Moldovas Economy and IMF Program Tokhir Mirzoev IMF

Moldova’s Economy and IMF Program Tokhir Mirzoev, IMF Resident Representative February 2013

1 Outline n Economic background n Outlook n IMF program

2 The economy is near-standstill… Decline in activity since Q 3 2011… In 9 months of 2012 GDP declined by 0. 2% vs 9 months of 2011. Key factors: eurozone + drought 30 20 (twelve-month growth rates, percent) Retail sales 40 30 (cumulative quarters , growth over the same period of prev. year, percent) Agriculture production 20 10 10 0 0 -30 -10 -20 -30 Industrial production 2007, Q 1 2007, H 1 2007, 9 mo 2007, full 2008, Q 1 2008, H 1 2008, 9 mo 2008, full 2009, Q 1 2009, H 1 2009, 9 mo 2009, full 2010, Q 1 2010, H 1 2010, 9 mo 2010, full 2011, Q 1 2011, H 1 2011, 9 mo 2011, full 2012, Q 1 2012, H 1 2012, 9 mo -20 Industrial production дек-07 апр-08 авг-08 дек-08 апр-09 авг-09 дек-09 апр-10 авг-10 дек-10 апр-11 авг-11 дек-11 апр-12 авг-12 дек-12 -10

3 External trade has declined as well… Both exports and imports are dropping since Summer of 2011, reflecting adverse conditions both domestically and externally (twelve-month growth rates, percent) 80 80 60 60 Exports (USD terms) 40 40 20 20 0 0 -20 дек-12 авг-12 апр-12 дек-11 -40 авг-11 апр-11 дек-10 авг-10 апр-10 дек-09 авг-09 апр-09 дек-08 авг-08 апр-08 дек-07 -40 -60 -20 Imports (USD terms) -60

50 40 30 20 10 0 -10 -20 -30 -40 -50 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10 сен-10 дек-10 мар-11 июн-11 сен-11 дек-11 мар-12 июн-12 сен-12 дек-12 External bank transfers to households 40 30 -20 2007, Q 1 2007, Q 2 2007, Q 3 2007, Q 4 2008, Q 1 2008, Q 2 2008, Q 3 2008, Q 4 2009, Q 1 2009, Q 2 2009, Q 3 2009, Q 4 2010, Q 1 2010, Q 2 2010, Q 3 2010, Q 4 2011, Q 1 2011, Q 2 2011, Q 3 2011, Q 4 2012, Q 1 2012, Q 2 2012, Q 3 2012, Q 4 Remittances grew 2. 8% in 2012 but remain volatile; budget revenues held up. (year-on-year growth rates, percent) 50 Budget Revenues (excluding grants) 20 10 0 -10 4

Growth in the financial sector shows signs of peaking amid elevated NPLs Credit growth remains surprisingly resilient, but banks’ NPL ratios have been on the rise since end-2011 (although spike in NPLs is largely due to BEM and reclassification)… 20 60 50 Bank credit to non- 40 government 30 (12 -month growth, percent) 16 Banks’ NPL ratio, percent 12 20 8 10 0 4 0 дек-07 мар-08 июн-08 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10 сен-10 дек-10 мар-11 июн-11 сен-11 дек-11 мар-12 июн-12 сен-12 дек-12 -20 дек-07 мар-08 июн-08 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10 сен-10 дек-10 мар-11 июн-11 сен-11 дек-11 мар-12 июн-12 сен-12 дек-12 -10 5

12 2 0 MDL bank interest spread 8 FX bank interest spread -5 дек-07 мар-08 июн-08 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10 сен-10 дек-10 мар-11 июн-11 сен-11 дек-11 мар-12 июн-12 сен-12 дек-12 10 дек-07 мар-08 июн-08 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10 сен-10 дек-10 мар-11 июн-11 сен-11 дек-11 мар-12 июн-12 сен-12 дек-12 Amid low inflation and demand, bank interest spreads have narrowed Both MDL and FX bank interest spreads have been dropping while slowing domestic demand kept inflation low (Percent) 20 Inflation 15 10 6 5 4 0 6

Past history points to good reasons to expect strong rebound in agriculture. Agriculture and GDP Growth, 2001 -2012 (percent from previous year) 7

8 Outlook n Growth looks to rebound on account of agriculture n Inflation in line with forecast n Fiscal performance will require an effort with BEM posing additional n Current account deficit could widen as demand recovers n But significant downside risks still remain, especially due to external factors and the political uncertainty but manageable (one-off) risk 2010 2011 2012 2013 proj. GDP growth 7. 1 6. 7 -0. 6 4. 0 Inflation, end year 8. 1 7. 8 4. 1 5. 0 Current account balance (% of GDP) -9. 8 -12. 6 -9. 5 -9. 9 Fiscal balance (% of GDP) -2. 5 -2. 4 -2. 1 -1. 5

IMF-supported Program n Last program review remains to be completed (disbursement of remaining USD 77 million). n Mission was postponed twice and program was extended till end-April. n Completion of the program depends on the authorities’ resolute actions to stabilize BEM and willingness to maintain responsible fiscal policies 9

Looking ahead: key policy issues n Banca de Economii n n n Budget 2013 needs revision; many supporting policies were put in place (vignette, fuel excises) n n n A systemic bank for several reasons Urgent need for recapitalization Management needs to be strengthened In the medium-term, bank should be privatized but there are worrying signs of populist initiatives Monetary policy should maintain low and stable inflation Structural reforms: n Education, energy sector, financial sector, privatization 10

11 Thank You!