Moldova: Risk Assessment
Country Risk Rating
Business Climate Rating
- Agricultural potential (wine, fruit, vegetables, sunflower, wheat)
- Association and free trade agreements with the EU (2014, extended to Transnistria in 2016)
- International financial support
- Relatively inexpensive labor
- Managed floating currency regime
- Europe's poorest country, high emigration (1 million emigrants out of 3.4 million inhabitants)
- Large informal sector, low productivity
- Corruption, weak governance, oligarchic system and cronyism
- Credit not very developed (20% of GDP in 2020)
- Dependence on transfers from expatriate workers
- Separatism in Transnistria
Domestic demand will drive the recovery
Driven by private consumption, which accounts for more than 80% of GDP, the economy returned to a sustained growth rate in 2021. Consumption increased with increased household income from higher wages, social assistance, and remittances. In 2022, the recovery will continue, but private consumption may be constrained by pressures related to inflation, which hit 6.7% in August 2021. Higher food prices due to a poor harvest in early 2021 and record energy prices are fueling inflation, which is expected to exceed the central bank’s 5% target in 2022. The slowdown in the global recovery due to supply chain disruptions and the risk of a return of the health crisis in the winter of 2021/2022 could also reduce remittances from Moldova’s million-strong diaspora, which account for half of the disposable income of 15% of households. In addition, while investments, thanks to favorable monetary conditions, rose by nearly 28% in 2021, they could be hampered by the hike in the central bank’s policy rate (to 5.5% in October 2021) in response to rising inflation. However, they should be helped by the new government’s ambitious anti-corruption program, provided it is implemented. Moreover, in the context of the energy crisis linked to soaring gas prices, the country, which relies entirely on the Russian company Gazprom for its energy supply, is set to continue the efforts to diversify supply, despite its limited fiscal capacity. After inaugurating the 120-km Ungheni-Chisinau pipeline linking Moldova’s gas network to the EU via Romania, the country signed a gas purchase agreement with Poland in October 2021. It will benefit from a EUR 60 million EU subsidy representing two months of supply.
Brisk domestic demand and inventory rebuilding led to solid import growth in 2021, which will continue into 2022. Exports (27% of GDP in 2020) will depend on the pace of recovery of the main trading partners (EU and Russia). They will be driven mainly by the agricultural sector (12% of GDP and 35% of the workforce) and the agri-food sector (35% of exports). The contribution of foreign trade to growth will therefore remain negative.
High twin deficits
The public deficit, which had risen sharply in 2020, fell in 2021 thanks to increased revenue generated by the economic rebound. In 2022, the deficit was poised to widen again in the face of increased public spending, particularly on health, education, and social protection. As a result, public debt (45% external) will increase while remaining relatively moderate by international standards. European aid will support the public finances considerably with a EUR 600 million EU stimulus package between 2021 and 2024.
The external position deteriorated as imports (mainly oil derivatives and machinery) rose rapidly in volume and value terms, outpacing exports. Not being offset by the small services surplus, the swelling trade deficit is causing the current account deficit to increase. Meanwhile, remittance growth could have sufficiently increased the remnant on the current transfers account. The country will continue to rely heavily on borrowing and financial assistance from multilateral organizations to meet its external financing needs. Three-quarters of the external debt (68% of GDP) is owed by the private sector (and primarily by non-financial companies).
New pro-EU government and tensions with Russia
The reformist, pro-EU Action and Solidarity Party (PAS) won a comfortable majority (63 of 101 seats) in early parliamentary elections held on 11 July 2021, taking 52.8% of the vote. The PAS, the party of President Maia Sandu, who was elected in November 2020 and replaced Idor Dodon of the pro-Russian Socialist Party, won 86% of the Moldovan diaspora vote, confirming the trend of solid diaspora support seen in the presidential election. The PAS’s parliamentary majority – held only 24 seats before the election – should usher in an era of political stability not seen in over a decade. The appointment of Natalia Gavrilita as the country’s prime minister should set the stage for proactive efforts to push forward reforms, particularly in terms of corruption, and bring the country closer to the European Union.
However, the election of a pro-European president is shaking up relations with Russia, which has been accused of using gas as a lever to influence ties with the EU. Gazprom cut its supply by one-third after the contract expired at the end of September 2021, before concluding a new five-year contract starting in November, still at a lower price than in European markets, reflecting the likely European influence in the negotiations. In addition, the gas supplied by Russia passes through Transnistria, a pro-Russian separatist territory that declared its independence as the Pridnestrovian Moldavian Republic in 1992 and where Russian forces are stationed.