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© German Economic Team Moldova / Berlin Economics
Overview
• Economic growth at 3.5% in 2017
• Weaker growth of 3.0% expected in 2018 due to decreased consumption demand
• Inflation at 6.6% in average during 2017; lower forecast for 2018
• Appreciation of the Leu reflects macroeconomic stability and positive economic situation
• Very good performance of external trade during 2017; two-digit increase in imports and exports
• Budget deficit at 3.1% of GDP in 2017; lower than expected due to increased revenues
Topics
• Banking sector. Stabilisation reached after banking fraud, crediting of the private sector still decreasing
• Foreign direct investment. Role of FDI for the economy so far underestimated, as a study of GET Moldova has shown
• Economic reforms. Comprehensive reforms to be assessed positively; too early for final assessment
• Increasing tax revenues. Increase in tax revenues can at least partly be attributed to reforms; positive example for structural reforms
ECONOMIC MONITOR MOLDOVA Issue 7 | January 2018
© German Economic Team Moldova / Berlin Economics
Moldova Ukraine Belarus Georgia Russia
GDP, USD bn 7.9 104.1 52.8 15.2 1,469.3
GDP/capita, USD 2,240* 2,459 5,585 4,123 10,248
Population, m 3.5* 42.3 9.5 3.7 143.4
Trade structure
Export Import
EU 65% | Russia 11% | Others 24% EU 50% | Russia 11% |Others 39%
Basic indicators
2
Source: IMF, estimation for 2017; *According to the census of 2014 only slightly less than 3 m inhabitants; based on this census GDP per capita amounts to ca. USD 2,650.
Vegetable products
25%
Textiles 15%
Foodstuffs 15%
Machinery 17%
Chemicals 4%
Metals 2%
Others 22%
Source: National Bureau for Statistics; Jan-Sep 2017, Note: Trade in goods
Machinery 16%
Minerals 16%
Chemicals 13%
Textiles 8%
Foodstuffs 7%
Metals 7%
Plastics 6%
Motor vehicles
6%
Others 21%
Source: National Bureau for Statistics; Jan-Sep 2017, Note: Trade in goods
© German Economic Team Moldova / Berlin Economics
Economic growth
3
GDP
2017: Growth at 3.5% slightly lower than in previous year
Reason: Good harvest, but weaker growth of agriculture than in 2016
Consumption robust during 2017
2018: Economic growth expected at 3.0%
Investment
2017: Strong growth compared to 2016
Reason: Significant increase of public investment, also due to international support
2018: Private investment expected to increase
Conclusion
Weaker economic performance in 2017 due to lower growth in agriculture
-2
0
2
4
6
8
10
2013 2014 2015 2016 2017* 2018*
Real GDP growth % yoy
Source: IMF, *Forecast from Dec 2017
-20
-10
0
10
20
30
40
2012 2013 2014 2015 2016 2017* 2018*
Total Private Public
Investment % yoy
Source: IMF, *Forecast Dec 2017
© German Economic Team Moldova / Berlin Economics
Structure
Retail trade (16%), agriculture and manufacturing (both 14%) are the three most important economic sectors
Dynamics
Agriculture growth at 3.3% during Jan-Sep 2017 due to good harvest, but not comparable to growth during 2016
Significant increase (7.1%) of retail trade
Manufacturing also slightly positive (2.2%)
Recovery of construction sector (4.3%) reflects increasing investment
Conclusion
Weaker overall growth due to lower growth rate in agriculture
Retail trade benefits from robust consumption
Sectoral perspective
4
Agriculture 14%
Manufacturing 14%
Construction 4%
Retail trade and repair services
16%
Transport and ICT 13%
Financial services and
insurance activities
6%
Real estate activities
6%
Education 7%
Others 20%
Composition of GDP in 2016
Source: National Bureau of Statistics
-20
-10
0
10
20
30
40
50
2013 2014 2015 2016 Jan-Sep 2017
Agriculture Manufacturing Retail trade Construction
Source: National Bureau of Statistics
% yoy Sectoral dynamics
© German Economic Team Moldova / Berlin Economics
Inflation
2017: Average inflation at 6.6%
However, strong dynamics: Surprisingly strong increase to 7.9% in October vs 2.4% end 2016
Reason: Increase of food prices and one-off adaption of health costs
Core inflation remains stable
Real wages
Speeding up of real wage growth in 2017 (ca. 5.3%) supported consumption
Continued moderate increase of real wages expected for 2018
Conclusion
Relatively high inflation in 2017 caused especially by one-off effects
Increasing real wages reflect good situation on the labour market
Inflation and wages
5
0
1
2
3
4
5
6
2014 2015 2016 2017* 2018*
Real wages % yoy
Source: IMF, *Forecast Dec 2017
0
2
4
6
8
10
2014 2015 2016 2017 2018*
Inflation % yoy
Source: IMF, *Forecast Dec 2017; Note: Annual average (consumer prices)
© German Economic Team Moldova / Berlin Economics
Exchange rate and remittances
6
Exchange rate and currency reserves
Exchange rate without major fluctuations in 2016
Since beginning of 2017: Appreciation of ca. 15% vs US dollar
Appreciation pressure positive for currency reserves, significant increase
5 months import coverage at the end of 2017
Remittances
Return to strong growth since 2017
Remittances from Russia continue to decrease
Conclusion
Appreciation reflects stability and positive economic situation
Increasing remittances support domestic demand
10
15
20
25
1.5
2.0
2.5
3.0
International currency reserves (left scale)
Official exchange rate (right scale)
USD bn MDL/USD
Exchange rate and currency reserves
Source: National Bank of Moldova
-80
-60
-40
-20
0
20
40
60
80
Q3
-12
Q4
-12
Q1
-13
Q2
-13
Q3
-13
Q4
-13
Q1
-14
Q2
-14
Q3
-14
Q4
-14
Q1
-15
Q2
-15
Q3
-15
Q4
-15
Q1
-16
Q2
-16
Q3
-16
Q4
-16
Q1
-17
Q2
-17
Q3
-17
Others
Total
Russia
Remittances (in US dollar) % yoy
Source: National Bank of Moldova
© German Economic Team Moldova / Berlin Economics
External trade
7
Import
Jan-Sep 2017: Increase in imports (19%)
Reasons additional to increased demand:
Tax reform: New standards of goods valuation, less smuggling
Energy imports from Ukraine; previously energy purchases from Transnistria
Export
Jan-Sep 2017: Strong increase of 15%
More exports of vegetable products and cable harnesses
Strong relation between investment from the EU and export of cable harnesses
Outlook
Exports are to increase further in 2018, but with lower speed (8%)
Also lower growth of imports expected (6%)
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
2012 2013 2014 2015 2016 Jan-Sep 2017
External trade
Export Import
% yoy
Source: National Bureau of Statistics; Note: Trade in goods
EU-28 65%
Russia 11%
CIS (excl. Russia) 9%
Others 15%
Exports by countries
Source: National Bureau of Statistics, Jan-Sep 2017
© German Economic Team Moldova / Berlin Economics
Budget deficit
2017: At 3.1% lower than expected
Reason: Higher revenues, partly due to reforms in tax administration and customs (see also slide 13)
Also lower expenditures due to delay in road construction projects and reorganisation of the government
Outlook
Deficit to amount to 3.3% of GDP in 2018, this is in accordance with the IMF programme
These numbers include much needed infrastructure reforms, e.g. road construction, and higher social expenditures
However, risk of higher expenditures, as parliamentary elections are to be held in November 2018
Public finances and government debt
8
-4
-3
-2
-1
0
2014 2015 2016 2017* 2018*
Budget deficit % of GDP
Source: IMF, *Forecast Dec 2017
35
40
45
2014 2015 2016 2017* 2018*
Government debt % of GDP
Source: IMF, *Forecast Dec 2017
© German Economic Team Moldova / Berlin Economics
Bilateral trade volume
2017: EUR 551 m
Significant increase (23%) vs 2016
Strong dynamics after weak performance in the last years
German exports to Moldova
Exports increased by 29% in 2017 vs 2016
Investment goods profit from investments in Moldova
German imports from Moldova
2017: Also strong increase (14%)
Conclusion
After the standstill in 2016, significantly higher trade turnover in 2017, whereas especially exports of German investment goods increased
Bilateral trade between Germany and Moldova
9
Others 25%
Motor vehicles and parts
21% Chemicals 20%
Machinery 15%
Agrifood 8%
Textiles 7%
Electro-technology
4%
German exports to Moldova
Source: German Federal Statistics Office; Jan-Sep 2017
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
2013 2014 2015 2016 2017*
German trade with Moldova
German exports German imports Balance
Source: German Federal Statistics Office, *Forecast based on data for Jan-Sep 2017
Euro bn
© German Economic Team Moldova / Berlin Economics
Changes in the sector after the fraud scandal
Three of 14 banks liquidated
Banking assets decreased from 84% of GDP in 2014 to 54% in 2016
Concentration increased, three largest banks have now a share of 65% of total assets after 50% in 2013
Currently: Confidence returns
„Flight“ to foreign currencies is over, dollarisation with 45% at the same level as prior to the fraud scandal
Capital adequacy ratio higher than before the crisis after liquidation of three insolvent banks
Increase in non-performing loans only due to stricter regulation
Shares in problematic ownership blocked and partly sold
Conclusion
Stabilisation achieved, but challenges remain, especially implementation of Basel III and crediting of the economy
Developments in the Moldovan banking sector
10
Moldova - Agroindbank
27.4% Moldindcon-bank 19.5%
Victoriabank 17.8%
Mobiasanca 12.4%
Eximbank 6.3%
ProCredit Bank 4.5%
FinComBank 3.6%
Energbank 3.6%
BCR Chisinau 2.1%
Comertbank 1.7%
EuroCredit Bank 0.9%
Bank segments and market shares
Source: National Bank of Moldova, Data for July 2017
Large banks
Western-ownedbanks
Smaller, mainlydomestic-ownedbanks
0.0
0.5
1.0
1.5
2.0
10
15
20
25
30
35
Dec
-13
Mar
-14
Jun
-14
Sep
-14
Dec
-14
Mar
-15
Jun
-15
Sep
-15
Dec
-15
Mar
-16
Jun
-16
Sep
-16
Dec
-16
Mar
-17
Jun
-17
USD bn MDL bn Bank deposits
MDL deposits FX deposits
Source: National Bank of Moldova
© German Economic Team Moldova / Berlin Economics
Background
Due to the lack of data so far no systematic analysis of the economic importance of FDI
Database developed by GET Moldova in cooperation with the National Bureau of Statistics
Results
Companies with FDI account for 15% of employment and 23% of value added
They are 71% more productive than domestic companies and pay higher wages
FDI companies pay 34% of corporate income tax and 21% of social security contributions
Conclusion
FDI play an important and so far underestimated role
Efforts for FDI attraction should be intensified and conditions for existing FDI companies should be improved
Economic importance of FDI
11
FDI stock
Importance of FDI companies for the economy
Source: National Bank of Moldova, data for 2015
Source: Own calculations
Russia 28%
Netherlands 12%
Cyprus 8%
Spain 8%
France 8%
Romania 6%
Italy 5%
Germany 5%
Great Britain 3%
Other EU countries
6%
USA 2%
Others 9%
EU-28 61%
Share of companies with foreign
capital in macroeconomic variables
Number 7%
Employment 15%
Value added 23%
Corporate income tax 34%
Social security contributions 21%
© German Economic Team Moldova / Berlin Economics
Comprehensive reforms have been launched in many fields and have partly already been implemented
Investment climate: Reduction of the bureaucratic burden and limitation of unannounced inspections, digitalisation of all inspections to improve transparency
Public administration: Reduction of the number of ministries from 16 to 9, reduction of ministerial employees by almost one half, wage increase of 40-60% planned
Pension: Increase of the pension age to 63 years, improved relation between contribution payments and pension amount, simplification of the system and elimination of privileges
Public procurement: Introduction of electronic procurement, independent office for complaints, decentralisation, ex-post controls
State administration and customs: Centralisation of tax administration, elimination of the independent juridical status of local tax offices, introduction of risk-based controls, reduction of the number of regional customs units, increase in wages
Our assessment
Reforms are very comprehensive and the persons in charge seem to have a genuine interest in their successful implementation
Positive development of tax revenues indicates first positive results
Too early for a final assessment, long-term success remains to be seen
Economic reforms
12
© German Economic Team Moldova / Berlin Economics
Background
Increase in revenues in 2017 stronger than expected
At the same time, tax administration and customs were subject to major reforms
Question: Have the reforms contributed to increased revenues?
Our results
Reform effect found for four out of five analysed tax types
For import VAT reform effect cannot be excluded, but undetectable with our methodology
Conclusion
Reforms have contributed to higher revenues
Reforms have to be continued, e.g. still high bureaucratic burden for companies paying payroll taxes
Increasing tax revenues – the role of reforms
13
Revenues as share of GDP
Reasons for revenue increase
Source: Own analysis
10.1% 10.1% 9.7% 8.9% 8.7% 9.5%
4.0% 4.0% 3.9% 3.9% 4.0% 4.4%
10.1% 9.7% 9.6% 9.9% 9.9% 11.4%
3.3% 3.5% 3.1% 3.1% 3.4%
4.3% 2.2% 2.0% 2.2% 2.3% 2.5%
3.4% 2.3% 2.2% 2.2% 2.2% 2.4%
2.7% 1.5% 1.4% 1.3% 1.1% 1.1%
1.2%
38.0% 36.7% 37.9% 35.6% 34.2% 39.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2012 2013 2014 2015 2016 Jan-Jun2017
Taxes oninternationaltradePersonalincome tax
Corporateincome tax
Excises
Socialcontributions
Domestic VAT
Import VAT
% of GDP
Source: Own calculations based on MinFin and NBS data
Effective tax rate increase
H1 2015 vs. H1 2017
Mainly due to
Progres-
sion
Economic tax
base growth
Reforms
Effective
tax rate
Tax base
growth
Personal income tax
(PIT) +0.3 pp
Social security
contributions +0.2 pp
Corporate income
tax (CIT) +1.9 pp
Domestic VAT +0.8 pp
Import VAT +0.3 pp
© German Economic Team Moldova / Berlin Economics
German Economic Team Moldova
The German Economic Team Moldova (“GET Moldova”) supports the Moldovan Government in stabilising the economic development and designing the necessary reform processes since 2010. In a continuous dialogue with high-ranking decision makers we identify current economic problems and present concrete recommendations for action based on our independent analysis. Furthermore, GET Moldova supports the German government, German companies and other German organisations by providing know-how and detailed information on the economic situation in Moldova. GET Moldova is financed by the German Federal Ministry of Economy and Energy and implemented by Berlin Economics.
Contact German Economic Team Moldova Tel: +49 30/ 20 61 34 64 0 c/o Berlin Economics info@get-moldova.de Schillerstraße 59 www.get-moldova.de 10627 Berlin Twitter: @BerlinEconomics Facebook: @BE.Berlin.Economics 14
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