National Bank of Moldova - bnm.mdNational Bank of Moldova • 7 GrigoreVieru Avenue, MD-2005,...

National Bank of Moldova

• 7 GrigoreVieru Avenue, MD-2005, Chisinau • www.bnm.md • E-mail: [email protected] • • Tel. (37322) 409 006 • Fax (37322) 220 591 •



Note The Monetary Policy Report No. 1, 2010 was prepared bearing on the most recent statistical data compiled by the National Bank of Moldova, National Bureau of Statistics, Ministry of Economy and Ministry of Finance. Likewise selected were certain statistical data furnished by the international community and by the Central Banks of the neighboring countries. Certain statistical data were calculated by the National Bank of Moldova independently.



LIST OF ACRONYMS AND ABBREVIATIONS

ANRE National Agency for Energy Regulation NBM National Bank of Moldova NBS National Bureau of Statistics of the Republic of Moldova NBC Certificates issued by the National Bank of Moldova CHIBID Chisinau Interbank Bid Rate CHIBOR Chisinau Interbank Offered Rate CIS Commonwealth of Independent States EUR Common European Currency CPI Consumer Price Index PPI Producer Price Index MDL Moldovan Lei OPEC Organization of the Petroleum Exporting Countries GDP Gross Domestic Product REPO Sale and Repurchase Agreement USA United States of America EU European Union USD US Dollar VMS Government Securities


• 7 Grigore Vieru Avenue, MD-2005, Chisinau • www.bnm.md • E-mail: [email protected] • • Tel. (37322) 409 006 • Fax (37322) 220 591 •

4

SUMMARY

The External Environment Following two years since the outbreak of the economic and financial crisis the severe recession that has eroded business performances worldwide is gradually making space for re-launching in major developing markets as well as in some of the advanced economies. Shrinking of global economy during the last quarter of 2008 and the first quarter of 2009 was replaced by positive growth in Q2 and Q3 of 2009. Due to measures taken by the governments of the United States, Europe, Japan and China aimed at granting support to banks and other financial institutions it became possible to prevent their meltdown. As a result the latter reported profits for Q2 and Q3 of 2009. Although there are signs of worldwide economic stabilization, including improvement in the stock market as well as in regaining consumers’ trust at the background of lower interest rates, still, the medium term perspective remains uncertain as there are still major risks endangering the global economic and financial stability. Macroeconomic background The economic development of Moldova’s key commercial counterparts was marked by further aggravation of global financial and economic crisis which, in its turn, has lead to deterioration in domestic conditions caused by a decrease of the size of remittances as well as by the slumping domestic demand to locally manufactured products. Thus, in the third quarter of 2009 as compared to the same period of the previous year the gross internal product decreased by 7.7 percent in real term. The labor market in 2009 was marked by the tendency toward shrinking due to the fact that a permanently growing number of companies renounced on their personnel recruitment plans while reducing the number of hired employees. According to the data made available by the National Bureau of Statistics the unemployment rate amounted to 5.7 percent beating by 3.6 percentage points the number registered for the same period of the previous year. Although the crisis persists producing a notable impact onto the labor market, the average monthly wage paid to some employees of the national economy during January-November 2009 showed an ascending pattern increasing by 8.5 percent in nominal terms. Development of the Inflationary Process The annual inflation rate in December 2009 measured using the consumer price index amounted to 0.4 percent as compared to 7.3 percent reported for December 2008. This development occurred at the background of a descending trend that has started in June 2008 and continued through the summer of 2009. Brake down by the components shows that the larger growth (by 2.5 percent) was marked by prices on non-foods followed by prices on services furnished to households (by 2.2 percent) while prices on food grade products showed a decrease of minus 3.8 percent.



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The core inflation registered a descendent development beginning with April 2008 (11.2 percent) amounting to 2.1 percent in October 2009 and showing slight alteration in December 2009 (2.9 percent). December growth of core inflation was determined by devaluation of the national currency against foreign currencies. Macroeconomic Projection of Medium-Term Inflation The medium term macroeconomic projection (2 years) was prepared based on the external economic conditions, actual standing of the economic cycle in the Republic of Moldova while bearing on the following assumptions: continuity of the monetary policies promoted by the National Bank of Moldova while pursuing its fundamental scope, i.e “ensuring and maintaining price stability” and achieving the inflation objective (measured against consumer price index published monthly by the National Bureau of Statistics (NBS)) at the level of 5.0 percent in 2010 with possible deviation of ±1.0 percentage points while for 2011-12 maintaining the inflation rate close to the average single digit range; maintaining slightly restrictive fiscal policy so as to allow for a decrease of budget deficit by 2.0 percentage points – from 9.0 to 7.0 percent of GDP due to increase of revenues as a result of growing indirect tax collection as well as by growing amount of grants. At the same time, overall expenditures will be reduced by about 1.0 percentage points. The assumptions in regard to fiscal policy are based integrally on the 2010 State Budget Law;

increasing excise duties and VAT and impact of this measure onto the inflation; bearing in mind when making projection were such factors as increase of energy tariffs for end consumers as of the beginning of 2010 approved by the National Agency for Energy Regulation as well as eventual changes of such in medium term perspective. Pursuant to our projection the annual CPI inflation rate will reach 6.1 percent in March 2010 followed by a ascending trend up to 7.7 percent in August-September while towards the end of the year it will register the value of 6.5 percent. Exceeding the stated range of inflation will bear only temporary and non-persistent nature based on certain objective factors, including such as: temporary shock registered at the beginning of this year as a result of increasing tariffs on natural gas, electricity and municipal heating by the National Agency for Energy Regulation. At the same time, this shock is partially determined by the increase of excise and VAT rates on certain products. Reversing the inflation trend and bringing it back to 5.0 percent ±1.0 percentage points has a rather high level of probability. With a probability of over 50.0 percent the inflation rate at the end of 2010 will be within the stated range. In 2010 the inflation will be captured totally within the stated range with a probability of over 90.0 percent while gradually decreasing to reach 4.6 percent in December.



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I. Macroeconomic Developments

Inflation

Consumer Price Index The following are the key factors underlying development of CPI inflation in 2009: slowdown of economic activity (reduction of aggregate demand); devaluation of the Moldovan leu against currencies of the key economic counterparts of the Republic of Moldova, especially against Ukrainian hrivna (except for the summer time of 2009); high volume of harvest in 2008 and reduction of agricultural production production in 2009; rise of prices on fuel internationally and change of tariffs on services with regulated prices. These factors have triggered both the pro-inflationary and deflationary pressures. However, following counterbalancing of such the annual CPI inflation rate at the end of 2009 was close to zero. The inflation rate in December 2009 for the last 12 months measured using consumer price

index amounted to 0.4 percent as compared to 7.3 percent reported for December 2008 (Chart no. 1.1). This decrease showed a descending trend beginning with June 2008, which continued through the summer time of 2009. During eight months (April through November) of the reported year the consumer price index was below the level registered during same months of 2008.

Breakdown by the components shows that the higher growth (by 2.5 percent) was marked in prices for non-foods followed by prices on services furnished to the households (by 2.2 percent) while prices on food grade products showed a reduction by minus 3.8 percent.

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Key components1 that have contributed to the formation of annual inflation rate since the end of the reported period were prices on food grade products (minus 1.2 percentage points2), prices on fuel (0.0 percentage points), and prices regulated by the state (0.2 percentage points). Likewise, prices on products and services making part of the core inflation contributed to the annual CPI inflation pace by 1.4 percentage points. Core Inflation Index3 The annual core inflation showed a descendent development (Chart no. 1.1) beginning with April 2008 (11.2 percent) reaching in October 2009 the value of 2.1 percent followed by slight acceleration in December 2009 (2.9 percent). This decrease of the annual core inflation is explained at large by reduction of consumption by households during the reported period. High volume of agricultural crop reported for 2008 produced the second wave deflationary effects onto the prices. Yet another reason lies with devaluation of currencies in the region (especially Ukrainian hrivna and Russian ruble) against the Moldovan leu that has taken place before February 2009 as well as in the summer of 2009 which produced positive impact onto the commercial mark up gained by the importers. The latter were encouraged to apply competitive strategies in setting the price which determined decrease of prices on the imported products. Slight increase in December is due to devaluation of leu against US dollar and Euro in the fall of 2009. Prices on Food Grade Products Beginning with June 2008 the annual growth (for the last 12 months) of prices on food grade products was continuously decreasing registering in May 2009 the value of minus 9.8

percent (Chart no. 1.2) followed by the reversal of trend and showing growth up to the value of minus 3.8 in December 2009. Growth of the annual pace of prices on food grade products was mainly triggered by devaluation of the Moldovan leu especially against Ukrainian hrivna which lead to rising prices on foods imported from this country.

Globally, the prices on foods went up by 19.9 percent as compared to December of the previous year, which likewise influenced the level of prices on foods in Moldova. At the same time, abundant agricultural products reported for 2008 in the Republic of Moldova as 1 Break down of CPI into respective components was done using internal methodology of the Monetary Policy and Research Department of the NBM. The CPI inflation components are: (1) core inflation; (2) prices on food grade products; (3) regulated prices; (4) oil prices. 2 Represents contribution of the respective component to the annual CPI inflation ireported for December 2009. 3 . Index was calculated by exclusion method (excluded were food grade products, fuel, goods and services with administrated prices) based on CPI calculated by the National Bureau of Statistics of the Republic of Moldova

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well as in the region (Ukraine, Russia, etc.) manifested deflationary effects that have influenced the growth pace of prices on foods in the first half of 2009. Regulated prices Year 2009 was a temperate one without major variations in regulated/administrated prices4. However, reported for the structure broken down by components were the important changes in tariffs. Thus, registered during January-December 2009 was the average monthly growth of 0.1 percent in regulated prices. The annual growth rate of administrated prices went down from 22.4 percent in January 2009 down to 1.5 percent in December 2009. Reduction of the annual growth rate of administrated prices during 2009 was basically due to decrease of annual prices on public utility services by 29.0 percentage points. At the same time, contributing to the decrease of the annual growth rate during 2009 was the temperate inflationary climate, insignificant growth of wages as a result of decline in the economic activity as well as relatively low level of prices on energy resources. Following 2009 elections period registered was major growth of regulated prices. In October it was by 1.4 percent more as compared to the previous month; this was due to increase of tariffs for water supply and sanitation services as well as for use of public transport in the municipality of Chisinau. Prices on Fuel The annual growth rate of prices on fuel shows a descendent development beginning with May 2008 (18.7 percent) amounting to the value of minus 21.2 percent in May 2009. Since May 2009 the prices on fuel stopped declining while starting with summer the annual growth rates have manifested the ascendant trend. Thus in December 2009 the average prices on fuel were by 0.5 percent higher than such in December 2008. The like development of prices on fuel was basically determined by the developments in the international oil markets as well as by the MDL/USD exchange rate during the reported period.

Production Price Index At the end of 2009 the production price index went up by 1.0 percent as compared to the end of previous year. In the extractive industry prices in December 2009 were by 7.1 percent below the level registered during similar period of 2008; in the field of electric energy, heating, gas and water by 0.2 percent

4 . In this text the notions of regulated and administrated prices bear the same meaning.

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while in the field of processing industry prices exceeded 1.2 percent the level of such registered at the end of previous year. Overall in 2009 prices on industrial production were by 3.0 percent below the average reported for 2008. In the field of extractive industry same as in the field of processing industry the average 2009 prices were below such of 2008 while in the field of electric energy, heating, gas and water such exceeded by 14.0 percent the average level reported for the previous year.

Beginning with the spring of 2009, the annual growth rates of prices on industrial production registered the tendency towards gradual increase. At large, this is due to the development of the annual growth rate of prices in the processing industry. This development was determined by growth of prices on raw material and foods in the international markets as well as by the developments in the Moldovan leu exchange rate against the currencies of the key external commercial counterparts of the Republic of Moldova (Chart no. 1.3).

Gross Domestic Product

Pursuant to the data made available by the National Bureau of Statistics the gross domestic product in the first 9 months of 2009 decreased in real terms by 7.7 percent on yea-to-year

basis. The economic crisis was obviously affecting all categories of resources (Chart no. 1.4). Unlike the previous year, reported for January-September 2009 was a negative value of the rate of change of agricultural value added (minus 10.6 percent). At the same time, decrease of value added in industry and construction by 23.3 and 30.8 percent accordingly has contributed notably to GDP decrease. The negative developments were

also registered with value added trade (minus 4.5 percent) and transport and communications (minus 14.8 percent). In January-September 2009 positive developments in value added were registered only in the category of „other services” showing an increase of 5.9 percent on year-to-year basis. Taxes on product went down by 5.1 percent as compared to January-September 2008. In GDP structure broken down by categories of resources the share of services went up from 63.7 percent in January-September 2008 to 65.6 percent in January-September 2009 while the share of industry decreased by 1.5 percentage points amounting to 13.2 percent in January-September 2009. During the reported period the share of agriculture went up from

Chart no. 1.4. Contribution of economic activity (p.p.) to annual GDP growth (%, year on year basis)

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7.3 to 7.4 percent. GDP development analyzed through the prism of consumption (Chart no. 1.5) at the background of the economic crisis that has generated negative expectations and in view of remittances slump shows on the one side a decrease by 9.2 percent of end consumption with households in January-September 2009 as compared to the same period of previous year which fact contributed notably to a decrease in GDP. On the other side, consumption by public and private administrations went up by 2.7 percent. However, due to small share of such it failed

to produce major changes in the development of GDP. The most significant negative contribution was through gross capital formation showing a decrease by 53.2 percent as compared to January-September 2008. Decrease of end consumption and drastic reduction in gross capital formation determined import dropdown by 24.6 percent. The volume of export was reduced by 11.8 percent due to fall in external demand for domestically manufactured products as a result of economic crisis that has captured Euro zone as well as the Russian Federation – key trade counterparts of the Republic of Moldova. In the GDP structure broken down by categories of expenditure the share of final consumption decreased from 120.0 to 118.0 percent in January-September 2009. At the same time, the share of gross capital formation in the GDP decreased from 32.4 to 16.2 percent. Analysis of quarterly development shows that in Q3 of 2009 the pace of annual decrease of GDP (minus 7.5 percent) was below that reported for Q2 of 2009 (minus 8.6 percent), which could be interpreted as the downturn of the negative trend observed at the beginning of the year in the economic activity of the Republic of Moldova and as an improvement of GDP in the subsequent periods. Household Final Consumption The final consumption of households during January-September 2009 as compared to the same period of the previous year registered a decrease by 9.2 percent in real terms. Pursuant to data made available by the National Bureau of Statistics observed was a decrease by 9.1 percent in consumption of goods as a result of drop down in retail sales of non-foods by 10.4 percent while the share of the latter in total sales amounts to 64.4 percent. At the same time, expenditures incurred with purchasing services at the expense of individual budget show a

Chart no. 1.5. Contribution of demand components (p.p) to the annual GDP growth (%, year to year basis)

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decrease of 4.2 percent in real terms. For the first nine months of 2009 the bigger decrease was registered with final consumption of goods and services in kind – by approximately 18.1 percent as compared to the same period of the previous year. This development was basically triggered by the decrease of average prices on selling agricultural products by the agricultural enterprises (prices in which consumption is calculated in kind) by 31.3 percent. Own financial resources of the households constitute the most important part of the financial resources in households’ final consumption, however, the negative effects of the economic crisis bear certain degree of uncertainty experienced by the households in regard to future incomes and hence influencing the final consumption. As compared to Q3 of 2008 when the remittances were the main source of financing households consumption, in Q3 of 2009 the main source of financing households consumption was represented by the total cost of labor force (wage bill) which makes approximately half of the total sources of financing thus contributing to the growth of household final consumption by 2.4 percentage points. This situation was created as a result of reduction in remittances from the Moldovan working abroad by 22.3 percent, which contributed to the downturn of households’ final consumption by 8.8 percentage points. The most impressive growth was reported for social transfers, which in Q III of 2009 increased by 22.7 percent, thus contributing to the growth of consumption by 1.7 percentage points. Despite of the fact that the process of lending was resumed, the amount of loans extended to households has never reached the level reported for 2008 although the share of loans in total sources of financing consumption did not change as compared to Q III of 2008, the loans contributed to the decrease of households consumption by 0.63 percentage points showing a decrease of about 75.4 percent on year-to-year basis. Gross Capital Formation Gross capital formation in January-September of 2009 decreased by 53.2 percent in real terms as compared to the same period of the previous year which shows an explicit decline as compared to the rates registered during the last 9 years. Gross fixed capital formation decreased by 39.5 percent in real terms as compared to the same period of previous year. The negative pace of gross fixed capital formation was determined by notable downturn of investments as a result of the economic crisis and pessimistic anticipation of investments in regard to subsequent development of the economic situation in the country. The share of this component in gross capital formation in January-September of 2009 amounted to 102.2 percent, due to negative value of the second component in gross capital formation. Contribution of the gross fixed capital formation to the growth of gross capital formation during the reported period amounted to minus 51.5 percentage points. Stocks variation in January-September of 2009 amounted to minus MDL 649.7 million in comparable prices against MDL 2,379.4 million registered in January-September of 2008.



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Industrial Production

Pursuant to the data made available by the National Bureau of Statistics the volume of industrial production regardless of the form of property decreased by 24.3 percent in real terms. Major contribution to the decline of industrial production (by 23.2 percentage points) was made by the downsize of the volume of industrial production in processing industry by approximately 26.3 percent, determined by reduction in „production of other items made from non-ferrous materials”, „shoemaking”, „canning fruits and vegetables” and „wine making industry” that have contributed to reduction of industrial production by 5.4, 1.4, 1.7 and 2.0 percentage points respectively. “Production and distribution of electric and thermal energy” contributed to the decrease only insignificantly (by 0.5 percentage points). Despite of the fact that engaged in the industrial production during January-September of 2009 were 12.3 percent of the total number of employed the labor productivity decreased as compared to the same period of 2008 by about 10.5 percent, which will definitely affect the production costs as well as the financial results obtained by the producers. Slump in remittances during the first nine months of 2009 as compared to the same period of 2008 contributed to reduction of household final consumption which manifested itself through a downturn of demand for domestically manufactured products predominantly food grade ones thus determining the slump in the industrial production. In January-October of 2009, compared to January-October 2008 the value of the industrial production generated by the industrial enterprises captured by the statistical monthly survey reduced by 23.2 percent in real terms; however reported for November 2009 was monthly increase by about 12.9 percent in real terms as compared to October 2009. Slump in volume of production output was also conditioned by the difficulties encountered by the enterprises in searching for markets, especially by reduction of orders from overseas companies, appreciation of the exchange rate that has contributed to reduction of prices on imported goods making these more accessible for the domestic buyers. At the same time more expensive domestically produced commodities were not in demand and less competitive for export purposes. During eleven months of 2009 as compared to the same period of 2008 the major decrease 32.2 percent was registered by extractive industry followed by processing industry showing a decrease by 25.2 percent and electricity, heating, gas and water showing a decrease of 3.4 percent respectively. It is worth mentioning that in November 2009 the energy sector marked on increase of 7.0 percent in real terms as compared to he same month of the previous year. Overall, the industry continues the descending trend that took off at the end of the previous year failing to reach even by November 2009 the values reported for 2008.



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Agricultural Production

Pursuant to the data made available by the NBS the global agricultural production in 2009 as compared to 2008 by all categories decreased by 9.9 percent in real terms. This decrease was determined by 17.4 percent slump in vegetable production. The major decrease as compared to the same period of 2008 was reported for harvesting sugar beets and wheat – by 65.1 and 42.9 percent accordingly. Pursuant to preliminary data made available by the NBS the total area planted with these 2 crops in 2009 was by 2.7 percent less as compared to 2008. The agricultural enterprises stated reduction of average yield on major crops except for grapes for which the average yield went up by 27.5 percent as compared to 2008. Compared to the previous year the livestock product registered an increase by 11.8 percent, basically due to growth in livestock and poultry production (live weight) by 16.1 percent. In Q III 2009 engaged in the agricultural sector was 32.5 percent of total employed population of which 45.0 percent were engaged in their own auxiliary household (by 9.1 percent less as in Q III 2008. This shows that one out of every 11 persons has pulled out of this sector in 2009). The average prices on selling farm products have decreased notably (by 31.3 percent) in January-September 2009 as compared to the same period of 2008, of which prices on vegetable products by 38.0 percent and on livestock products by 12.0 percent.

Investments in Fixed Capital

During January-September 2009 investments in fixed capital by enterprises done at the expense of all sources of financing decreased by 42.5 percent in real terms as compared to January-September 2008.

Construction and mounting works in the total volume of investments amounted to 56.5 percent. Compared to January-September 2008 this volume decreased by 37.8 percent in real terms. The main sources of financing the investment activity (Chart no. 1.6) remain own means invested by businesses and households (58.0 percent). These decreased by 37.1 percent in real terms as compared to the same period of the previous year. Another important source of investments in fixed capital are foreign investments amounting to 19.0 percent; these have decreased by 42.5 percent as compared to

January-September 2008. Investments in fixed capital at the expense of budgetary

Chart no. 1.6. Breakdown of investments in fixed capital by sources of financing (Jan-Sep. 2009)

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Budget sourcesBudget sources of territorial administrative units Means of economic agents and of the populationsMeans of foreign investorsOther souces



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resources (both state and local government budgets) amounted to 9.8 percent of the total amount. In the specific structure of investments in fixed capital an important share was targeted towards construction of buildings and premises and amounted to 48.3 percent of the total investments made (including 22.2 percent – investments in construction of housing). Investments in construction of housing decreased by 40.7 percent while such for other purpose premises by 50.9 percent as compared to January-September 2008. The share of investments in fixed capital used for purchasing machinery, equipment and transport facilities amounted to 36.6 percent of the total volume of investments made. In the structure of investments in fixed capital broken down by forms of property 26.7 percent belong to businesses with public form of property with preponderant share of 73.3 percent belonging to businesses from non-public sector of national economy who have absorbed about 71.0 percent of the total volume of construction and mounting works and 97.6 percent of total commissioned housing.

Services Furnished to Households and Retail Sales

In January-September 2009 as compared to the same period of 2008 paid services furnished to households went up by 2.3 percent in real terms. Commercial facilities sold out to households consumer goods by 4.7 percent less (in real terms) as compared to the same period of previous year. This was basically caused by reduction of sales in non-foods by 10.4 percent while the share of such amounts to more than half of the retail sales value. At the same time, sales of food grade products through commercial facilities went up by 6.0 percent; their share in total sales amounts to 33.0 percent. In January-November 2009 as compared to January-November 2008 paid services furnished to households went up by 2.6 percent in real terms while retail sales registered a decrease of 4.6 percent in real terms.

Labor Force Market

The labor force market in 2009 was characterized by a tendency towards shrinking economic activity as well as by persistence of the climate of uncertainty. The ever growing number of companies renounced on their recruitment plans and proceeded to decrease the number of employees in their companies. Pursuant to the data made available by the National Bureau of Statistics the nationwide unemployment rate in Q III 2009 amounted to 5.7 percent being higher by 3.6 percentage points as compared to the same period of 2008. The reasons could be found in a decrease of consumption and smaller amount of orders from external businesses to local businesses. As a result, such processes determined the decline of the employment rate by 2.2 percentage points and decrease of the number of able bodied population (employed plus unemployed) by 2.4 percent compared to Q III 2008. Data supplied by the National Bureau of Statistics indicate that the most affected sector is agriculture which on the one side registered a decrease of employed population by 9.1



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percent and on the other side the number of employees was maintained at about the same level representing 67.4 percent of total population employed as per professional status or by 2.2 percentage points more as compared to Q III 2008. The Beveridge curve shows that decline of the number of unemployed in Q III 2009 as compared to Q II 2009 is associated with reduction of vacancies. Reported for Q III 2009 was a decrease in the number of vacancies (adjusted by seasonal factor) by 6.4 percent as compared to the preceding period explained by maintaining low level of demand for goods and services. Inter alia, decrease in the number of unemployed in Q III 2009 as compared to the preceding period was also determined by the economy featuring high seasonal pattern; it is worth mentioning that a third of the population is engaged in agriculture. Wage Income The situation on the labor market in the Republic of Moldova aggravated in 2009 as a result of effects produced by the financial crisis. During this period registered was slumping of business activity at the background of narrowing gap between supply and demand in the labor force market. According to some estimates, the number of persons that have lost their job and thus turning into vulnerable category from the economic standpoint, went up as compared to the recent years numbers which has notably affected the labor market. Although the crisis persists and its impact on the labor force market is highly negative the average monthly wage per employee in January-November 2009 showed an ascending development both in nominal and real terms. Pursuant to data made available by the National Bureau of Statistics the average wage during this period registered and increase of 8.5 percent in nominal terms as compared to the same period of previous year. Contributing to maintaining enhanced growth of wage earnings was the fact of rising wages of public sector employees by 21.6 percent. Extractive and construction industries represent two domains that were amongst the first to be affected by the crisis and registered significant cuts in wages. Less favorable outlook was reported for constructions sector showing a decrease of average wage by 13.6 percent. Given the relatively high level of specialization of industrial branches employment of those that have lost their job in other sectors or their professional retraining seems to a problem. According to the statistical data, in January-November 2009 the average wage paid in industry registered was the growth rate of 4.1 percent as compared to the same period of the previous year. In Q III 2009 a significant share of Moldovan population was engaged in agricultural sector – about 32.5 percent of total employees. Growth of wages in this sector shows a rather essential slump. In January-November 2008 the wage growth rate in agriculture amounted 36.0 percent while in January-November 2009 the growth was only 1.6 percent as compared to the same period of previous year. Same as before, the biggest remuneration is paid to the employees of financial institutions registering further increase by 4.6 percent as compared to the same period of previous year. This ascendant development in wages could be deemed as negligible at the background of the fact that this segment represents only a small segment of total employees.



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The actual unit labor cost5 in 2008 registered a trend towards a decrease since the nominal GDP growth rate was higher than the growth of total labor cost represented by wage bill. In line with a decrease of unit labor cost the local producers become more competitive. This trend is not valid in the first quarters of 2009 since the economic growth rate was slumping and concomitantly the unit labor cost went up. Thus, the actual unit labor cost index in Q III 2009 increased by approximately 13.2 percent as compared to the same period of previous year. Balance of Payments The balance of payment situation in the Republic of Moldova overviewed for the first three quarters of 2009 was determined at large by the global economic recession. Dependence of the Republic of Moldova on the external factors resulted in a decrease in the main aggregates of the balance of payments. External transactions conducted by the Republic of Moldova at the extent of 2009 followed the descendent trends of the global economy showing a decrease as compared to the

previous year in the external trading of goods and services as well as in the financial flows. The current account of the Balance of Payment of the Republic of Moldova during January-September 2009 registered a negative balance of minus USD 317.7 million (Chart no. 1.7). The current account to GDP ratio amounted to 7.9

percent showing a decrease by 8.0 percentage points as compared to the same period of 2008. External trade deficit went down by 42.6 percent, which was due to more pronounced decrease of imports (minus 35.1 percent) compared to exports (minus 25.6 percent). The following were the main groups of commodities exported during January-September 2009: food grade products, beverages and tobacco (their share amounted to 22.6 percent showing a decrease by 14.3 percent), textiles amounting to 20.9 percent (showing a decrease by 22.2 percent as compared to the respective period of 2008). Due to climatic conditions of 2008 favorable for agriculture, reported for the first three quarters of 2009 was an increase in exporting vegetables by 34.9 percent, their share in the structure of exported products went up by 8.4 percentage points as compared to the same period of 2008.

5 The actual unit labor cost represents a ratio of wage bill in real terms and real GDP.

-44.5

-215.9-264.3-184.3-306.5-232.3

-57.3

-900

-700

-500

-300

-100

100

300

500

Q I, 2008 Q II, 2008 Q III, 2008 Q IV, 2008 Q I, 2009 Q II, 2009 Q III, 2009

USD, million

Goods Services IncomeCurrent transfers Current account

Chart no. 1.7. Current account – main components (USD, million)



17

An increase by 46.4 percent for January-September 2009 was reported for case of chemical products. Analysis of export counterparts of the Republic of Moldova during the reported period shows that the bigger share belongs to the European Union states (53.3 percent) followed by the Russian Federation (21.1 percent), Ukraine (6.2 percent) and Belarus (6.1 percent). As compared to the first three quarters of 2008 the slump in the volume of export was obvious in all groups of countries which could be explained by the economic recession in the majority of such countries resulting from the effects of the global financial crisis. In the first three quarters of 2009, import to the Republic of Moldova has fallen by 35.1 percent as compared to the same period of the previous year. Break down by the categories of products shows that the most critical decreases were registered with import of mineral products (by 38.6 percent), ordinary metals and articles made from such (by 54.4 percent), machines and devices; electrical appliances, sound and image recording or reproducing devices (by 45.3 percent), vehicles, air jets, watercrafts and transportation means (by 61.9 percent). This development is determined by the reduction of import prices and downturn of economic activity. Import of electric energy was down to minimum and basically delivered from Ukraine since there was a decision approved by the authorities stipulating purchases of energy from Cuciurgan power station (Moldovan CERS). Likewise, a slump by 10.7 percent was reported for the natural gas import while the value of imported gas went up by 29.2 percent. Import partner-states for the Republic of Moldova are its neighboring countries (Russian Federation, Ukraine, and Belarus) as well as Turkey, China and European Union states. The European Union is maintaining the leading position in importing from the Republic of Moldova. Thus compared to January-September 2008, registered was an increase of the share of import by 0.4 percentage points (moving from 48.7 percent to 49.1 percent). The share taken by the Russian Federation increased from 12.3 percent in January-September 2008 to 17.2 percent for the same period of 2009 while the share taken by Ukraine decreased

by 16.2 percent. Although remained positive, the revenue balance in the first nine months of 2009 was reduced by 2 times as compared to the same period of 2008. The current transfers balance during the reported period registered positive balance although with a decrease by 31.6 percent as

Chart no. 1.8. Capital and financial account – main components

-0.837.7

303.2

428.1

86.0

257.7

138.9

-400.0

-300.0

-200.0

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

Q I, 2008 Q II, 2008 Q III, 2008 Q IV, 2008 Q I, 2009 Q II, 2009 Q III, 2009

USD, million

Capital transfers Direct investmentInvestment portfolio Other investmentReserve assets Capital and financial account



18

compared to the first 9 months of 2008. In the first three quarters of 2009 the grants as well as technical assistance extended to the Republic of Moldova by the international organizations and foreign governments and also the inflows of humanitarian aid decreased as compared to the previous year. The surplus of capital and financial account during this period amounted to USD 340.1 million (Chart no. 1.8). Net inflows of foreign direct investments decreased in January-September 2009 by 83.7 percent as compared to the same period of 2008. It is worth noticing that during the outbreak of the financial crisis in order to ensure liquidity in the member-states the International Monetary Fund proceeded to allocate SDR in proportion to their membership quotas. The Republic of Moldova received SDR 117.7 million (USD 184.2 million) disbursed in August as part of general allocation and in September as part of special allocation. The External Debt of the Republic of Moldova as at 30 September 2009 increased by 4.6 percent as compared to the end of 2008 and amounted to USD 4292.7 million. In total external liabilities the long-term ones amounted to 66.2 percent. Borrowings amounted to 69.6 percent din in the long term external liabilities, lending between the affiliated companies amounted to 23.7 percent, SDR allocation to 6.5 percent, bonds and other liabilities to 0.1 percent. Short term liabilities amounted to 33.8 percent in total external liabilities with 43.9 percent making commercial loans; 14.1 percent arrears; 13.5 percent foreign currency and deposits; 3.4 percent borrowings and 25.1 percent other debt liabilities. At the end of September 2009 the external public and publicly guaranteed debt has reached the value of USD 1139.51 million while non-guaranteed private one amounted to USD 3153.22 million.

Budget Execution6 The budgetary policy in 2009 was marked by the slump in revenues as well as by the increase of spending by the national public budget. Taking into account the fact that public revenues depend at large on the economic activity as well as on the households’ final consumption the downturn of the domestic demand produced negative consequences onto the budget. According to the data made available by the Ministry of Finance, the revenues accumulated by the national public budget during January-December 2009 amounted to total worth MDL 23.2 billion which shows a slump by 8.9 percent as compared to the same period of the previous year. During the recent years dependence of the state budget on households’ consumption continued to grow. That was due to increase of the share of indirect taxes in total public revenues while the decrease of imports has lead to a slump of accumulation of

6 Data made available by the Ministry of Finance: 2008 – final data; January-December 2009 – preliminary data.



19

financial resources with the national public budget generated by settling for acquiring the import rights. Tax revenues continued to hold major part in budget revenues; same as in the previous years the main source of revenues remained with charging internal taxed on goods and services. The share of direct revenues in tax revenues kept decreasing beginning with 2008 due to application of “zero” rate on corporate income tax for reinvested profit. This applied to legal entities, peasants’ farms (farmers) as well as to individual entrepreneurs. The government used this strategy pursuing the scope of encouraging domestic businesses. Recent information coming from the Ministry of Finance shows that corporate income tax during January-December 2009 marked a decrease by 13.2 percent as compared to the same period of the previous year while the internal taxes on goods and services decreased by 16.4 percent. As a result of slumping of these indicators the tax revenues were reduced by 9.4 percent. Beginning with December 2006 (following sitting of the Consultative Group of Donors for Moldova) significantly increased the disbursements of grants for budget support as well as for the externally financed projects – a significant share of such was disbursed in January-December 2009. Analyzing January through December periods of 2007-2009 one could see that the total amount of public spending was marked by the ascending development. The total spending at the expense of the national public budget in January-December 2009 amounted to total of MDL 27.3 billion which is by 4.6 percent more as compared to the same period of the previous year. Growth of spending was conditioned by rise of wages in education and health as well as by increase of pensions. These influences were partially offset by the effect of higher revenues generated by VAT on goods and services as well as by higher contributions paid to the mandatory state social insurance budget. In the context of shrinking economic activity in the Republic of Moldova, the major components of the national public budget were marked by the divergent development, such as enhancing of negative development in total revenues as well as considerable increase of expenditures. The execution of consolidated budget in January-December 2009 resulted in the bigger deficit ever amounting to (minus) MDL 4.1 billion as compared to (minus) MDL 0.6 billion reported for January-December 2008. During 2009 the balance of external debt decreased by USD 4.6 million as compared to the balance reported as at 1 January 2009 and amounted to USD 773.7 million. The internal debt as compared to the beginning of the year increased by MDL 1,595.0 million thus amounting to MDL 5,104.9 million. Change of the domestic debt was produced at the expense of increasing the issue of government securities exclusively.



20

II. Monetary Policy Promotion

Monetary Policy Instruments

During 2009 the National Bank of Moldova continued to make flexible use of the entire set of available monetary policy instruments. As a response to the global financial crisis, in the context of reduced inflationary pressures and notable downturn of the economic activity, the National Bank of Moldova attempted important measures to support banks liquidity and lending to economy under critical situations. Interest Rates Policy Slackening monetary policy promoted by the National Bank of Moldova by lowering at the extent of 2009 of the NBM base rate and decreasing required reserves ratio pursued the scope of reducing interest rates in the market and offering possibilities of lending to real sector of the national economy. Although the main operations of monetary policy (short term sterilization as well as injection of liquidity) were done using the NBM base rate the signals send by the NBM rates were picked up with a delay by the interbank market of loans-deposits and by the government securities market and often failed to influence the short term interest rates in these markets. Thus, in November 2009 the average interest rate on interbank loans/deposits dropped down below the inferior ceiling of the corridor of interest rates, constituted by the interest rate on overnight deposits, registered the lowest value - 1.00 percent annual – the situation produced at the background of stagnation of the activity in this market generated by the excess of

liquidity in banking system. Likewise, the yield in government securities market in April (at the time of maximum shortage of liquidity) exceeded more than 10.0 percentage points upper ceiling of the interest rates corridor – the average monthly interest rate on government securities with 91 day maturity registered 23.8 percent on annual basis (Chart no. 2.1).

The reference rate of the interbank market Chibor overnight, that in the first half of the year had a distorted position in regard to the monetary policy rate got corrected towards the end of the year registering relatively small fluctuations. However, overall in 2009 the interest rates in the interbank monetary market and on government securities picked up descendent adjustments of the monetary policy interest

Chart no. 2.1. Dynamics of interest rates corridor in 2009

02468

1012141618202224

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

%Overnight creditsOvernight depositsInterbank credits/deposits91-day T- bills



21

rates. The average monthly interest rate on interbank loans/deposits maintained tendency toward a reduction reaching in December the level of 3.02 percent, inferior to the one registered in January – 18.84 percent. The average interest rate on government securities placed in the primary market was also reduced from 17.45 percent in January to 4.51 percent in December, while the yields on transactions with government securities in the secondary market decreased from 17.22 percent in January to 3.72 percent in December 2009. Open Market Operations The divergent nature of the monetary market manifested during 2009 made the National

Bank to adopt the manner of managing the liquidity depending on market conditions and using a wider range of instruments. Next to the ones meant for mopping up the liquidity - the National Bank Certificates (NBC) brought back to the market after more than 10-years break were REPO transactions for purchasing government securities (Chart no. 2.2).

Selling NBM Certificates Certificates of the National Bank of Moldova as the instrument for mopping up the liquidity were actively used by the NBM at the beginning of the year (during the first months) as well as at the end of 2009 (last days); excess of liquidity reported by the market in the second half of the year as a result of foreign currency purchases by the NBM alongside with reduction of required reserves ratio which allowed the banks to lend to the real sector of the national economy. In the first two months of the year the National Bank of Moldova was holding weekly two auctions for selling NBC while beginning with the second half of March the NBM proceeded to holding the auctions once a week. Issued during this period were 7 days maturity Certificates; by so doing the NBM has achieved the objective of issuing single maturity NBC. Daily balance of NBC issued in the first quarter of 2009 changed from maximum value worth MDL 2518.5 million in January to minimum value worth MDL 89.0 million reported at the end of March 2009. At the end of the year, pursuing the scope of short term mopping up the excess of liquidity in the banking system the NBM resumed operations of NBC placement by holding 2 auctions for selling NBC with maturity terms of 14 and 28 days and upon 30 December 2009. These auctions allowed the National Bank of Moldova to withdraw from the market liquidity worth MDL 3080.3 million.

Chart no. 2.2. Development of daily balance of open market operations conducted by the NBM in 2009

20.0

5.010.0

0.0

15.0

-3300

-3000

-2700

-2400

-2100

-1800

-1500

-1200

-900

-600

-300

0

300

600

900


MDL, million %

Daily balance of NBCDaily balance of operations REPO by purchasing state securitiesBase rate of the NBM



22

Throughout 2009 the certificates were sold at the interest rate equivalent to the NBM base rate. In the first months of 2009 the base rate was lowered through two adjustments by 1.50 percentage points done on 20 January and 10 February 2009 up to the level of 11.00 percent on annual basis. Thus, the interest rate on the issued NBC was brought down from 13.96 percent annual at the beginning of January to 11.00 percent annual in February-March 2009. As a result of lowering the base rate in the subsequent period of 2009 applied to the certificates issued in December was the annual interest rate of 5.0 percent. Overall in 2009 the average weighted rate on sterilization operations was set at 10.62 percent annual as compared to 17.00 percent applied in 2008. Lowering rates on sterilization operations conducted by the NBM as well as insignificant amounts (as compared to 2008) have lead to reduction of cost incurred by the NBM with sterilization of the excess of liquidity from MDL 210.8 million in 2008 to MDL 32.8 million in the reported year. REPO Purchase Transactions In the context of liquidity slump in the market reported at the end of Q I 2009, beginning with May 2009 the National Bank of Moldova started injecting liquidity into the banking system through REPO operations for purchase of government securities at the NBM base rate for a term of up to 6 months. In May-June and in the first week of July conducted were REPO operations for purchase of government securities based on negotiations; by using this instrument the National Bank of Moldova injected liquidity into the banking system to the value of MDL 346.0 million. Beginning with November 2009, the National Bank of Moldova has reiterated its intention to support revival of the process of lending to economy by accepting a commitment to ensure permanent liquidity of banks by holding weekly REPO operations for purchase of government securities through the auctions applying flat interest rate (NBM base rate) in compliance with a schedule prepared for the period November 2009 through December 2010 and published on the official webpage maintained by the NBM. Out of 7 auctions announced by the NBM bids were submitted only to the one held on 25 November 2009; the liquidity worth MDL 3.0 million was extended to a single bank at the annual rate of 5.00 percent for a term of 28 days. The average weighted interest rate for REPO purchase operations conducted during 2009 amounted to 10.16 percent on annual basis with the average term amounting to 114 days. Money Lending At the background of mopping up the excess of liquidity in Q I 2009, beginning with April 2009 the National Bank of Moldova changed its position thus becoming a lender for the banking system (Chart no. 2.3).



23

Expanding the accessibility of lending resources of the National Bank of Moldova in 2009 became possible as a result of diversifying destinations and increasing the terms of lending to the banks. During 2009 the National Bank proceeded to allocate loans in order to maintain banks liquidity, lending to

real economy and protecting integrity of the banking system. The amount of loans disbursed by the National Bank amounted to MDL 2,209.9 million representing major share in total volume of NBM’s refinancing operations. Lending resources of the National Bank of Moldova were disbursed mainly for the purpose of maintaining liquidity in the banking system and lending to the real sector of the national economy. Pursuing the scope of maintaining banks liquidity the National Bank of Moldova in 2009 disbursed loans to six licensed banks worth MDL 660.0 million; the balance of these loans as at 31 December 2009 amounted to MDL 450.0 million. Pursuing the scope of lending to real sector of economy the National Bank of Moldova in May-August 2009 opened credit line for 9 banks for a term of one year to the value of MDL 960 million. At the end of the year the balance of the disbursed loans amounted to MDL 798.0 million. The aforementioned loans were allocated by the banks preponderantly in industry and commerce (42.2 percent), agriculture and food industry (about 33.6 percent) and energy and fuel sector (about 14.1 percent). Lending for the purpose of maintaining banks liquidity and lending to real sector of the economy were disbursed at the NBM base rate, fluctuating during the effective period of lean contracts which over the year went down from 11.00 to 5.00 percent on annual basis. Disbursing lending resources to the banks at the base rate of the National Bank of Moldova contributed to reversal to a descendent trend of interest rates on the interbank market and accordingly, interest rates on loans disbursed by the banks. These actions resulted in a slowing down the slump of lending and helped to resume normal functioning of financial and lending market. During 2009 the National Bank of Moldova continued monitoring of loans disbursed in the previous years to housing construction cooperatives. At the end of the reported year the balance of these loans amounted to MDL 21.9 million. As a result of timely repayments and anticipated payments the balance of loans disbursed to housing construction cooperatives as compared to the end of 2008 showed a reduction by 17.0 percent.

Chart no. 2.3. Money market operations conducted by NBM in 2009

-1500

-1000

-500

0

500

1000

1500

2000


MDL, million

Average daily balance of credit operations of the NBMAverage daily balance of NBM sterilization operations



24

The total balance of accounts payable of the banks due to the National Bank of Moldova as at 31 December 2009 amounted to MDL 1859.8 million as compared to the debt worth MDL 26.4 million reported at the end of 2008 which was integrally represented by the loans disbursed to housing construction cooperatives. Rather essential changes in 2009 were made in the structure of collateral securing the accounts payable due by the banks to the NBM. In the reported year accepted as collateral when disbursing loans were the required reserves of the banks both in Moldovan lei and in free convertible currencies maintained by the banks at the NBM as well as government securities while in 2008 the pledge was constituted only by the monetary means available on banks LORO accounts maintained at the NBM. Permanent facilities The mode of permanently functioning facilities (deposits and overnight lending) established by the NBM allowed banks to manage efficiently their own liquidity and offered an advantage of flexibility to the NBM in realization of its monetary policy. Overnight lending facility. In the context of shortage of liquidity observed in the banking system at the beginning of 2009, the National Bank of Moldova during February-May 2009 , pursuing the scope of ensuring adequate functioning of the interbank monetary market, supplied monetary means through its overnight lending facility at banks’ demand the average daily balance, which during this period amounted to about MDL 66.8 million. During the aforementioned period the minimum value of the average daily value of balance on overnight loans worth MDL 10.0 million was reported in February while the maximum value worth MDL 126 million was reported in April 2009. Overnight deposit facility. Reversal of NBM position in regard to banking system has not excluded permanent formation of short term excess liquidity that was placed with the National Bank of Moldova at the initiative of banks through overnight deposit facility. Under condition when the National Bank of Moldova has ceased sterilization operations and at the background of growing liquidity (as a result of liberalization of monetary policy and enhancing foreign currency purchase operations by the NBM) and persistence of major risks of lending the banks were often appealing to overnight deposit facility thus showing good capacity of short term management of own resources during a period of crisis. The average daily balance of overnight deposits throughout the year showed an ascendant trajectory moving from MDL 59.9 million in January to MDL 3069.1 million in December 2009; the size of balance growing dependent on the increase of liquidity in the banking system. Required Reserves In 2009, besides using interest rate policy, the National Bank of Moldova continued to actively use the mechanism of required reserves pursuing the scope of achieving its monetary policy objectives.



25

The efficient use of required reserves instrument by the NBM during the reported year was basically marked by gradual decrease of the required reserves ratio – the action justified by the necessity of increasing liquidity injection in the banking system at the background of downsizing lending activity by the banks. During June-September 2009 pursuing the scope of preventing further recession and resuming normal functioning of the lending market, the Administrative Council of the National Bank of Moldova concomitantly with the decrease of the base rate approved (four times) the decision on reducing the required reserves ratio: On 18 June 2009 the required reserves ratio was lowered by 1.5 percentage points, being established in proportion of 16.0 percent of the calculation base beginning with the period of observation of the borrowed funds: 21 June 2009 through 5 July 2009. On 16 July 2009 the required reserves ratio was lowered by 2.0 percentage points, being established in proportion of 14.0 percent of the calculation base beginning with the period of observation of the borrowed funds: 21 July 2009 through 05 August 2009. On 6 August 2009 the required reserves ratio in Moldovan lei was set at 10.0 percent while such in free convertible currencies at 12.0 percent of the calculation base (a decrease by 4.0 percentage points and 2.0 percentage points accordingly) beginning with the period of observation of the borrowed funds: 6 August 2009 through 20 August 2009. On 3 September 2009 the required reserves ratio in Moldovan lei and in free convertible currencies was set at 8.0 percent of the calculation base (a decrease by 2.0 percentage points and 4.0 percentage points accordingly) beginning with the period of observation of the borrowed funds: 6 September 2009 through 20 September 2009. Successive decrease of the required reserves ratio has generated ample amounts of excess liquidity in the banking system thus influencing banks lending capacity – the paramount condition for economic growth recovery. During 2009 the level of required reserves constituted by banks was determined by the size of required reserves ratio as well as by the development of borrowed funds. During January through May 2009 period while maintaining constant required reserves ratio of 17.5 percent of the calculation base, the required reserves maintained in Moldovan lei went down by about 19.0 percent due to negative development in borrowed funds as a consequence of the global financial crisis. The descendent curve shown by the required reserves during June-November was determined by the lowering the required reserves ratio as well as by maintaining a descending trend of funds borrowed by the banks during the specified period. In December 2009 the trend for the required reserves maintained in Moldovan lei reversed showing an increase during two successive periods of observation of borrowed funds. The amount of required reserves maintained in Moldovan lei constituted by the banks according to the period of observation of borrowed funds: 6 December 2009 through 20 December 2009 and maintained at the end of the year amounted to MDL 1,041.9 million



26

showing a decrease of MDL 1,844.4 million or by 2.8 times as compared to the same period of previous year. Overall during the reported year the required reserves maintained in foreign currencies, same as such maintained in Moldovan lei were influenced by the development observed in the required reserves ratio and in borrowed funds. The amount of required reserves maintained by the banks in US dollars and Euros as at 31 December 2009 amounted to USD 42.0 million and Euro 48.6 million respectively showing a decrease by USD 68.4 million and Euro 73.7 million or by 2.6 and 2.5 times respectively as compared to the required reserves maintained by the banks at the end of December 2008. With the scope of cutting down the costs incurred with banking assets additionally imposed onto the banks by the necessity of constituting required reserves, the National Bank of Moldova in 2009 paid out to the banks on the rate of required reserves exceeding 5.0 percent of the liabilities used to calculate such reserves the amount of interest worth MDL 31.1 million. Foreign Exchange Market Intervention During 2009 the NBM conducted interventions in the foreign exchange market in its quality of a buyer of foreign currency as well as the seller of such; that was done in order to mitigate excessive fluctuations of the exchange rate of the national currency against US dollar. During the reported period the net amount of NBM transaction conducted in the domestic foreign exchange market amounted to the equivalent of USD 220.17 million, including USD 318.50 million purchases of foreign currency and USD 538.67 million selling foreign currency in the interbank foreign exchange market. It is worth noticing that during January through April 2009 the NBM sold in the domestic foreign exchange market USD 513.66 million and on 28 September 2009 another USD

25.01 million. At the same time, during April-December 2009 the National Bank of Moldova conducted interventions in the domestic foreign exchange market in its quality of a buyer of foreign currency purchasing USD 315.94 million. Likewise, the amount of purchases of other foreign currencies amounted to the equivalent of USD 2.56 million (Chart no. 2.4).

Chart no. 2.4. Dynamics of the official exchange rate of USD/MDL and NBM daily transactions in 2009 (USD, million)

-27.0-24.0-21.0-18.0-15.0-12.0

-9.0-6.0-3.0

.03.06.09.0

12.015.0

12.0

1.09

27.0

1.09

11.0

2.09

26.0

2.09

14.0

3.09

31.0

3.09

16.0

4.09

07.0

5.09

25.0

5.09

10.0

6.09

26.0

6.09

14.0

7.09

31.0

7.09

18.0

8.09

07.0

9.09

23.0

9.09

09.1

0.09

28.1

0.09

13.1

1.09

01.1

2.09

16.1

2.09

USD, million

10.2

10.5

10.8

11.1

11.4

11.7

12.0

12.3MDL/USD

Interbank transactions NBM and IBRDOfficial exchange



27

Transactions (net sales) in foreign currencies against Moldovan lei conducted by the NBM in the interbank market in 2009 amounted to USD 220165.12 thousand.

Development of Monetary Indicators

Development of monetary indicators in 2009 could be split up in two stages with diametrically opposed tendencies. The first stage before April 2009 was marked by the ongoing reduction of monetary aggregates as a result of tightening monetary policy in January-September 2008. The monetary indicators marked stabilization and showed certain growth beginning with April 2009 as a result of phased out liberalization of monetary policy. However, it is worth noticing that development of monetary aggregates was influenced by the situation in the national economy affected by the global economic crisis. Money supply In January-December 2009 the money supply (M2)1 decreased by 3.8 percent as compared to 18.4 percent growth reported in 2008. In 2009 development of M2 reflected negative tendencies accentuated in February-May 2009 while marking the highest drop by 21.9

percent in April. The trend in development of both components of the broad money M2 in January-December 2009 was negative, showing a decrease same as in 2008. The behavior of two components during January-April 2009 was similar but as of May 2009 the development of monetary aggregate (M0)2 has changed its trajectory showing signs of stabilization (Chart no. 2.5) which fact was determined by immobilization as a result of net

sales of foreign currency by the NBM. At the same time, money supply (M3)3 in 2009 went up by 3.2 percent while in 2008 its growth rate was reported at15.9 percent. Slower money supply M3 decrease pace as compared to that of M2 is explained by the ascendant trend in the development of deposits in foreign currencies recalculated in lei equivalent (Chart no. 2.6). Deposits in foreign currency recalculated in lei have shown high pace of growth during the last 12 months – 18.5 percent while their growth in US dollar during the same period amounted to only 0.2 percent, i.e. USD 2 million. 1 Money supply M2 includes (M0), deposits in lei and monetary policy instruments. 2 Monetary aggregate M0 represents money supply in cash issued by the National Bank of Moldova less cash in vault of commercial banks and the NBM 3Money supply M3 includes money supply M2 and residents deposits in foreign currencies expressed in lei.

Chart no. 2.5. Evolution of components of money supply M2 (growth compared to same month of previous yr, %)

-30-20-10

010203040506070

Jan.

200

8F e

b.M

ar.

Apr

.M

ayJu

n. Jul .

Au g

.S e

p.O

ct.

Nov

.D

ec.

Jan.

200

9F e

b.M

ar.

Apr

.M

ayJu

n. Jul .

Au g

.S e

p.O

ct.

Nov

.D

ec.

Money supply (M2)Monetary aggregate (M0)Balance of deposits in MDL



28

The highest growth pace of deposits in foreign currencies expressed in US dollars was marked in May 2009 – 7.1 percent was due to expectations of leu devaluation at the background of deepening economic crisis and as a consequence “escape” of monetary resources in foreign currency. Deposits maintained in national currency during January-December 2009 showed a more profound decline as M0 – by 14.7 percent (during the same period of 2008 these went up by 21.0 percent) thus

determining directly to the slump of M2 and the negative trend in the development of M2 in 2009. The main reason explaining the slump of deposits in national currency attracted from legal entities as well as from individuals was failing of current incomes; this in conditions of maintaining reduced pace of economic activity has lead to the shortage of their monetary resources. The share of call deposits in total deposits maintained in national currency in December 2009 amounted to 36.0 percent showing an increase by 7.6 percent during the last 12 months. This regrouping in the structure of deposits maintained in national currency in favor of call deposits shows the need of access to monetary resources with high liquidity for businesses as well as for households. The major part of total amount of time deposits attracted by the banks during the reported year was determined by the enhancement of its components while the growth pace of deposits maintained in foreign currencies has outrun such maintained in national currency (25.9 percent as compared to 1.2 percent). Likewise, it is worth mentioning that observed during February-April 2009 as well as in August and September 2009 was a trend of growing interest to making savings in foreign currency as a consequence of pessimistic expectations of devaluation of national currency and converting certain amounts of lei into FCC. As a result the share of time deposits attracted in foreign currency in the structure of total deposits increased by 5.5 percentage points, thus determining the change in the share of deposits maintained in foreign currencies from 46.0 percent in 2008 to 51.5 percent in 2009. Growth of the amount of time deposits attracted in national currency by MDL 227.6 million (1.2 percent) was at large influenced by the increase of the amount of time deposits maintained by legal entities by MDL 1,446.2 million (34.3 percent) while the amount of deposits in lei maintained by the natural persons decreased by MDL 1,218.6 million (8.7 percent).

Chart no. 2.6. Dynamics of the main components of money supply M3 (%, growth over the similar month of the previous year )

-30-25-20-15-10

-505

10152025

Dec

.200

8

Jan.

2009

Feb.

Mar

.

Apr

.

May

Jun.

Jul.

Aug

.

Sep.

Oct

.

Nov

.

Dec

.

Money supply (M3) Deposits in MDLDeposits in foreign currency



29

Chart no. 2.7. Evolution of credits to economy (growth as compared to the same month of previous year,%)

-10.0-5.00.05.0

10.015.020.025.030.035.040.0

Dec

.200

8

Jan.

2009 Feb.

Mar

.

Apr

.

May Jun. Jul.

Aug

.

Sep.

Oct

.

Nov

.

Dec

.200

9

Total creditsCredits in MDLCredits in foreign currency

During the reported year, unlike previous year, time deposits attracted in foreign currency showed higher development as compared to such attracted in foreign currencies. Thus the amount of deposits in foreign currencies went up by MDL 4032.5 million (25.9 percent) being conditioned by the enhancement of deposits made by natural persons by MDL 4,042.8 million (30.0 percent). Under conditions of devaluation of the national currency and at the background of economic environment showing signs of improvement the preference was given to short term deposits maintained in foreign currencies, especially to the ones with maturity term from 3 up to 6 months; the share of such deposits increased from 41.0 percent in 2008 to 48.1 percent in 2009. Loans market In 2009 the total balance of lending to economy4 as compared to 2008 decreased by 4.9

percent showing a tendency opposite to the one from previous year when registered was an increase of 20.3 percent. Slump in the growth pace was marked in the balance of lending in national currency as well as in such loans that were disbursed in foreign currencies. The pace of slump in the balance of loans disbursed on national currency amounted to 10.7 percent being influenced by different factors among which unfavorable term of new loans offer at high interest rate for both

private sector and households. Thus, the decline of demand for loans was caused by the growing cost of new loans and pessimistic expectations in regard to future incomes (Chart no. 2.7). The balance of loans disbursed to private sector decreased in 2009 by 4.3 percent while the growth registered in 2008 was at 18.8 percent. The balance of loans disbursed to private sector in foreign currencies

4 According to IMF methodology excluded from total loans disbursed to economy (including interst on principal) should be interbank credits and such disbursed to the government.

-1 5

-1 0

-5

0

5

1 0

1 5

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2 5

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Dec

.200

8

Jan.

2009 Feb.

Mar

.

Apr

.

May Jun. Jul.

Aug

.

Sep.

Oct

.

Nov

.

Dec

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9

P o p ulat io n

No n -fin an cial in st it ut io n s an d n o n -m o n et ary f in an cialin st it ut io n sT o t al balan ce o f credit s

Chart no. 2.8. Credits breakdown by sectors of the economy (growth as compared to the same month of previous year, %)



30

expressed in US dollar was marked by more pronounced slump pace (17.2 percent) as compared to loans disbursed in national currency; this was caused by the common factors of both components of loans disbursed to private sector as well as by devaluation of Moldovan leu against US dollar and Euro. It was also due to intention of the private sector to avoid risks bound to brisk devaluation of the national currency. The most accentuated negative pace was reported on balances of loans disbursed to the households; this amounted to 8.2 percent in January-December 2009 (Chart no. 2.8), being determined by 30.0 percent slump in the balances of loans for consumption the share of which in total loans disbursed to households at the end of 2009 amounted to 51.4 percent. Dynamics of Newly Disbursed Loans In 2009 the process of lending to economy has marked an accentuated decline of 48.8 percent (down to MDL 14246.4 million) as compared to 5.0 percent growth marked in 2008. Such recourse in the process of lending to economy could be referred at large to the pessimistic anticipations in real as well as in banking sectors determined by the cuts in finances disbursed to the banks by the international organizations under conditions of deepening global financial crisis and shortage of liquidity experienced by the banking

system. Slump in the dynamics was marked by the component in national currency as well as by such in the foreign currency maintaining at more pronounced level in case of the first component (by 54.3 percent as compared to previous year or by MDL 9299.3 million) (Chart no. 2.9). The major part of loans disbursed in the national currency is

subsequently represented by the loans disbursed to legal entities amounting to 84.9 percent of total loans in lei showing a slump by 51.1 percent as compared to the previous year and reaching the amount of MDL 6645.3 million. The slump in newly disbursed loans was more pronounced during April-June 2009. Similar development applied to loans disbursed to the household which marked a decrease of 66.4 percent as compared to 2008, amounting up to MDL 1182.6 million. Main reasons explaining this slump in demand for loans was the downturn of economic activity and reduction of income for businesses as well as for individuals. Slight mitigation of the lending process was experienced in the second half of 2009 following application of monetary policy measured adopted by the NBM on disbursing loans to the banks for lending to businesses acting in real sector of economy and maintaining banks liquidity. During 2009, in parallel to reduction of base rate the NBM proceeded to

17.65 %

22.23%

23.30 %

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400.0

800.0

1200.0

1600.0

2000.0

Jan.

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Dec

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Feb.

Mar

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Jun.

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Nov

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MDL, million

0.0

5.0

10.0

15.0

20.0

25.0%

Volume of credits in MDL Average rate on credits in MDL

Chart no. 2.9. Dynamics volume and average rates on credits extended in national currency



31

reduce the required reserves ratio on financial resources attracted by the banks. This measure was also meant for stimulating the process of lending to economy. Besides, the lending institutions were maintaining prudent lending policies under which they did not reduce the interest rates down to the potential of easing. They managed to maintain

high cost of newly disbursed loans due to shortage of lending resources and development of unfavorable loans especially under conditions of the global financial crisis. Lending in foreign currency was also positioned on a descending trend (Chart no. 2.10), although it was more tempered as compared to lending in national currency (39.9 percent) and amounted

to MDL 6418.5 million (equivalent to USD 577.5 million). The slump occurred basically at the expense of loans disbursed to legal entities for a term of more than 12 months which contributed 66.5 percent to this slump. Despite all that the share of loans in foreign currencies in total new loans disbursed in 2009 increased as compared to the previous year showing a change from 38.4 to 45.1 percent as a result of more pronounced decrease of lending in national currency as well as due to the statistical effect generated by devaluation of the national currency and enhanced expectations bound to the exchange rate development. Interest Rates and Monetary Policy Transmission Mechanism During 2009 the National Bank of Moldova proceeded to relax its monetary and foreign exchange policy by lowering NBM base rate which fact has lead to the increase of liquidity in the banking sector. Thus, it could have been expected that the average interest rates at the background of pronounced deflation will mark a descendent trend complying with the actual economic conditions. The accentuated transfer of monetary policy was noticed only in deposits m

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