Moldova: Risk Assessment
Country Risk Rating
Business Climate Rating
- Agricultural potential (wine, fruit, vegetables, sunflowers, wheat)
- Association and free trade agreements with the EU (2014)
- International financial support
- Relatively inexpensive labor
- Managed float currency regime
- Poorest country in Europe, high emigration (1 million people have left)
- Large informal sector, low productivity
- Corruption, kleptocracy, weak governance, oligarchy and clientelism
- Underdeveloped credit (19% of GDP)
- Dependence on remittances from expatriate workers
- Separatist tendencies in Transnistria
Moderate and stable growth in 2020
Private consumption (85% of GDP) will benefit from increased participation and employment rates, as well as from growth in real wages owing to the low level of unemployment (3%), which is reflective of the country’s high emigration. Remittances from expatriate workers (16% of GDP) will be boosted by the excellent health of the Israeli economy (number-one source) and the slight improvement in Russia (number-two), but will be hurt by weak growth in Italy, Germany and the United Kingdom. Credit should continue to grow well, which should also encourage investment (25% of GDP). Thanks to loans and assistance from European financial organizations and the World Bank (€264 million, or 2.7% of GDP in 2019), work to connect the Moldovan and Romanian power grids is set to get underway. Foreign trade, despite featuring a recurrent deficit, should make a positive contribution to growth, as exports will outpace imports. Agri-food exports to the European Union will continue to grow thanks to free trade arrangements. Exports to Russia, which had fallen following the embargo imposed by Russia in 2013 in response to Western sanctions, have benefited since early 2019 from a reversal of the stance on five products. In addition, Russia now allows Moldovan products destined for third countries to pass through Ukraine and its territory in succession. Despite diversifying into clothing, electrical wiring and pharmaceuticals, where low production costs offset low productivity, Moldova remains dependent on the agri-food sector (19% of GDP and 34% of employment) and, therefore, on climatic conditions. The floating lei allows the central bank to focus its action on inflation, which should remain within the core target range.
Persistent deficits and a fragile banking system
In order to reactivate IMF budget support (Extended Credit Facility and Extended Fund Facility) totaling USD 179 million from 2016 to 2020, as well as EU macro-financial assistance (up to €100 million) – which was halted in 2018 and the first half of 2019 following tax giveaways in the lead-up to elections –, the new government had to adopt corrective measures equivalent to 0.6% of GDP in the form of spending cuts and increased and new taxes. Meanwhile, electricity prices were updated in the autumn of 2019. The aid is intended for investment in the social sector and under-resourced infrastructure. A full 58% of public debt is external, but is contracted with States or international organizations.
The aid has also been made conditional on efforts to clean up the financial system, which was marred by a major scandal in 2014, and improve governance. The ownership structures of the top four banks have been radically overhauled to make them more transparent. These institutions are now mainly held by foreign shareholders, including the EBRD. However, their exposure to related parties, although declining, remains significant. Non-performing loans still accounted for 11% of outstanding loans in May 2019. While supervision has improved, protection against money laundering is not perfect. Under these circumstances, the authorities have opted to limit development of the system by imposing a mandatory reserve ratio of 43% on deposits in local currency and 17% for foreign currencies.
The current account deficit is expected to remain high in 2020, due to the massive trade deficit (27% of GDP in 2018), despite remittances from expatriate workers and international budget support (3.5% expected in 2019). To finance its current account deficit and maintain its foreign exchange reserves, which are equivalent to more than 4 months of imports, the country uses IMF and EU loans with a grant component of 36%, while FDI remains limited. Accounting for 65% of GDP at end-2019, external debt is 72% private, with FDI-related loans making up one-third of this share.
Russian loan as leverage with EU, IMF
After four tumultuous months, the February 2019 elections had led to the formation of a coalition government of pro-Russian socialists (35 seats out of 101) and members of the pro-European ACUM party (26 seats) under the leadership of Prime Minister Maia Sandu (ACUM). The coalition, supported by both Westerners and Russia, looked like a marriage of convenience designed to get rid of the country's most influential and wealthy man, Vlad Plahotniuc, leader of the Democratic Party (30 seats) which provided the previous government. In November, this government was overthrown after a vote of no confidence, the Socialists having withdrawn their support. The partners did not agree on the appointment of the Attorney General. A new Prime Minister, the socialist Ion Chicu, appointed by President Dodon, a former socialist leader, has taken over the leadership of a minority government. He is waving the possibility of a Russian loan to obtain a softening of the conditions of the EU and the IMF for their support. The next presidential election will be held in the fall of 2020.
Moldova has to contend with separatist tendencies in the eastern Transnistrian region. The area, which is Russian-speaking, enjoys autonomous status and self-declared its independence as the Moldovan Republic of Dniestr in 1992. Russian forces are stationed there. The lawless region includes most of the country's heavy industry, as well as electricity production.