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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006
MOLDOVAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Moldovan politics will be more tense than in
2005, owing to the erosion, since late last
year, of the "national consensus" that had
nominally united the ruling PCRM with three of
the parliamentary opposition parties. The level
of discord on the political scene will
nevertheless be considerably lower than
during the PCRM's first term in office in 2001-
04, as opposition groups generally continue
to share the PCRM's central goal of achieving
closer integration with the EU. Moreover,
although the Democratic Party (DP) and the
Social Liberal Party (SLP) no longer consider
themselves to be in "constructive opposition",
the CDPP does. As the CDPP had previously
been the most anti-communist and openly
confrontational of Moldova's political parties,
its partnership with the PCRM was always the
most significant aspect of the national
consensus.
The ruling PCRM is expected to maintain its
pro-EU stance, and fulfilment of the EU-
Moldova Action Plan will remain a central
policy goal for the Moldovan government.
This will ensure greater EU engagement in the
country. However, implementation of the
Action Plan will be constrained by Moldova's
limited administrative capacity, and by the
government's continued reluctance to make a
serious effort to tackle some of the reforms
required by the EU, including in the fight
against corruption, modernization of the
judiciary and opening up the broadcast
media.
As expected, the IMF approved a three-year,
US$118m poverty reduction and growth
facility (PRGF) in May. Combined with the
existing economic growth and poverty
reduction strategy paper (EGPRSP), and the
EU-Moldova Action Plan, the IMF program will
help to provide a solid policy framework for
the country. The fiscal-monetary mix is
therefore expected to remain generally sound
in 2006-07, and some progress on structural
reform is expected. The IMF program will
focus on reform of the public administration
and of public enterprise management, as well
as on the introduction of a comprehensive
strategy to improve the tax administration.
Other areas in which some progress is
expected include competition policy and
judicial reform, which should help to improve
the business environment. However, reform
progress is unlikely to be swift or consistent.
The PCRM is hesitant about pushing through
changes–such as the strengthening of the
judiciary–that would weaken its political
control or the economic interests of its
backers. Moreover, although the deputy prime
minister, Zinaida Greceanii, has assembled a
strong team to co-ordinate reform efforts,
weak administrative capacity and the
presence of vested interests will slow
progress on important issues, including
energy sector reform, privatization and
deregulation. A recent move to restrict foreign
ownership of agricultural land has underlined
these concerns.
Economic Performance
Real GDP rose by 6.2% year on year in the
first quarter of 2006. This was largely owing to
a 13% increase in household consumption,
which compensated for the increasingly large
drag on growth coming from net exports.
The economy's expansion is nevertheless
expected to decelerate to 4% for the year as a
whole, owing to the combined effect of rising
gas import prices and Russian trade
restrictions on important Moldovan economic
sectors (in particular, wine). Wine is a crucial
part of Moldova's economy, and many other
sectors are indirectly dependent on the wine
industry. The Russian restrictions are therefore
expected to drag down real GDP growth rates
for as long as they remain in place. Data for
January-May 2006 already point in this
direction, with a steep fall in wine production
pushing industrial output down by 7% year on
year.
Year-on-year consumer price inflation has
accelerated to almost 12% owing to relatively
strong price increases in May. The rising cost
of gas and electricity imports, and the
increased availability of financing from
donors, are expected to bring further
increases in year-on-year inflation over the
remainder of 2006. This is likely to result in
annual average consumer price inflation of
around 13.5%. Relatively sound fiscal and
monetary policies should nevertheless help to
prevent inflation from accelerating further. In
2007 continued growth in remittances and,
possibly, further increases in gas import
prices, combined with fiscal loosening, will
limit the extent of disinflation possible and
ensure that prices continue to rise at a
double-digit annual rate. A risk to the inflation
forecast is that gas prices could go up by
more than currently expected; the government
appears committed to passing on to endusers
the cost of higher gas prices rather than
subsidising them.
Moldova's currency, the leu, has weakened
against the US dollar in recent months, and
further nominal weakening is expected over
the remainder of 2006-07. This will reflect the
large current account deficit, which is the
result of rising energy import prices and
Russia's recent ban on Moldovan wine.
An increase in external financing inflows
should nevertheless help to contain the risk of
the currency's depreciating even further.
Owing to relatively high rates of inflation, the
real effective exchange rate is expected to
strengthen (although the euro's appreciation
against the US dollar, and hence the leu,
should help to contain this trend).*
* Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
MSE President Dr. Corneliu Dodu dodu@infomarket.md
Listing, Marketing and Quotation Department rimma@moldse.md, silvia@moldse.md
National Securities Commission of Moldova www.cnvm.md
Department of Privatization www.privatization.md
2004-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Services
Agriculture & fishing
Private consumption Public consumption Gross fixed investment
Industry
Construction
Increase in stocks
Net exports
55.3
20.8
100
80
91.6
18.7
60
4.7
40
20
0
16.9
24.4
5.4
-20
-40
-38.2
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