economic monitor moldova - get-moldau.de · © german economic team moldova / berlin economics...

© 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


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


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


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


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


0

2

4

6

8

10

2014 2015 2016 2017 2018*

Inflation % yoy

Source: IMF, *Forecast Dec 2017; Note: Annual average (consumer prices)


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



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


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


35

40

45

2014 2015 2016 2017* 2018*

Government debt % of GDP



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


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



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%


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


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

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 [email protected] Schillerstraße 59 www.get-moldova.de 10627 Berlin Twitter: @BerlinEconomics Facebook: @BE.Berlin.Economics 14

economic monitor moldova - get-moldau.de · © german economic team moldova / berlin economics...

Documents