and those that continue operating will receive up to 60%. The National Bank of Moldova cut the policy rate in the face of shrinking aggregate demand and lowering inflationary pressures. It also allowed banks to defer loan payments until the end of June 2020 and decreased the MDL reserve requirement to support liquidity among the firms and the banking sector. Moldova’s emergency response is in line with policies in the rest of the EBRD regions; 86% of economies where the EBRD invests implemented some form of tax and loan payments deferral, monetary policy was eased in two-thirds of the regions and social benefits were boosted in over 40% of the economies.

The initial policy response was designed in conjunction with ensuring financing. With the budget deficit estimated at around 7% of GDP, fiscal space and capacity is a significant challenge for the extent of the response. Declining remittances and export receipts will exacerbate an already weak current account position, albeit partly compensated for by the expected import compression. External funding sources are needed to cover the arising fiscal and external gaps – the government already obtained access to emergency funds from the IMF and other development partners, which will cover some of the financing needs. The authorities could also tap into the domestic market, as banks have expressed decent interest in previous issuances.

The opportunities

The Covid-19 crisis may lead to reconsidering the over-concentration of global value chains, thus creating an opportunity for Moldova. The crisis revealed the importance of resilience, including through placing greater emphasis on the closer markets, in relation to cost optimisation, which will likely lead to global players reorienting their supply chains. With existing experience of successful FDI attraction in the free trade zones and competitive advantages of proximity to the EU, in addition to the well-educated but cost-efficient labour force, Moldova has an opportunity to attract investments that will relocate from Asia and other developing economies back to Europe. However, the competition for FDI in the region will likely be high, and solving bottlenecks such as infrastructure, simplifying red tape and strengthening the rule of law will be critical to attract investments.

Addressing longstanding infrastructure priorities can provide stimulus to the economy in the recovery phase as well as increase its growth potential. Moldova is in dire need of significant capital investments in its road, rail and municipal infrastructure. Advancing infrastructure will improve people’s lives as well as increase productivity, enhance Moldova’s attractiveness to foreign capital and set the ground for long-term growth potential. For it to support the economic recovery and create jobs in the short-term, the speed at which infrastructure projects are implemented is crucial. Deploying additional resources to address bottlenecks to public finance project management and speeding up the implementation of capital investments would bring significant economic returns.

This crisis can and should act as an accelerator to boost digitalisation in different areas. Although the country has made a steady progress in the area of digitalisation, its usage is still relatively low. Digital solutions including e-signatures, e-commerce and e-banking are quickly becoming new business norms and the state should expand  e-government platforms to provide more services. In addition, online education may become more regular – proving particularly useful for children in remote and rural areas. Appropriate digital infrastructure and regulatory framework development will be crucial in this sense, providing a much-needed boost for the country’s rural and regional development.

Authorities should encourage returning migrants to remain in Moldova. Since the recovery is likely to be subdued as long as the health crisis is not completely addressed, many returning migrants could remain home for some time. According to some estimates, the share of such Moldovans represent around 10% of the working-age population. As the private sector has been facing serious skills shortages in recent years, these people could become a significant source of labour. State-sponsored incentives to enter the domestic market could be helpful in the short term. However, and much more importantly, reintegrating Moldovans into the Moldovan labour market calls for a reinvigorated pursuit of structural reforms that would help create economic opportunities and environments conducive to the private sector and entrepreneurial initiatives.■
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The views expressed in the article are those of the authors only and not of the EBRD.

 

Comentarii [2]

Comentariu
  • 16.06.2020 07:36:55 Eva
    It's very-very intresting and very-very practic for Moldova.
  • 27.06.2020 02:25:41

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